FTC launches Shell antitrust probe

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The Seattle Times

The U.S. Federal Trade Commission (FTC) is investigating whether Royal Dutch/Shell Group’s plan to close a California refinery violates antitrust rules by reducing competition in a market that already has the highest gasoline prices in the continental U.S.

The refinery near Bakersfield, which Shell says it will shut in October because it’s not economically viable, is one of 13 facilities in California that produce the low-polluting gasoline blend required by state rules.

A U.S. General Accounting Office study released in May found that six oil-industry mergers in the late 1990s lifted U.S. gasoline prices an average of 2 cents a gallon.

“The increased consolidation which we have found and the General Accounting Office has found and others have found makes it easier for these companies to engage in anti-competitive behavior,” Tyson Slocum, research director for Public Citizen, a Washington-based consumer group, said in an interview.

California Attorney General Bill Lockyer and members of the state Legislature have asked Shell to keep the facility open, saying that lack of competition in the state’s refining business is lifting prices.

Gasoline pump prices touched a record $2.327 a gallon in California in May, while the nationwide average reached $2.036, also an all-time high, according to government data. Gasoline inventories in California are tighter than in the rest of the nation.

“This state’s market is extremely fragile,” Tom Dresslar, a spokesman for Lockyer said. “Any disruption, any lowering of supply, substantially bumps up the pump prices.”

Energy prices have become part of the U.S. presidential campaign. The Democratic candidate, Sen. John Kerry from Massachusetts, has said the Bush administration isn’t doing enough to address U.S. energy needs.

Democratic Sen. Ron Wyden of Oregon and Sen. Barbara Boxer, a California Democrat, last month threatened to block the appointment of Deborah Majoras, President Bush‘s choice to head the FTC. Both lawmakers said they were looking for Majoras to provide new direction to the agency’s enforcement of antitrust laws on the oil industry.

“We’re looking at whether there is any antitrust misconduct associated with the decision to close” the Bakersfield refinery, William Kovacic, the Federal Trade Commission’s general counsel, said yesterday at a hearing of the energy subcommittee of the House Committee on Government Reform on gasoline prices.

The agency has a range of remedies to pursue should it find that the refinery closure violates antitrust standards, Kovacic said.

Asked if the commission could block closure of the facility, Kovacic said, “in theory, yes.” Subpoenas have been issued, Kovacic said. He declined to provide further details.

The GAO, the watchdog agency of Congress, found mergers increased market concentration in the refining and sale of gasoline, leading to higher wholesale prices. The FTC said the GAO’s study was flawed because it didn’t account for other factors that might have contributed to higher prices.

California gasoline prices are higher than elsewhere in the U.S. because of the limited refinery capacity, according to a study by Severin Borenstein, James Bushnell and Matthew Lewis at the University of California, Berkeley.

The state has “the potential for greater premiums due to the ability of some firms to exercise market power,” the study concluded.

California’s inventories of its cleaner-burning gasoline are 7.9 percent lower than a year ago, according to the California Energy Commission. Supplies in the rest of the nation are about even with last year, based on Energy Department data.

The Bakersfield refinery can process 70,000 barrels of crude oil per day. It produces 2.2 percent of the state’s gasoline supply and 6 percent of its diesel fuel, according to the California Energy Commission.

Shell has said the refinery is not economically viable in part because the supply of the particular crude oil grade that it uses has been declining. Shell is willing to sell the refinery should a buyer reach a different conclusion.

Shell spokesman Stan Mays said the company was cooperating with the investigation.

“It’s nothing new,” he said. “They have been evaluating our decision and we have been cooperating in that regard for several months. We will continue to answer any questions that they have.”

He said the decision to close the refinery was a matter of economics.

“The refinery is a small, inland, inefficient refinery that can no longer compete with larger, sophisticated refineries … typically located on the coastline,” Mays said. He said the refinery has lost $50 million over the last three years and faces $30 million to $50 million in upgrade costs.

A watchdog group, The Foundation for Taxpayer and Consumer Rights, last month sent internal company documents to the FTC that show Shell faces no shortage of crude for its California refineries, according to Jamie Court, the group’s president.

“Why would you take 2 percent of the state’s gasoline off line at a time when margins are at a record,” Court said. “Because you don’t want a competitive market. You want to shrink inventories and keep the system running on a bare minimum.”

More than 25 companies and individuals have expressed interest in purchasing the refinery, Shell spokesman Stan Mays said in an interview. Of those, six have signed confidentiality agreements that allow the exchange of more detailed information on refinery operations.

U.S. refiners are enjoying record profit margins as a result of above-normal demand for gasoline and diesel produced by ConocoPhillips, Exxon Mobil, Valero Energy and other refiners.
Information from The Associated Press is used in this report.

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