[Oil Price Fact Check] Did Only Refiners Profit in the Era of High Oil Prices?

Surprising Earnings Boosted by Refining Margin Gains
Domestic and Export Volumes of Petroleum Products Similar
Concerns Over Declining Petroleum Demand in Second Half

[Editor's Note] As high oil prices persist, the blame game over fuel prices is in full swing. Refiners are accused of sitting idly and making excessive profits, while gas stations are criticized for quickly raising prices when international oil prices rise but delaying price cuts when they fall. The social atmosphere repeatedly suspects collusion in fuel pricing during these opportunities. Although rising fuel prices are not necessarily anyone's fault, they are always the target of criticism.

Claims that taxes included in fuel prices are excessive have also been repeated for several years. Despite being a very unique market where price information from international oil prices to refinery supply and gas station sales is transparently disclosed, controversies over fuel prices rarely subside. Through some fact-checking on fuel prices in the era of high oil prices, we aim to distinguish misunderstandings and truths in the oil market.

[Asia Economy Reporter Oh Hyung-gil] During the period of high oil prices, refiners' earnings have soared, leading to criticism that refiners are "sitting idly and making excessive profits." Although fuel prices reflect international oil prices, they are accused of not lowering prices promptly and engaging in profiteering at the expense of ordinary citizens. Discussions are even underway in political circles to recover the excess profits refiners have earned during the high oil price period. Are refiners really "making a windfall"?

According to the industry on the 14th, refiners are expected to achieve record-breaking earnings in the first half of the year. This is due to rising oil prices and strong refining margins. It is true that they are benefiting from high oil prices.

According to financial information firm FnGuide, SK Innovation's consensus operating profit estimate for the second quarter (average of securities firms' earnings forecasts) is 1.274 trillion KRW, expected to increase by 152% compared to the same period last year. Sales are expected to rise 72% to 19.1191 trillion KRW compared to the same period last year.

In the first quarter, SK Innovation recorded sales of 16.2615 trillion KRW and operating profit of 1.6491 trillion KRW, an increase of 6.8571 trillion KRW in sales and 1.0647 trillion KRW in operating profit compared to the same period last year. With rising refining margins and a significant increase in petroleum product export volumes, the petroleum business alone achieved an operating profit of 1.5067 trillion KRW. Exports increased by 31 million barrels, up 57% from the same period last year.

S-Oil's second-quarter sales are projected to increase 63% year-on-year to 10.5674 trillion KRW, with operating profit expected to rise 98% to 1.1283 trillion KRW. Achieving over 1 trillion KRW in operating profit for two consecutive quarters since its founding is becoming a foregone conclusion. GS Caltex and Hyundai Oilbank are also expected to record strong performances following the first quarter.

However, as refiners post such "surprise earnings," they are criticized for making profits through excessive price pass-through during the high oil price period. They are accused of refining cheaply purchased crude oil and selling it at high prices to generate excess profits.

There are also voices suspecting price collusion due to the domestic petroleum product market being an oligopoly composed of only four companies. A representative case is when the Lee Myung-bak administration imposed fines of about 430 billion KRW on refiners in 2011 for alleged collusion to control fuel prices, but lost in lawsuits filed by the refiners.

▲Overview of the Nexlene plant within SK Innovation's Ulsan Complex, the largest oil refining company in Korea

However, the profits earned by exploiting the price difference between crude oil and petroleum products, i.e., inventory valuation gains, are a natural management strategy for refiners.

Another fact is that refiners earn a significant portion of their profits from exports. This year, the growth rate of petroleum product export volumes reached the highest level in 11 years.

In the first quarter, petroleum product exports amounted to 108.99 million barrels, a 20.0% increase compared to the same period last year. This is the highest growth rate since the first quarter of 2011 (25.6%). Export value rose 95.3% to 12.03 billion USD, the highest in 22 years since 2000.

According to the Ministry of Trade, Industry and Energy's export-import trends, the top export item in the first half of this year was semiconductors, recording 69.02 billion USD. The second was petroleum products, recording 30.38 billion USD. Petroleum product export value showed the highest growth rate, increasing 89.3% compared to the same period last year.

In particular, petroleum products recorded 5.48 billion USD in exports last month, an 81.7% increase compared to the same month last year, significantly contributing to reducing the trade deficit.

The domestic consumption and export proportions of petroleum products are similar in scale. According to the Korea National Oil Corporation, petroleum product exports from January to May totaled 197.71 million barrels, a 15.7% increase compared to the same period last year. During the same period, domestic consumption excluding naphtha was 206.65 million barrels, not significantly different from export volumes. This means they are not making money solely from domestic fuel sales.

The problem is that the refining industry’s boom will not last forever. Just a few years ago, refiners struggled with losses amounting to trillions of KRW. In 2020 alone, they recorded operating losses exceeding 5 trillion KRW. The driving force that helped them endure the crisis caused by the sharp decline in petroleum product demand due to the COVID-19 pandemic was the reserves accumulated during prosperous times.

Recently, amid inflationary pressures, the demand slowdown for gasoline and middle distillates is gradually becoming a reality, and there is growing anticipation that refining margins will decline in the second half of the year.

Jeon Yoo-jin, a researcher at Hi Investment & Securities, said, "Under high oil prices and inflationary pressures, concerns about demand slowdown are gradually materializing. Gasoline and middle distillate demand in the U.S. has begun to decline, and unless a global economic recovery occurs, further demand decline is inevitable."

A refining industry official expressed concern, saying, "Due to global economic recession caused by tightening, petroleum product demand may fall immediately, which could lower international oil prices and turn inventory gains into losses."