Would those be the greedy refiners whom Joe Biden spent most of 2019-2020 promising to shut down? The same refiners who have to tangle with Biden’s executive order that all but eliminates the ability to expand operations?
Yes, indeed, it is. Biden and the White House argue that the US is in “a time of war” now to demand action, a declaration that certainly raised a few eyebrows:
Pres. Biden sends letters to 7 major oil refiners – an area of intense focus at the WH due to capacity issues.
-Energy Sec will convene emergency meeting
-Companies asked to provide reasons for reduced refining capacity and “any concrete ideas” to address issues pic.twitter.com/WCJdl1l1EQ
— Phil Mattingly (@Phil_Mattingly) June 15, 2022
President Joe Biden on Wednesday called on U.S. oil refiners to produce more gasoline and diesel, saying their profits have tripled during a time of war between Russia and Ukraine as Americans struggle with record high prices at the pump.
“The crunch that families are facing deserves immediate action,” Biden wrote in a letter to seven oil refiners. “Your companies need to work with my Administration to bring forward concrete, near-term solutions that address the crisis.” …
The letter notes that gas prices were averaging $4.25 a gallon when oil was last near the current price of $120 a barrel in March. That 75-cent difference in average gas prices in a matter of just a few months reflects both a shortage of refinery capacity and profits that “are currently at their highest levels ever recorded,” the letter states.
This is a lot of drizzly nonsense, and in some corners might even be considered “misinformation.” We’ll get to the reasons why the bottlenecks in refining have forced prices higher, but let’s first look at the assumptions. Have refiners made windfall profits in this crisis? Only if one describes “windfall” so broadly as to be meaningless.
The EIA lists the ten top US refineries by capacity, the first of which is owned by Saudi Arabia’s Aramco. Their P&L is not published, since it’s not a publicly traded firm, but others on the list are. Marathon operates the next two largest refineries as well as partners on #9. What do their financials tell us? Marathon’s total income in Q1 was $38.384 billion with costs at $36.668 billion, for a post-tax profit of $1.454 billion — or a net margin of 3.8%. Marathon paid $282 million in taxes in Q1 for a tax rate of 19.6%, by the way. And that is a significant improvement over the 2021Q1 report, but only because Marathon lost money in that quarter — $136 million, in fact.
The next two refineries on the EIA list at positions 4 and 5 are owed and operated by ExxonMobil. I wrote extensively about ExxonMobil’s financial statements on Saturday as well as Biden’s brainless demagoguery of them, so be sure to read it all. Briefly, though, ExxonMobil’s net margin in 2022Q1 was 6%, a bit better than 2021Q1’s 4.6%, but still relatively modest. They also paid a 32% tax rate in Q1 of this year.
Next up is BP, who took a reported loss in Q1 of $20.4 billion, in large part because of US and EU sanctions on Rosneft and other Russian producers. That cost BP $24.4 billion, but even if that hadn’t occurred, the net profit from Q1 would not have differed much from 2021Q1’s $2.3 billion in profit. Citgo’s Q1 report only reflects its income, but at $518 million, it’s not in the same league as the other corporations — likely because CITGO is a subsidiary of PDVSA, which is a sovereign firm owned by Venezuela. That’s only its refining operation income, which did bounce up significantly from the previous year, but also the report notes that their refineries are already operating at 95% of capacity, too.
Finally, Chevron fills the tenth slot on the EIA list. Its Q1 report shows $54.373 billion of sales against $45.319 billion in costs. Their pretax profit amounted to $9.054 billion, with taxes paid of $2.777 billion for a tax rate of 30.7%. The net profit of $6.259 billion is a net profit margin of 11.5%, much better than 2021Q1’s 4.3% net profit margin. However, it also shows that Chevron increased both inputs and outputs of its US refineries in 2022Q1 over the previous year, so it’s not scaling back output at all.
So Biden’s entire predicate for this letter is simply false. The real reason for escalating gasoline costs, the industry’s lobbying group responded, was regulatory hurdles that prevent any expansion of refining capacity, along with policy hostility that keeps scaring off investors:
“While we appreciate the opportunity to open increased dialogue with the White House, the administration’s misguided policy agenda shifting away from domestic oil and natural gas has compounded inflationary pressures and added headwinds to companies’ daily efforts to meet growing energy needs while reducing emissions,” API CEO Mike Sommers said in a statement.
Sommers added, “I reinforced in a letter to President Biden and his Cabinet yesterday ten meaningful policy actions to ultimately alleviate pain at the pump and strengthen national security, including approving critical energy infrastructure, increasing access to capital, holding energy lease sales, among other urgent priorities.”
Does Biden really want more oil and more refining in America? The first step would be to rescind his EO 13990, and then some efforts to adjust permitting processes to allow for quick construction and expansion of refining capacity. As long as Biden keeps EO 13990 in place, he’s simply demagoguing.
And this is only the second-dumbest response in Washington DC to skyrocketing gas prices. Senate Democrat Ron Wyden wins that kewpie doll this week:
Oil companies that record a profit margin better than 10% would face a new federal surtax under a plan developed by a key senator, as Democrats and the White House struggle to curb US energy costs and broader inflation.
The proposal by Senator Ron Wyden, an Oregon Democrat who chairs the tax-writing Finance Committee, would mean oil companies face federal taxes of as much as 42% on profits considered excessive — the 21% US corporate tax rate plus a new 21% surtax, according to two people briefed on the proposal. …
“The proposal I’m developing would help reverse perverse incentives to price gouge, by doubling the corporate tax rate on companies’ excess profits, eliminating egregious buybacks and reducing accounting tricks,” Wyden said about the proposal he plans to introduce in the coming weeks. “By contrast, companies that provide relief to consumers by either reducing prices or investing in new supply would not be affected.”
First off, the only major oil company to poke its head into double-digit net profit last quarter was Chevron, and only briefly. Even then, the argument is absurd, since we don’t charge an income-tax surcharge onto other corporations whose net profit margin exceeds 10%. But even if we did start taxing oil companies, who pays that cost? The end-use consumer pays those costs in higher prices, the very issue that Wyden claims his policy will address.
And if Wyden and Biden plan to enforce a cap on return on investment, good luck getting capital to expand capacity. It’s a perfect storm of idiocy and demagoguery on energy policy at the moment, and the only expectation we should have is that it will get a lot worse.
Update. 6/17, 4:30 ET: I realized that I had neglected to link to the Chevron data. I’ve fixed it now.
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