Chevron Executive Defends High Fuel Prices and Profits

Few things anger consumers more than high gasoline prices -- except maybe soaring profits for the nation’s refineries because of high gasoline prices.

The high-price, high-profit combination is on display at ChevronTexaco Corp., which nearly tripled its income from U.S. refineries, fuel sales and transportation operations to $1.3 billion in 2004.

The results were particularly good news for Patricia A. Woertz. She runs the so-called downstream business of refining, selling and trading fuel for ChevronTexaco, which has two refineries in California and is one of the state’s largest fuel retailers. The 52-year-old executive vice president spent the last two years overhauling the San Ramon, Calif.-based oil company’s downstream operations, which employ about 18,000 people worldwide. Woertz rejects the notion that recent refiner profits are somehow unseemly. The refining industry is cyclical, she said, and is merely rebounding from a dismal patch in 2002, when post-9/11 energy demand plummeted and Woertz’s group at ChevronTexaco lost $400 million in the United States.

Refining profits today are largely a reflection of high demand for fuel and crude oil, coupled with slow growth in the ability of refineries to process oil, she said. Woertz tackled the issue of refinery earnings and other subjects during a recent interview in San Francisco.

Question: What are your thoughts on the future of refining in the United States and California?

Answer: Demand [for fuel] is still growing at 1% to 2% a year in the U.S., refineries are running at about full capacity, and we’re importing about 10% a year. It continues to be kind of a constrained environment. So maybe over the next 5 to 7 years, refining can find itself in a little bit of a higher band [of profit margins]. We certainly saw a very high band in 2004. Will that remain forever? I don’t think so, but it will be somewhat of a higher trend than it’s been in the past. Things can change very quickly, of course, and we can have sources of demand fall off, the economy could not be as strong as it is today, or you could find new sources of supply, say, from outside the U.S.

Q: But with the supply-demand gap what it is today, wouldn’t it require a major economic catastrophe of some sort? Either that, or hybrids take over the world?

A: Any of the opportunities to have demand fall off quickly seems to me to come from current consumer behavior. Will people stop driving? Probably not. Will they drive somewhat less? It depends on both their behaviors and what they’ve been used to buying. People are still buying vehicles -- that’s always a good indication that they will continue to drive. They’re buying bigger vehicles. So it’s hard to imagine that there will be something precipitous, but you can’t ever predict the future.

Q: The industry talks pretty openly about California being the most profitable refining market. What makes it so?

A: The West Coast of North America has good weather, it has a strong amount of growth, it has populations that are young and continuing to grow. In general, where you have strong economic growth, most industries tend to prosper, which of course would include the gasoline manufacturing industry. In addition, California has [fuel] specifications that are the tightest in the world. It’s like a bull’s-eye that you’re having to hit all the time ... so if you ever have a supply disruption, because it is so difficult to make, it causes a constraint on supply and that has an effect to it.

Q: Operating profit from your U.S. refineries nearly tripled in 2004, despite having to buy crude oil at escalating prices. When you have high gasoline prices, and you post very high refining margins, how do you explain that to the traveling public that is thinking, ‘This is more than a nice profit. This is gouging me.’ ?

A: I think it’s a misinformed question. Actually, prices are lower on an inflation-adjusted basis. They are 28% lower than they were in 1981, for example. We’ve had high times and low times. If you look at milk prices, or water prices, or electricity prices, or other things that we spend on in our daily lives, I think there should be less irritation about the price of gasoline compared to other commodities. It’s a real bargain, actually.

Now you asked that compared to a profitable quarter or a profitable year for an oil company, and I think those rates of return -- particularly when compared to those years of zero rates of return -- it balances out to quite a bit less than most other manufacturing sectors. But you don’t get the same questions about an Intel or a Hewlett-Packard ... are they gouging or whatever.

Q: But the public knows that oil is controlled largely by a cartel, and that most commodities are not. Plus, it’s a necessity.... How do you counter that?

A: Well, investigation after investigation after investigation, particularly here in California, ... has shown that it’s a highly competitive industry; there is no collusion. In fact, as taxpayer dollars are spent on additional investigations, you’d almost like to hope that they’d read the last investigation with the same exact data and/or allegations.

Q: What’s your reaction to those who think California’s refining industry is nonetheless a tight oligopoly -- where so few players dominate the market that actions by any one of them can materially affect prices?

A: I think I would probably turn them to the California Energy Commission, or to some of these investigations. They conclude that it’s a very competitive market. The independents certainly add to that competitive nature, so it’s not just a small group of companies, but it’s a very long list of companies. I suggest that those who have a different view go to some of this research material.