Motorists aren't the only ones seeing red over the recent jump in oil prices. Companies like Crown Central Petroleum Corp. also are feeling the pinch.
Baltimore-based Crown Central, a producer and distributor of gasoline, heating oil and related products, occupies a vulnerable middle level of the oil industry that historically has been pounded whenever oil prices shoot up.
The major oil companies -- the Exxons, Mobils and Texacos of the world -- have their own reserves of crude oil that immediately appreciate in value when the price of oil skyrockets, providing instant profit when sold to others. Crown Central, a so-called "independent" refiner, lacks that cushion and must buy crude oil on the open market to feed its two Texas refineries.
And even though many consumers perceive that gasoline prices have soared in the past 10 days right along with the price of crude oil, Crown Central officials said they have not been able to increase their gas prices enough at their several hundred Crown stations and their wholesale business to recoup their increased costs for crude. While the price of crude oil is up about 20 cents a gallon in the past two weeks, Crown has been able to raise its wholesale gasoline prices only 5 to 15 cents a gallon because of competitive pressures. The same squeeze confronts its retail business.
"That is not adequate to cover the total replacement costs should crude continue at its current level of $26" a barrel, said William R. Snyder, Crown Central's vice president for administration.
Crown Central is not alone in this quandary. Other independent refiners have found themselves in a similar vise as crude prices have soared beyond most gasoline prices since Iraq invaded Kuwait, causing a crisis in the Middle East and upheaval in world oil markets. "We're normally squeezed when prices go up, to some extent, and we just have to try to be as efficient as we can and be as best we can during periods like that," said John R. Hall, chairman of Ashland Oil Inc., the nation's largest independent refiner.
As a result, Crown Central, Ashland and other independents are taking a beating on the stock market while stocks of bigger oil companies are rising. At the same time that oil prices were rising $8 a barrel, Crown Central's stock was falling $4.50 a share, to close at $26.50 Friday.
Crown has seen times like these before in its 67-year history -- including earlier this year, when a rise in crude oil prices briefly outstripped the increase in prices of gasoline and other products, cutting into first-quarter profit -- and Snyder said the company believes the current situation eventually will right itself, with crude prices dropping from their current highs or gasoline prices moving up slowly to meet production costs.
Crown buys crude oil both domestically and abroad. Its 50,000-barrel-a-day refinery in Tyler, Tex., gets virtually all of its oil from oil fields in East Texas, at current market prices, while its 100,000-barrel-a-day Houston refinery buys some oil from Texas and gets the rest -- about 70 percent of its needs -- from the North Sea, Angola, Nigeria and other foreign sources.
That means that Crown must purchase a medium-size tanker load of imported oil about once a week at whatever is the going rate. And when prices take off, things get tricky, according to Snyder. "Obviously, the first consideration is how to replace your inventories of crude oil at the time you need it, and at a price you think you can buy it, and still make a profit," he said. "The problem is that the volatility in the market is so extreme that there are no benchmarks to work with."
Financing, in particular, becomes difficult, Snyder said. "If crude prices go up quite substantially -- like they did in the last 30 days, from $16 a barrel to $26 a barrel -- then in your own financial planning you must provide for that," he said. In some cases, that means that the company, which carries little debt, must take out short-term loans to pay for the oil -- which doesn't produce any income in the several weeks it takes to process and ship to wholesale terminals and dealers. "In any case, you've got the cost of the money tied up in the inventory while you're processing the crude," Snyder said.
As most motorists have noticed in the past few days, the higher prices of replacing crude oil inventories are passed on to the pump almost immediately, with customers usually getting a break at the other end of the cycle when product prices drop in the marketplace before companies have finished using up their higher-priced crude.
Even so, Snyder said, Crown Central is limited by competitive considerations from raising prices at the pump quickly enough to cover higher crude costs. Price-sensitive customers usually gravitate to the stations selling the cheapest gas, making it difficult for a company with a cost disadvantage to price its products above the market. In addition, it is almost impossible for smaller companies like Crown to take the lead in pricing over the much bigger oil companies.
"Without question, smaller companies like Crown Central cannot be a leader on pricing," Snyder said. "We price our product competitively and follow the market." Indeed, Crown dropped its wholesale gasoline price 4 cents last week in response to competitive pressure.
Snyder said he expects the situation for his company to ease in the next few days as crude oil prices stabilize, and perhaps -- because there is a surplus of oil on world markets -- drop somewhat.