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Refineries clean up, by restricting supply

Press Enterprise (Riverside, CA)

The following commentary by FTCR president Jamie Court, was published in The Press Enterprise (Riverside, CA) on Sunday, May 15, 2005:

Recently the leaders of Saudi Arabia set President Bush straight on the real cause of high gasoline prices.

“It will not make a difference if Saudi Arabia ships an extra million or 2 million barrels of crude oil to the United States,” said Adel Al-Jubeir, a senior adviser to the crown prince. “If you cannot refine it, it will not turn into gasoline, and that will not turn into lower prices.”

In other words, the recent jump at the pump is not being caused by a shortage of crude oil, but by too few refineries to process that crude into gasoline. In California – where five refiners control 90 percent of the state’s gasoline supply – the artificial shortages that result when oil companies shrink refining capacity are particularly profound.

There are only 12 refineries that produce conventional gasoline in California now, down from nearly three dozen two decades ago.

Refiners today have an incentive to keep inventories too low because when the commodities market senses a shortage, the price of their commodity skyrockets. That’s why Californians consistently pay dimes more per gallon than motorists across the nation.

If the Saudis weren’t telling the truth about domestic refiners, every major oil company in America wouldn’t be reporting world record profits quarter after quarter. Shell Oil reported to stockholders, for example, higher industry profit margins from West Coast refining operations than refining profits anywhere in the world. The reason: Too little supply translates into a
higher price for Shell‘s gasoline.

President Bush may point to OPEC as the problem and drilling in the Arctic as the solution, but the real answer lies in taming domestic refiners. The oil companies cheat by working with competitors to keep gasoline prices artificially high, rather than compete with each other to boost supplies and lower prices.

Waiting for President Bush, an oil man, to act is like Waiting For Godot. The president was missing in action during the last gas price spikes during the 2004 election cycle while collecting
$2.5 million from the oil and gas industry for his re-election.

Fortunately, California can take matters into its own hands, if the Legislature finds the political backbone to stand up to the oil lobby, or voters ever get the opportunity at the ballot box to approve these changes themselves.

Here’s what can be done:

* Give the authority to regulate gasoline supplies to a public utilities board. The commission could require ample inventories, fine companies that profiteer, and stop the closure of refineries. It would chart shipments and supply, and have the power to tell oil companies how to manage supply in the same way the Public Utilities Commission regulates electric power companies and plants.

* Charge an “excess profits” tax on profiteering in the refining business. A California excess profits tax would require oil companies to declare under penalty of perjury how much it actually costs to make and deliver a gallon of gasoline in the state, then impose a tax on any unreasonable rate of return.

* Let sunlight be the best disinfectant. Legislative leaders could subpoena oil executives to the Capitol and have them open their books. If leaders in Sacramento turned a spotlight on the real cost of making gasoline and asked the hard questions about ill-gotten profits, the public would revolt.

* Go to one or two grades of gasoline, down from three octanes. That would increase inventories. The three-octane grade gasoline offering of regular, midgrade and premium results in under-utilization of the existing tanks, many of which sit partially filled with slower-selling high octane gasolines. The small percentage of vehicles requiring higher octane fuel could easily receive the octane boost by pouring a bottle of additive in the tank every other fill-up.

Once it’s established that domestic refiners are most to blame for the jumps at the gas pump, these solutions become unmistakable. All that stands between California implementing them are myths and the power of Big Oil to manufacture and sell them.
Jamie Court is president of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. He served on the state Attorney General’s Gas Pricing Task Force from 1999 to 2003.

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