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View From Exit 24
Are we over a barrel?

Dick Larsen, Senior Editor

Mounting fuel prices as summer arrives leaves truckers wondering if they’ve been flim-flammed once again — held hostage by retailers, “big oil” and OPEC, who play this expected seasonal shell game.

In California, for example, Shell Oil Co. is closing a refinery in Bakersfield, one of three it operates in the state. Consumer groups say the company really wants to stifle capacity so prices will rise. Why would the company increase supplies, thereby decreasing its profits, the reasoning goes?

The company, however, insists oil fields in the area are running dry.

Others say California’s situation is devoid of carny tricks. A panel of academic experts recently met with the Assembly Transportation Committee at the state Capitol.

They concluded there’s no industry price gouging. Instead, they cite the escalating price of crude to more than $40 a barrel, limited state and U.S. inventories and a competitive market.

Other states agree, responding to allegations of gouging by retailers or by “big oil.”

Nebraska Attorney General Jon Bruning recently said he found no evidence of price-gouging by retailers. He said investigations instead found how little retailers profit during times of high prices.

“They’re making a lot less money on gasoline than anybody thinks,” Bruning told the local press. “That’s why you don’t see any pure gas stations any more. There’s always a convenience store attached. These are businesses, after all.”

In Florida, meanwhile, Gov. Jeb Bush responded to reporters’ questions about rising prices. He said Attorney General Charlie Crist would address price gouging; however, he doesn’t think there is any illegal activity going on.

“We have a problem in our country right now that we are dependent on foreign sources of oil, and that creates a long-run problem for our country,” Bush said.

In Illinois, Gov. Rod Blagojevich said the state should monitor retail and wholesale gasoline prices to guard against price gouging.

He wants the Department of Revenue to watch for unjustified price increases. If they find any, Blagojevich says the information will be sent to Illinois Attorney General Lisa Madigan for further action.

All of this sounds like politicians playing their own “now you see it, now you don’t” game in an effort to convince the public they actually want to do something about the problem.

Even at the federal level, regulators for years have declined requests by U.S. legislators to investigate allegations of fuel price gouging.

So what’s really going on here — who is profiting?

A May report by the Consumer Federation of America and Consumers Union suggests some answers.

According to the report, domestic petroleum companies have stuck U.S. gasoline and natural gas consumers with about $250 billion in price hikes since January 2000, resulting in an increase in after-tax windfall profits of $50 billion to $80 billion.

“The industry became concentrated in the hands of a few vertically integrated companies and allowed domestic oil companies to shut down refineries, reduce stocks and exploit markets when they become tight,” said Mark Cooper, CFA’s director of research. “Since these price increases were about padding the corporate bottom line, not about responding to increased costs, petroleum industry profits have risen to record highs over the period.

“Based on results from the first quarter of this year, domestic petroleum industry profits are headed for another record, with refining and marketing profits up about 50 percent compared to the first quarter of 2003,” Cooper added.

Cooper made the charges in a joint telephone news conference with officials of Consumers Union to announce their report: “Fueling Profits: Industry Consolidation, Excess Profits & Federal Neglect, Domestic Causes of Recent Gasoline and Natural Gas Price Shocks.”

Among other measures Cooper would like to see:

  • Investigations by federal and state law-enforcement agencies to prosecute domestic oil companies that violate the law. Such investigations will likely modify the companies’ behavior when it comes to pricing, he says.
  • A congressionally mandated windfall profits tax, thus taking the incentive out of manipulating supplies to increase profits. In addition, policymakers should increase market flexibility by expanding fuel stocks through tax incentives.
  • Prevention of further consolidation through vigorous enforcement of the Department of Justice Merger Guidelines to encourage competition; and, expose companies that withhold supplies through a joint federal state task force of attorneys general.

“These policies would build a much more competitive and consumer-friendly energy market in this country for a lot less than the $250 billion consumers already have handed over to the oil companies,” Cooper concluded. “The $20 billion that the energy bill would give to the oil industry would be better spent as a down payment on a long-term commitment to reduce demand and increase domestic market flexibility.”

However, an oil industry trade group spokeswoman dismissed the report.

“It’s not a fair characterization of what’s happening in the market,” said Rayola Dougher, senior policy analyst for the American Petroleum Institute.

“This is a ludicrous accusation about the mergers,” she told The Kansas City Star. “Companies merge in order to stay in business, to cut the bottom line.”

Because of the mergers, she told the paper, companies had to spin off refineries and gas stations to other companies.

“If anything, the mergers enhanced competition,” she said.

She also said many of the 50 refineries closed because they could not meet new environmental regulations without incurring large costs. She also said new formula requirements had placed new burdens on refineries.

The higher prices, she said, are caused by a huge demand in the face of fewer and costlier supplies. American demand for fuel has increased despite the higher costs, she said, and that demand is exacerbated by a 30 percent increase in demand from China.

Prices for crude oil charged by OPEC nations have risen to $40 a barrel, compared with $10 a barrel in 1999, she said.

“There have been 30 investigations into gouging; all have failed to find any wrongdoing,” Dougher said. “No one is deliberately keeping inventories low.”

It’s useful to listen to both sides on this issue. But in the end, our eyes and ears trick us. After all, it’s hard to guess under which shell the pea resides, because this game is as old as the carny itself.

Dick Larsen can be reached at dick_larsen@landlinemag.com.

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