Crack spreads — vernacular for oil refiners’ profits — have soared this year as gasoline demand outstrips supply.
They measure the difference between the cost of crude oil and the prices of refined products like gasoline — and are a key contributor to both profits at oil refineries and also prices at the pump.
Matt Phillips of Axios believes crack spreads will see more pressure as the Biden administration does everything in its power to push gas prices lower before November’s mid-term elections.
Already, stocks of the major oil refiners got hammered on Wednesday, heading into yesterday’s meeting between Energy Secretary Jennifer Granholm and top industry executives.
Marathon Oil fell 7%, Phillips 66 and Conoco Phillips both dropped 6%, while Chevron and Exxon both fell about 4%.
President Biden publicly is urging an increase in U.S. refinery production, saying bluntly, "I'm calling on the industry to refine more oil into gasoline and to bring down gas prices."
But earlier this year, as crack spreads soared, so did the share prices of major American refining companies, which are up a whopping 38% since January – even as the S&P 500 index has entered bear territory.
While surging profit margins for the makers of gasoline open the industry up to charges of price gouging, industry officials claim that they’re producing as much gas as they can right now.
Industry capacity utilization is running at 94% these days – the highest since 2018 when it hit 97%.
But a recent government report also showed that overall refining capacity has fallen in the last two years.
In fact, it’s now back down to where it was in 2014, meaning that supply will remain hurt even if refineries were to run at 100%.
So, with little chance of bringing new sources of gasoline – domestic or imported – online anytime soon, the administration's best chance to lower prices at the pump in the near term will have to come from leaning on OPEC+ to drill more oil or on refiners to accept smaller profit margins.
That, I predict, will become a growing source of agita for investors in oil companies – and other industries.
By Dave Allen for Discount Gold & Silver
Crack spreads — vernacular for oil refiners’ profits — have soared this year as gasoline demand outstrips supply.
They measure the difference between the cost of crude oil and the prices of refined products like gasoline — and are a key contributor to both profits at oil refineries and also prices at the pump.
Matt Phillips of Axios believes crack spreads will see more pressure as the Biden administration does everything in its power to push gas prices lower before November’s mid-term elections.
Already, stocks of the major oil refiners got hammered on Wednesday, heading into yesterday’s meeting between Energy Secretary Jennifer Granholm and top industry executives.
Marathon Oil fell 7%, Phillips 66 and Conoco Phillips both dropped 6%, while Chevron and Exxon both fell about 4%.
President Biden publicly is urging an increase in U.S. refinery production, saying bluntly, "I'm calling on the industry to refine more oil into gasoline and to bring down gas prices."
But earlier this year, as crack spreads soared, so did the share prices of major American refining companies, which are up a whopping 38% since January – even as the S&P 500 index has entered bear territory.
While surging profit margins for the makers of gasoline open the industry up to charges of price gouging, industry officials claim that they’re producing as much gas as they can right now.
Industry capacity utilization is running at 94% these days – the highest since 2018 when it hit 97%.
But a recent government report also showed that overall refining capacity has fallen in the last two years.
In fact, it’s now back down to where it was in 2014, meaning that supply will remain hurt even if refineries were to run at 100%.
So, with little chance of bringing new sources of gasoline – domestic or imported – online anytime soon, the administration's best chance to lower prices at the pump in the near term will have to come from leaning on OPEC+ to drill more oil or on refiners to accept smaller profit margins.
That, I predict, will become a growing source of agita for investors in oil companies – and other industries.
It’s Not Just Big Oil
Price markups and profits of several industries in the U.S. last year were the highest since at least the 1950s, according to a recent study published by the Roosevelt Institute.
And the NYTimes' Peter Coy writes that the analysis is raising questions about a possible relationship between corporate greed and inflation.
But it’s not a simple case of businesses driving up prices to earn more money, says Mike Konczal, co-author of the paper along with Niko Lusiani.
Konczal says that profit motive is “part of the mix of explanations, but “[i]s greed the sole or main reason for inflation? I’d say no.”
The paper sheds light on one of the biggest economic mysteries of last year (and this): What’s the cause of today’s high inflation? Is it strong demand, supply shortages or rising profit margins? Or the good ole “all of the above?”
Those who say strong demand blame the Biden administration, Congress and the Federal Reserve for overstimulating the economy with their fiscal and monetary largesse in 2020 and 2021.
Those who say it’s supply shortages point fingers at the disruptions caused by forces majeure like the pandemic and Putin’s invasion of Ukraine.
And those who are wary of big multinational corporations focus on their excess profits.
The study says there’s some evidence for all three explanations.
Using S&P Global-related data that go back to 1955, Konczal and Lusiani looked at companies’ price markups – the difference between the prices they charge and their marginal costs.
The paper supports the strong-demand theory of inflation by showing that increases in markups have been widespread among many types and sizes of companies.
That suggests that a broader demand for goods and services throughout the economy is an important factor in price increases.
At the same time, markups increased greater in industries that experienced supply disruptions, indicating that supply chain problems are also a factor in the high inflation we’re seeing.
Among the sectors with big markups pointed out by the authors were real estate, mining, quarrying and, yes, oil and gas extraction.
But the biggest markup that the paper found was, surprisingly, in finance and insurance.
The third explanation – rising profit margins – isn’t an alternative explanation but in addition to the demand and supply explanations.
The paper says that companies simply seized the opportunity of strong demand and weak supply to increase their profits.
Supporting that theory is the authors’ finding that, after adjustments for size, companies that increased prices before 2021 were the most likely to increase prices in 2021.
That, they say, suggests those companies had a position in the market that made it easier for them to pass along price increases and maintain them.
In terms of public policy, Konczal said their findings show that “there is room for these profit margins to come down” through competition, antitrust enforcement or the presidential the bully pulpit.
Konczal and Lusiani conclude that since markups are unusually and suddenly so high, there’s room for reversing them with little harm to the economy and likely benefit to society.
That includes lower prices in the short term and less inequality and more innovation in the medium and long run.
The paper is posted at the Roosevelt Institute website – rooseveltinstitute.org.