On December 12th, the US Energy Information Agency reported that the cost of a barrel of crude in the US was $36.58/barrel. On December 22nd, conventional regular gasoline in the US sold for $1.635/gallon at retail. For convenience, figure that it takes two barrels of oil to make one barrel of regular gasoline (it’s actually a bit more). That means the raw material to make a 42 gallons of gasoline cost $73.16. The gasoline in the refined barrel fetched a retail total of $68.61.  Is that any way to make money?

Fortunately, that single barrel of crude also generates a lot of otherproducts, like jet fuel, fuel oil, and diesel fuel, so that the finalmargin on a barrel of oil usually ends up in the plus column. But it’sbecoming a thinner margin all the time.

Bloomberg reportsthat new data from BP plc (NYSE: BP) shows that global refining marginsfor the fourth quarter average $4.84/barrel, compared with $5.69 forthe same period a year ago. That’s very close to the first quarter 2008margin of $4.57/barrel, when gasoline prices were rising steadily.

Refining margins in the third quarter moved back up, mostly on the backof falling crude prices in July. For the fourth quarter, margins aresinking like a stone. In BP’s data,average fourth quarter 2008 margins have dropped nearly $2/barrel inthe US. In the Midwest, margins have fallen from $10.47/barrel to$2.20/barrel. It’s nearly as bad on the Gulf Coast.

Back in January, refiners were squeezed by high feedstock prices. Now,they’re being squeezed by falling demand. It shouldn’t be any surprise,then, that refiners attempting to change their business model arehaving a bit of trouble. Take Marathon Oil Corporation (NYSE:MRO), forexample.

Marathon announced in July that it was evaluating splitting the companyinto a refining business and an E&P business. Earlier this month,the company said it planned to continue evaluating that evaluationbecause "the recent extreme volatility in the capital and commoditymarkets requires further evaluation before a decision can be reached."Uh-oh.

And what about Valero Energy Corp. (NYSE: VLO)?  Valero had problems keeping up with rising oil prices squeezing its margins.  It seems that lower prices are helping it out in refining, but its stock had to sell off 75% before any real support came in for it from investors.

Refining margins depend heavily on crude oil prices. If the prices aretoo high, refiners suffer. If the price is too low caused by consumers’unwillingness to buy, refiners suffer. Now is not the time to be arefiner.

Paul Ausick
December 24, 2008

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