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NEW YORK (AP) — U.S. refiners are getting high prices for their gasoline and diesel while paying less for the crude and natural gas needed to make it.
This is leading to big profits even though demand for gasoline is down in the U.S. as the economy plods along and more efficient cars than ever are zipping along the nation's highways.
Paul Cheng, an analyst at Barclays Capital, calls it a "new golden age" for U.S. refiners.
The reason is a surprising dynamic in world oil markets: There's a relative glut of crude in the U.S., the world's biggest oil consumer. Demand for gasoline and other fuels is as low as it's been in a decade, while oil production is booming in the middle of North America at newly-prolific fields in North Dakota, the Rockies, Texas and Canada's oil sands.
This surplus means refiners such as Valero Energy Corp., Phillips 66 and Marathon Petroleum Corp., along with the refinery divisions of oil giants ExxonMobil Corp. and Chevron Corp. have to pay less for their crude.
But this oil "glut" is not turning into a glut of gasoline. U.S. refiners are using their cost advantage over foreign competitors to export record amounts of gasoline.
U.S. refineries that use crude priced in the middle of the country, called West Texas Intermediate oil, have been buying at a discount of $15 per barrel on average so far this year compared with competitors abroad who buy oil pegged to Brent crude, which is priced in London.
That price discount has persisted for more than a year, and helped boost profits at refineries in the central U.S. Now, though, even the price of oil along the Gulf Coast, which usually tracks the more expensive Brent, is beginning to fall. By next year, that oil, known as Light Louisiana Sweet, is expected to be $3 to $4 per barrel cheaper than Brent crude, according to Barclays. The Gulf Coast is where most of the U.S. refinery capacity is located.
Refiners are also benefiting from domestic natural gas prices that are half or even one-third the price of natural gas abroad. Refiners burn natural gas to help cook oil into fuels.
Bill Klesse, CEO of Valero, cited the low cost of natural gas and access to cheaper crudes in a conference call on Tuesday. That helped the company compete with European refiners, he said. Kleese believes the cost advantage along the Gulf Coast is going to "materialize significantly."
"There's no question, if you're a Mid-Continent refinery, you're making a lot of money," he said. "But we believe you can compete in the world market...even by coming out of the U.S. Gulf Coast."
Barclays estimates US refiners along the Gulf Coast will average a profit of $16.87 per barrel this year, compared with a profit of just $2.31 in Europe and $8.36 in Singapore. Cheng predicts less efficient refineries in Europe, Japan and Australia could be forced to close.
The U.S. Energy Department projects that gasoline demand in the U.S. will fall for the third straight year this year, and drop again in 2013. The U.S. is burning about the same amount of gasoline it did in 2001. Consumption of all petroleum products, including diesel, jet fuel and heating oil has fallen even further, to 1997 levels.
But the lower costs for U.S. refiners means they can ship the fuel that Americans don't want abroad and still make a good profit. Exports of petroleum products reached a record 914 million barrels last year, and were the biggest U.S. export category by value. Petroleum product exports were 11 percent higher this year through May.
Valero's net income rose 12 percent in the second quarter and its shares are up 30 percent so far this year. Marathon Petroleum's net income rose slightly in the quarter, and its shares are up 45 percent this year. Exxon and Chevron posted lower overall earnings, but results at their refinery divisions rose sharply. Other refinery shares that have soared this year include Western Refining Inc., which is up 76 percent, and HollyFrontier Corp., which is up 60 percent.
Jonathan Fahey can be reached at http://twitter.com/JonathanFahey .