Sunoco 2011 Annual Report Download - page 22

on this relationship. Retail marketing margins also have been volatile, and vary with wholesale prices, the level
of economic activity in our marketing areas and as a result of various logistical factors. Although an increase or
decrease in the price for crude oil may result in a similar increase or decrease in prices for refined products, there
may be a time lag in the realization of the similar increase or decrease in prices for refined products. In many
cases, it is very difficult to increase refined product prices quickly enough to recover increases in the costs of
products being sold. The effect of changes in crude oil prices on operating results therefore depends in part on
how quickly refined product prices adjust to reflect these changes. A substantial or prolonged increase in crude
oil prices without a corresponding increase in refined product prices, a substantial or prolonged decrease in
refined product prices without a corresponding decrease in crude oil prices, or a substantial or prolonged
decrease in demand for refined products could have a significant negative effect on our earnings and cash flows.
We may experience significant changes in our results of operations due to planned or announced additions
to refining capacity by our competitors, variations in the level of refined product imports into the United States,
changes in product mix (including increasing usage of renewable biofuels) or competition in pricing. Demand for
the refined products we manufacture also may be reduced due to a local or national recession, or other adverse
economic conditions, resulting in lower spending by businesses and consumers on gasoline and diesel fuel. In
addition, our profit margins may decline as a direct result of unpredictable factors in the global marketplace,
many of which are beyond our control, including:
•Cyclical nature of the businesses in which we operate: Refined product inventory levels and demand,
crude oil price levels and availability and refinery utilization rates are all cyclical in nature.
Historically, the refining industry has experienced periods of actual or perceived inadequate capacity
and tight supply, causing prices and profit margins to increase, and periods of actual or perceived
excess capacity, resulting in oversupply and declining capacity utilization rates, prices and profit
margins. We are currently in a period of oversupply, largely as a result of reduced gasoline demand in
North America and over capacity in Europe and North America. The cyclical nature of this business
results in volatile profits and cash flows over the business cycle. Additionally, due to the seasonality of
refined products markets and refinery maintenance schedules, results of operations for any particular
quarter of a fiscal year are not necessarily indicative of results for the full year.
•Changes in energy and raw material costs: We purchase large amounts of energy and raw materials for
our businesses. The aggregate cost of these purchases represents a substantial portion of our cost of
doing business. The prices of energy and raw materials generally follow price trends for crude oil and
natural gas, which may be highly volatile and cyclical. Furthermore, across our businesses, there are a
limited number of suppliers for some of our raw materials and utilities and, in some cases, the number
of sources for and availability of raw materials are specific to the particular geographic region in which
a facility is located. Accordingly, if one of these suppliers were unable to meet its obligations under
present supply arrangements or were unwilling to sell to us, we could suffer reduced supplies or be
forced to incur increased costs for our raw materials.
•Geopolitical instability: Instability in the global economic and political environment can lead to
volatility in the costs and availability of energy and raw materials, and in the prices for refined
products. This may place downward pressure on our results of operations. This is particularly true of
developments in and relating to oil-producing countries, including terrorist activities, military conflicts,
embargoes, internal instability or actions or reactions of governments in anticipation of, or in response
to, such developments.
•Changes in transportation costs: We utilize the services of third parties to transport crude oil and refined
products to and from our refineries. After our exit from the refining business, we will likely continue to
require those services for the acquisition of gasoline and diesel for our retail marketing business. The cost
of these services is significant and prevailing rates can be very volatile depending on market conditions.
Increases in crude oil or refined product transportation rates could result in increased raw material costs or
product distribution costs. Our operating results also may be affected by refined product and crude oil
pipeline throughput capacities, and accidents or interruptions in transportation.
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