Crippled by last fall's hurricanes and facing the prospect of more storms this year, U.S. petroleum refiners have struggled to reopen and boost production.

And yet, refiners see another year of record profits on the horizon, boosted by sky-high gasoline prices and tight new fuel standards.

Wall Street appears to agree. This year, analysts have increased their earnings estimates for nearly all independent refiners. Investors have followed and share prices have risen by as much as 59% since January.

"Refiners could counterfeit money, but it wouldn't be nearly as profitable," says Tom Kloza, publisher of the Oil Price Information Service in Wall, N.J.

A perfect storm of sorts is expected to boost this year's earnings. Aside from the usual switch to cleaner gasoline blends in the summer, refiners had to pay out billions of dollars to meet strict regulations for gasoline and diesel. These changes, combined with limited capacity -- some refiners are still battling to return to full production following Hurricanes Katrina and Rita -- are driving up wholesale gasoline prices, tightening supplies and padding refiners' profit margins.

Independent refiners, unlike most major oil companies that drill and refine crude, earn all of their money from refining. They make money when they can sell refined products -- not only gasoline, but other products like propane and jet fuel -- for more than a barrel of crude. Despite higher oil prices, their profit margin, or "crack spread," has nearly tripled over the past six months, to $17.55 a barrel.

Although oil prices have climbed 20% over the past six months, prices for refined products have risen more. That increase, and the ability to process crude that is high in sulfur, has cemented refiners' profits. Although high-sulfur crude is more complicated and costly to process, it is more abundant and costs less. For instance, Mexican Maya crude, which has high levels of sulfur, sells for $14 less per barrel than West Texas Intermediate.

Spreading Out
Stock gains for major refiners over the last six months.

Crude heavy in sulfur is less expensive because not many refiners can process it. New government specifications that lower sulfur levels in gasoline and diesel have also dampened its price because some refiners only want oil with little sulfur.

During the first quarter, low prices for heavy oils and rising prices for gasoline and other refined products helped boost refiners' earnings. At Valero Energy (VLO - Get Report), the country's largest refiner, profits soared 59%, while earnings jumped 67% at Frontier Oil (FTO) and 54% at Tesoro (TSO). Holly's (HOC) profits skyrocketed 244%. In contrast, Sunoco's (SUN - Get Report) profit plummeted 32% largely because it can only process costly oil low in sulfur.

"We had the highest first-quarter earnings in the company's history, and the outlook for the rest of the year is even better," said Bill Klesse, Valero's chief executive, in a conference call last month.

Analysts, accordingly, raised their annual estimates for Valero's earnings over the past month to a mean average of $7.92 a share in a Thomson First Call poll. At Holly, projections advanced to $6.13 a share from $5.91. Forecasts for Frontier Oil climbed to $5.19 a share, and Tesoro is expected to make $8.01.

The estimates surpass results in 2005, when a pair of hurricanes shut down much of the Gulf Coast's refining industry. Last year, Valero earned $6.10 per share, Holly made $5.30, and Frontier $4.80. Tesoro earned $7.20 a share.

"We have a tiger on our hands in the energy complex," says James Ritterbusch, president of Ritterbusch & Associates, an energy consultancy in Galena, Ill. "Refineries are plugged in for another good year."

This year, changes in fuel requirements are expected to cut supplies and drive up prices in the short term, boosting refiners' returns.

Refiners have been draining their tanks of gasoline containing methyl tertiary butyl ether, or MTBE, which, though it reduces tailpipe emissions and allows gasoline to burn cleaner, has been linked to groundwater pollution. Starting May 5, refiners lose protection from hundreds of water-contamination lawsuits, as mandated by the federal Energy Policy Act of 2005.

As MTBE is phased out, refiners are blending gasoline with ethanol, a motor fuel made from corn and sugarcane. But ethanol is more expensive and tougher to transport because it must be delivered separately from gasoline and then blended at a terminal before delivery. (MTBE is added at the refinery and then sent through pipelines.) Because ethanol makes gasoline evaporate very quickly, refiners have to modify gasoline to blend with ethanol. That makes the reformulated gasoline more expensive.

MTBE isn't the only challenge refiners are facing. Beginning June 1, diesel must have 15 parts per million of sulfur, compared to 500 now. Refiners had to modify their facilities, and altogether, the changes cost $19 billion over the past few years, according to the National Petrochemical and Refiners Association in Washington.

The advent of the hurricane season, which begins June 1, should also buoy energy prices -- and profit margins. Traders will be worried another round of tropical storms will again damage the Gulf Coast's petroleum industry and drive down supplies. Six months after Hurricanes Katrina and Rita, almost a quarter of the region's oil industry remains offline.

"I think refiners are in a sweet spot until the hurricane season is over," says Kloza.

Not all analysts are so bullish. Some predict crack spreads will peak this month and then come under pressure after ethanol is phased in. Jacques Rousseau, an energy analyst at Friedman Billings Ramsey in Arlington, Va., expects margins will be 16% lower this year as high gasoline prices crimp demand.

"In refining, the market is pointing to specification changes as bullish, while we see this as, at best, a short-term positive," wrote Paul Sankey, an energy analyst at Deutsche Bank, in a March 20 report.

Already there are signs consumers are cutting back. Over the past four weeks, gasoline demand averaged 9.1 million barrels per day, or about equal to last year, according to the U.S. Energy Department. Last year at this time, demand growth was up nearly 1%.

With oil prices so volatile, it becomes harder to predict where profits will go. An impasse with Iran over its nuclear program and reduced production in Iraq and Nigeria, the largest African crude producer, have boosted oil futures by $10 to $15. Analysts call this a "risk premium" and say that oil and gasoline prices would drop if any of these problems disappeared.

"If the risk premium is withdrawn, margins could really be squeezed," says Ben Tsocanos, an energy analyst at Standard & Poor's in New York.

Still, there are ways refiners can keep pumping out profits over the next few years. Capacity is constrained -- there have been no new refineries built since 1976 -- and a new one is not slated to open for another three years. In the U.S., the number of refineries has fallen from a high of 324 in 1981 to 148 last year, figures from the U.S. Energy Department show. Low profit margins forced many refiners to shut down and file for bankruptcy over the past 20 years, making them loath to invest in new facilities. Instead, they've made do with expansions, increasing capacity to just below 1981 levels.

Another factor that may boost the industry's earnings is deteriorating crude quality. Production of light, sweet crude is declining as older fields mature and new sources of heavy, sour crude come online. Because heavier oils are less expensive, refiners that can process them stand to profit enormously.

A growing U.S. economy and a squeeze in refining capacity should keep gasoline supplies tight and prices high for the next few years. Gasoline consumption has risen 45% since 1981 and doesn't appear to be slowing anytime soon. U.S. drivers, hit with sticker shock at the pump, won't be happy to hear it, but refiners' profits are likely to remain high for some time to come.