Crude used for East Valley gasoline comes from all over the world, but the process to get it from the field to the tank is controlled by a handful of big oil companies.
They explore for, drill and pump it. They own most of the refineries to turn it into gasoline, and they make up the lion's share of the retail market.
Combine two decades of consolidation and mergers in the industry, increased demand for oil and a volatile world situation that has resulted in rampant market speculation, and the result is record high gas prices.
“You've got high crude prices, you've got state and federal gasoline taxes, you've got increased consumption — I mean who has stopped driving — you really do have U.S. refinery limitations, you've got the OPEC production cutbacks and you've got state environmental regulations that call for cleaner burning gasoline,” said George Seitts, Arizona Energy Office director.
“Energy products are always volatile. We've become used to pretty solid, steady supply and good prices. But if you look at things over time, there were warning signs. The country keeps growing, but the infrastructure doesn't grow,” he said.
About 70 percent of the gasoline in the East Valley comes from California and 30 percent from Texas. Most of the oil California's 13 refineries use to make the Valley's gas is produced in California and Alaska. About 30 percent of it is foreign oil that is shipped from as far away as Australia and as close as Canada.
Gasoline from Texas is refined in New Mexico and Texas using oil mainly from domestic fields. A small percentage comes from oil pumped in the Middle East and shipped to the Gulf Coast for refining.
Big oil companies, under contract with petroleum-rich countries, discover and drill for crude. The oil is shipped by pipeline to a coastal area where it is stored. The companies, either using their own or leased ships, load the oil at an off-shore platform and transport it to refineries in the United States.
Oil is unloaded and run through a pipeline to an off-shore port where it is pumped onto land and stored.
“All of these stages are costs reflected in the amount a refiner is willing to pay for a barrel of crude,” said Mark Baxter, adjunct professor and director of the Maguire Energy Institute at the Southern Methodist University Cox School of Business. “The guy who is selling that $41 a barrel oil, it did not cost him that much, so anything above and beyond that is profit for him.”
The latest federal government statistics show the cost of crude oil is roughly half the cost of a gallon of gas. California Energy Commission numbers show for every $1 increase of the cost of a barrel of oil, there is an average increase of about 2 1/2 cents per gallon of gasoline. A $10 increase per barrel in crude prices means a 25 cent increase at the pump.
Once at refineries, oil is turned into gasoline, diesel, propane, butane, kerosene, or jet fuel, and heavy bunker fuel for power plants and ships. Gas is made and burned in the refinery process as fuel. The oil is also used to make asphalt and roofing shingles.
Gas is stored at the refinery before it is shipped by a pipeline to a marketing and distribution terminal in Phoenix. Ethanol is added to the gas to improve air quality. Additives that can cost consumers 5 cents to 7 cents a gallon are put in by oil companies that promise better engine performance. A truck hauls it to a gas station that pays a wholesale price. It is put in underground storage tanks for use by motorists.
While the margins can be figured at each step of the process, it's difficult to determine oil company profits.
“We're not reading their books,” said David Cowley of AAA Arizona. “We know what gas costs when it gets to the port and we know what we're selling it for wholesale, the difference is the margin. Break it down from there? We can't.”
For instance, Cowley questions why oil is selling for more than $40 a barrel when OPEC says its profits are suitable at prices between $22 and $28.
“To me, it's windfall profit,” he said. “That's not oil company money, that's more the producing country. That's OPEC. But the oil company makes money the whole way. The only place they are taking a serious risk is at the beginning in exploration. Exxon and Chevron are getting some of that $40. Presumably, Saudi Arabia is getting most of it. Then Exxon gets it again when they refine it.”
Baxter said finger-pointing at big oil companies may not be justified, even though he admits they are reporting record profits.
“They took the risk to get there,” he says. “Since I've been in the industry, what these companies do is they retire their debt and they reinvest. Oil companies have to replace reserves every year."
Others take a dimmer view of the role of oil companies in higher gas prices.
Mark Cooper, author of Fueling Profits, a report done for the Consumer Federation of America and the Consumers Union, said industry consolidation, excess profits and federal neglect are the domestic causes of recent gasoline spikes.
He said most refiners don't pay the market price for oil.
“The actual refiner acquisition costs are probably $38 a barrel today,” he said. “That's about 90 cents a gallon. About 40 percent of the crude used to produce gasoline is domestic so of that 90 cents, 35 goes to domestic oil companies.”
Taxes, on average, make up 42 or 43 cents a gallon. And the rest is what Cooper calls the domestic spread, or refining and marketing operations.
“Right now, it's 68 cents if gas averages $2 per gallon,” he said. “That's the number we complain about because that number was 25 cents less 4 years ago. They pushed that number up real high. It's not necessarily gas stations, but refiners making the money. Most gas stations are integrated anyway. Oil companies set the price.”
Cooper said 80 percent of the nation's refiners are run by large oil companies that also produce oil and market gasoline. The United States has not built a refinery since the mid-1970s.
Foreign refineries also play a role in East Valley gas. Refineries in Finland, Saudi Arabia, Venezuela and Singapore ship gas directly to Los Angeles harbor to be put in a pipeline for the Valley, said Mark Ellery, a policy adviser with the state Energy Office.
Because the United States is relying more on imported gas, any supply disruption causes jumps at the pump. Domestic refiners say they can't keep up with summer driving demand and gas inventories are 5 million barrels below normal for this time of year.
Cowley predicts more foreign refiners will take advantage of expected high prices this summer.
“I suspect we'll get a flotilla of ships from the east and west, Japan, anybody that can refine and we're going to see gas stocks go up a little bit,” he said. “As they sort of flood the market with gas, the price should ease off a little bit.”
In California, seven large oil companies control 92 percent of refining capacity, said Joe Sparano, president Western States Petroleum Association. In most cases, companies refine their own oil, but they also buy barrels on the market.
“Those seven companies are competitive as hell,” he said. “Those folks are fighting each other every day. It's a 5 cent on the dollar business and the reason there aren't more players is it's not a great business. If it was a better business, you'd have a refinery in Arizona.”
Higher refinery margins don't always translate to profit, Sparano said. The California crudes contain high amounts of sulphur and metals and it costs more to run refineries. He said the state's refiners paid $5 billion in the early 1990s to retool plants to make ultraclean burning California gas. Energy costs to run the refineries are up significantly since last year, he said.
“There's no mystery why there are only 13 gasoline-producing refineries left in California,” Sparano said. “The other 20 that were there in the mid-1980s have closed for the most part because their owners could not afford to pitch in that $5 billion of investment.”
Baxter estimates refining profits can be anywhere from 3 to 7 cents a gallon.
“Historically when crude oil prices go up, refineries really hurt,” he said. “They just to seem to be able to catch up and pass those costs along as quickly as they need to. That's an advantage of an integrated oil company. When the refineries are hurting, they're exploration and production is really doing well.”
He said pipeline operators such as Kinder Morgan, which supplies the Valley with gas, can make anywhere from 8 percent to 10 percent return on investment.
“Pipelines don't make more profit if oil is higher,” he said. “They charge a tariff, so many cents per barrel. It doesn't matter if that barrel is $2 barrel cost or if it's a $12 a barrel because all they're doing it is transporting it, say at 50 cents per barrel.”
On the retail side, California Energy Commission statistics from 2001, the latest available, show six major oil companies own 87 percent of the market. Ninety percent of gas stations in the state are either leased from the oil companies or owned by independent business people who buy from small refiners and wholesalers who often have agreements to sell only company-branded gasoline.
The AAA study showed the money made by a gas station has fallen by more than a penny from the 2000-03 average of 12.2 cents per gallon. In the southwestern United States, retailers are seeing margins averaging 12.8 cents per gallon, a half cent over the 3-year average.