Boom and Bust, Risk and Reward

Oil refineries have been reporting RECORD profits… but before we get out our torches and pitchforks, let me ask a question: what has the risk and uncertainty of the last two years done to your company’s operating costs? How about your profit margins?

Risk and input cost volatility must be priced into an industry – and while it may seem greedy or unfair to rake in profits hand over fist while so many people are struggling with the prices at the pump, I suggest that the alternative is worse.

That alternative is what we’re currently seeing in the semiconductor industry. All of the environmentally destructive, capital-intensive parts of the chip manufacturing process have outsourced (to unfriendly or uncertain countries). Now the federal government is stepping in to subsidize investment.

Citizens and businesses will pay for risk one way or the other – through taxes or at the pump. Which do you prefer?

In this week’s episode of Dial P for Procurement - Why is fuel so expensive? - I dig into the oil supply chain, gathering details about costs, profits, risk, and capital investments to put today’s oil industry financial results into perspective.

Refineries Are Making Headlines With Record-high Profits

• Exxon Mobil, Chevron, and Shell – reported a collective $46 Billion Q2 profit
• Valero reported $4.7 B net income in Q2, 29X 1 year ago and above expectations

It would be easy to point at refinery operators and accuse them of driving high prices at the pump, but that would be too simple. And if you’ve listened to a few episodes of Dial P, you know we don’t do simple. There are multiple factors and years at play…

The U.S. Has a Problem with Refinery Capacity

• According to the American Petroleum Institute, there are 11 fewer operational refineries in the U.S. today than there were before the pandemic
• Politico reports that U.S. fuel production capacity has fallen by nearly 1 million barrels per day since early 2020

In a recent WSJ article , Matthew Blair, an Equity Analyst at Tudor, Pickering, Holt & Co, pointed out that “refineries are a high fixed cost business and small changes in margins can have a big impact on profitability.”

• Valero spent 2020 and 2021 with either breakeven or negative net profit margins, averaging between 2-4% profit between 2012 and 2020.
• Other refineries entered the pandemic carrying heavy debt and ended up closing, either because they could not afford to operate or because they could not afford elevated sustainability-driven insurance costs.
• The whole industry has been affected by high labor costs and increased steel prices.?

Today’s record refinery profit margins are not lasting or reliable. If we don’t want the U.S. government to have to intervene to keep domestic refineries in operation (like they are doing with semiconductor manufacturing capacity), we need to allow for years of high profitability to offset years of losses and mounting debt. The reward associated with operating a refinery has to compensate for years of significant risk, allowing companies to bounce from boom to bust year after year.

Other topics I address in the Dial P for Procurement episode include:

• The troublesome volatility of crude oil prices and how they ripple through the whole supply chain
• Why gas stations are definitely not making money on today’s high fuel prices
• Whether sanctions against countries like Russia and Iraq are having the desired effect, and how much they account for record high prices at the pump
• What procurement and supply chain professionals can do to keep fuel spending in control – and how they can reverse this particular curse

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Other Content Released This Week

?? Art of Procurement Podcast: Hour of Change and Challenge: 10X the Impact of Procurement

? This Week in Business History for August 2nd: Tasting Stars with Dom Perignon

6?? The Procurement 6 podcast for Friday, August 5th on Art of Procurement

?? The Sourcing Hero podcast episode 76: Tapping Into the Thoughts of Today’s CPOs with Tarek Alaruri and Greg Tennyson

?? How to Track and Measure Workforce Diversity on Supplier.io

?? The Supply Chain Buzz for August 1: Dial P for Procurement Edition