The Tulsa World (Oklahoma)
Critics point to huge profits as proof of price gouging Bombarded by allegations of price gouging and market manipulation, oil and gas companies are under increasing pressure to justify record profits and face the possibility of more regulatory control.
Last week, members of the Senate Energy and Natural Resources Committee grilled executives of the nation’s largest oil refiners. During questioning, senators said the companies had a “desire to short the market” and were “purposely keeping refining capacity low” to increase profit margins.
The uproar stems from the sharp spike in oil and gasoline prices last summer and the record profits that followed in the third-quarter. The consumer backlash could grow as winter sets in and heating bills soar. Gas bills for customers in the Midwest could rise as much as 61 percent this winter, the government has said.
U.S. gasoline prices have dropped from more than $3 a gallon in the aftermath of Hurricane Katrina, but motorists are still paying, on average, $2.37 a gallon, according to the U.S. Department of Energy.
QuikTrip in Tulsa was selling regular for $1.98 on Saturday.
Industry advocates maintain the higher prices are the result of a major swing in supply and demand, and that oil and gas profits are no greater than the profits of banks, software firms and pharmaceutical companies.
“We’ve seen an increasingly tight market over the past several years,” said Lee Fuller of the Independent Petroleum Association of America. “Worldwide, you’ve seen increasing demand, particularly in China and India, which has put constant pressure on the oil market.”
Jamie Court, president of the Foundation for Taxpayer and Consumer Rights, has a different theory.
Fuel supplies are tight because the industry deliberately made less gasoline and ignored a need to build new refining capacity, he said.
“When there are no inventories being built up every summer when we know they’re going to be needed — that’s a recipe for huge profits,” Court said.
Internal memos from several big oil companies expose a strategy to drive up profits by shutting down U.S. refining capacity, Court said.
“They rigged the system for high prices this summer,” he said. “They didn’t expect Katrina, but they did expect some shock to the system. This is an industry you can’t leave unregulated, and yet we have.”
Under pressure from angry constituents, members of Congress have offered a number of proposals that would reduce profits for oil and gas companies, including a windfall profit tax and a plan to distribute the tax proceeds to American consumers in the form of “refund” checks.
Industry advocates see the situation differently.
America’s oil and gas companies are reinvesting 150 percent of their profits in new production projects, Fuller said.
“They’re borrowing money to develop more upstream assets,” he said. “We’re taking the money we receive from these prices and putting it back into more production.”
Congress should back off and allow the free market to work, said Keith Bailey, former chairman and chief executive of Tulsa-based Williams Cos. Inc.
Congress is “pandering to what they believe the voters will respond to,” Bailey said. “That’s completely irresponsible on the part of the elected officials.
“They’re going to get stuff passed after the market has already dealt with it, and then they’re going to create an environment where people are going to be much less willing to invest in domestic energy.”
A windfall profit tax was lev ied against oil and gas companies in the 1980s. The results were disastrous, Fuller said. It reduced domestic production and discouraged investments in domestic energy — about $40 billion worth, he said.
“It was bad policy, and it didn’t work,” Fuller said. “It didn’t make sense at the time, and it doesn’t make sense now. It took money out of production. As a result, we produced less oil and we got more dependent on foreign imports.”
Criticism of the oil industry is coming from some the industry’s strongest Republican supporters, including Senate Majority Leader Bill Frist, R-Tenn., and House Speaker Dennis Hastert, R-Ill. Both are pressuring the industry to build more refining capacity.
“Even extremists within the Republican party are coming to the realization that this is not a crude oil problem, but a refining and supply problem,” Court said.
But he and others are not expecting any immediate action from Congress. The proposed measures have not gained enough Republican support to be successful.
“The only thing we’re going to see is some informal pressure on the oil companies to increase refining capacity,” Court said.
The government should have the authority to force refiners to build new capacity, he said, adding that the market is being manipulated and isn’t working like it should.
“We need supply-side regulation,” Court said. “The gasoline market needs to look more like a public utility.”
The criticisms and claims of foul play are nothing new to the energy industry.
Americans feel they’re entitled to cheap energy, Bailey said. “When prices spike, the industry is vilified by Congress and threatened with punitive action, but its contributions to the economy are rarely recognized.”
“The energy industry, in the 40-plus years I’ve been involved with it, has always been a sort of congressional whipping boy — something the public in times of high prices always finds fault with,” he said. “I think that’s unfortunate because there are very few industries that you can look to that have actually done more for the economy.
“We are an energy-dependent economy, and it’s the people who went out and found, created and commercialized all these various forms of energy that have enabled us to have the economy we have today.”
Exxon Mobil Corp. posted a third-quarter profit of $9.9 bil lion, up 75 percent from a year ago. Royal Dutch Shell earned $9.4 billion, a 68 percent increase. ConocoPhillips reported a third-quarter profit of $3.8 billion, up 89 percent from a year earlier.
Tulsa-based Oneok Inc., a leading distributor of natural gas, made $184.5 million in the third quarter, nine times greater than earnings in the same quarter last year. Unit Corp., another Tulsa-based energy company, said earnings more than doubled in the third quarter to $57.6 million.
A Oneok spokesman said the company’s chairman and chief executive, David Kyle, was unavailable for an interview. Phone calls to Unit President and CEO Larry Pinkston were not returned.
“The proof of price gouging is in the profit reports,” Court said.
Oil companies do not set the price of crude oil, which accounts for half the cost of a gallon of gasoline. But they do set the price of the refined product, he said.
“Oil companies do set the market price,” Court said. “They set it at the wholesale level, by which every dealer in the nation has got to buy from.”
————–
Contact the author Russell Ray at 581-8380 or [email protected]
