Quote:
Originally Posted by artplumber
So how did they make money in 2004 and early 2005 at these (or less) prices?
It's nice when an industry sees not being able to produce its product as a positive since it will jack up prices.  |
If you had any clue about what you were talking about you would not be rolling your eyes. Here's a lesson:
Refiners use a benchmark called a crack spread. Typically it's the 3-2-1- crack spread. That basically takes into account the price of crude oil and compares it to the sale price of an equal volume of finished product made up of 3 parts gasoline, two parts diesel and one part jet or fuel oil. Here's an example:
http://www.bloomberg.com/apps/cbuilder?ticker1=CRK321M1%3AIND
Typically a break even crack spread is around $7 depending on how efficient and modern a refinery is. That is how much it costs to make the fuel not counting the raw material.
That cost has risen over the years due to higher energy costs (electricity, natural gas etc) higher labor costs, higher materials costs like piping and valves etc.
In 2004 it was probably a dollar or two per barrel cheaper than it is now so the break even point was around $5 to $6 then.
If you look at that chart I provided the link for, the crack spread in the first quarter of 2004 was averaging about $7.50 which was profitable. In May it jumped up to about $12 and then settled back to $7 in September and stayed there until around march 2005. $2 per barrel gross profit is nothing to sneeze at in the refining business, that's almost 5 cents per gallon. After everything is added up, that's still probably around 2 cents per gallon net profit. Not bad at all.
See, refining works on small profit margins and large volume. But if the profit drops 10 cents per gallon, they go deep into the red. The volume starts worknig against them. they live off their cash reserves and maximize cash flow at the expense of profits, hoping they can keep their heads above water until the market turns around and they start being profitable again. That's what they are doing now.
Around May of 2005 the crack spread jumped big time and they were making good money.
Notice that the 3-2-1 crack spread is just over $5 today.
With expenses of $7 per barrel, that's a negative $1.75 per barrel or a 4 cent per gallon loss. Now if you figure that the average refinery processes about 5.2 million gallons per day, that's a net loss of $210,000 per day per refinery. Many oil companies have over a dozen refineries. Cant keep that up forever.