Introduction Catalysts GAO Conclusion The Cost of Filling Up: Did the FTC Approve Too Many Petroleum...

IntroductionIntroduction

CatalystsCatalysts

GAOGAO

ConclusionConclusion The Cost of Filling Up: Did the FTC Approve Too Many Petroleum Industry Mergers?

Rayola Dougher

Manager, Energy Market Issues

American Petroleum Institute


CatalystsCatalysts

GAOGAO

ConclusionConclusion

Benefits of mergers

Efficiency improvements

Economies of scale

Refining and marketing margins down

Savings passed along to consumers

Market is healthy and very competitive

Introduction


CatalystsCatalysts

GAOGAO


The cost of filling up has gone up. The question is why?

Introduction

$0.77$1.17

$0.54

$0.61

$0.44

$0.39

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

1990 March 21, 2005

(per

gal

lon

co

nst

ant

2005

$)

TaxesMfg/MktCrude

$2.15

$1.77


CatalystsCatalysts

GAOGAO


Profits about average compared to U.S.

5.4% 5.6%

7.2% 7.0%

Last 5 Years 2004

Profit Margins (net income/sales)

All U.S. Industry Oil & Natural Gas

Introduction


CatalystsCatalysts

GAOGAO


Overview

Catalysts for changeRegulatoryEconomic

GAO report

Causality

Crude prices

Refinery utilization rates

Inventory assumptions

Introduction


CatalystsCatalysts

GAOGAO


From 2 gasoline formulations to 17Catalysts


CatalystsCatalysts

GAOGAO


Return on investment(net income/net investment in place)

-4

-2

0

2

4

6

8

10

12

14

16

18

201

99

0

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

03

pe

rce

nt

Standard & Poors Industrials Refining & Marketing

20

02

Catalysts


CatalystsCatalysts

GAOGAO


Producing more gasoline with fewer refineries

0

50

100

150

200

250

300

350

1980 1983 1986 1989 1992 1995 2000 2003

0

20

40

60

80

100

120

140

Number of refineries

Gasoline production

Billions gallonsCatalysts


CatalystsCatalysts

GAOGAO


Gasoline refining and marketing margins have been trending downward

0

10

20

30

40

50

60

70

80

90

100

1980 1985 1990 1995 2000

20

05

ce

nts

pe

r g

all

on

Catalysts


CatalystsCatalysts

GAOGAO


Problems with the GAO report

GAO report

Causality

Crude prices

Refinery utilization rates

Inventory assumptions

GAO


CatalystsCatalysts

GAOGAO


Refiner’s costs—GAO left out 34% of equation

Before After = GAO attributes to merger impact

Refiner’s rack price less crude price

Refiner's Rack Price

Crude 66%

Energy 2%Services 6%Labor 6%Capitol 20%

GAO assumed these costs were constant. They are not.

GAO


CatalystsCatalysts

GAOGAO


Refiner margins differ by crude price

20

22

24

26

28

30

32

34

1994 1995 1996 1997 1998 1999 2000

2004

in

flat

ion

-ad

just

ed c

ents

per

gal

lon Domestic Imported WTI

GAO


CatalystsCatalysts

GAOGAO


Which crude price makes a big difference

0

1

2

3

4

5

6

7

8

9

1994 1995 1996 1997 1998 1999 2000 GAO

(infla

tion

-ad

just

ed

20

04

ce

nts

pe

r g

allo

n)

WTI-Imported WTI-Domestic GAOGAO


CatalystsCatalysts

GAOGAO


GAO – Data problems and limitations

Correlated NATIONAL refinery utilization rates with CITY rack prices

Inventory assumptions neglect:

more costly summer blends

price of crude

decline in inventories

GAO


CatalystsCatalysts

GAOGAO


The cost of filling up has gone up, but not because of mergers

Conclusion

$0.77$1.17

$0.54

$0.61

$0.44

$0.39

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

1990 March 21, 2005

(per

gal

lon

co

nst

ant

2005

$)

TaxesMfg/MktCrude

$2.15

$1.77


CatalystsCatalysts

GAOGAO


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