California pays for corporate chicanery

The San Francisco Chronicle

The following Op-Ed commentary by FTCR president Jamie Court, was published in the San Francisco Chronicle on Sunday, May 14, 2006:
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Californians are paying the highest price in the continental United States for gasoline. The nation’s big oil companies announced world record profits for the first quarter, building on last year’s world record profits. Sound familiar?

The latest version of California’s electricity crisis registered $3.37 per gallon at the pump last week.

A few years ago, Enron and other energy companies turned off the lights and robbed Californians blind. They did it by closing power plants and artificially withholding electricity to give the illusion of scarcity. That made the price of electricity soar, even though the price of producing it was minimal.

Big Oil is playing a similar game now. A few large oil companies are making billions of dollars by artificially limiting refined gasoline supplies to jack up prices far in excess of raw material and production costs. (That’s why a recent drop in crude oil prices isn’t resulting in reductions at the pump.)

California oil refiners have rigged their system by limiting the number of refineries and running on low inventories. The companies have closed nearly half the state’s refineries since federal gasoline deregulation in 1981. Today, the gasoline supply barely meets demand. As a result, the commodity appears scarce and the market price for it is sky high, along with profits.

The latest proof comes from government gasoline pricing reports. They show that from January to April, crude oil costs increased far less than the run-up in gasoline prices, even assuming that refiners all had to pay the high “spot market price” for crude oil, which they didn’t.

The increases in the crude oil “spot price” accounted for only 12 cents extra per gallon of the 60-cent rise in that period. More than 40 cents of the 60-cent increase in gasoline prices over 3 1/2 months came as increased refinery profit margins for the oil companies.

The reason oil companies generally do not pay the spot price for crude is that they either harvest crude oil from their own fields or have long-term contracts at cheaper prices. So even the oil spot price calculation gives oil companies too much credit for increased costs of producing gasoline.

The refiners also blame increased costs for ethanol additives for the big jump at the pump. But if ethanol blending increased costs for oil companies in California, other states in the West using conventional unblended gasoline should not be as affected. Yet Washington state, which uses only conventional gasoline and has similar refinery capacity and crude oil sources, saw increases at a higher percentage rate than California’s. To pump up their profits, refiners have also taken a page out of Enron‘s playbook by shipping needed energy products out of the state.

According to a California Energy Commission report, state refiners recently switched production from our state’s gasoline formula to gasoline that could be used only in other states, including Arizona, Nevada and Oregon. The supply of export gasoline increased by a startling 38.5 percent during a single week, while production for in-state use fell by more than 10 percent. This prevented any surplus in California, which would have pushed prices downward.

The most visible proof of refiner profiteering came in corporate reports to shareholders. Chevron, for example, informed its investors of a 49 percent increase in net income financed by a 260 percent increase in refining and marketing profits, in large part coming from California.

When oil companies can make more money by making less gasoline, what is their incentive to change?

Only the big stick of government regulation of the gasoline supply can help.

First, the state Public Utilities Commission should be charged with regulating gasoline supplies. The commission could require refiners to meet demand by controlling exports of gasoline products and by monitoring refinery shutdowns to prevent manipulation of supplies. If necessary, the commission could force oil companies to build new refining capacity.

Second, California needs to invest in alternative fuels to stop our dependence on petroleum and the companies that control it. Signatures are expected to be turned in soon for a November ballot measure to take back a small portion of oil companies’ windfall profits in order to fund the development of alternative fuels that could significantly reduce gasoline consumption and fuel prices.

Unfortunately, Big Oil, like Enron, has paid a lot of campaign cash for its political cover. For example, Gov. Arnold Schwarzenegger has received $2.2 million in campaign contributions from oil companies, running a close second to President Bush ($2.6 million) for top spot in most campaign contributions in America from Big Oil.

If California politicians had acted quickly to take over power plants and stop the electricity rip-off, Californians would have saved tens of billions of dollars. State officials need to learn from that lesson or the financial toll from this “energy crisis” — and the next — will be just as bad.
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Jamie Court is president of Santa Monica’s Foundation for Taxpayer and Consumer Rights. Contact us at: [email protected]