Consumers suspicious; industry says it can’t control pump costs

Minneapolis Star Tribune

Gas prices shoot through the roof, so the duet begins anew.

First verse: Consumer advocates and oil industry critics scream about collusion, price gouging and obscene profits.

Second verse: Industry spokespeople and government officials reply that nothing more is at work than the natural workings of supply and demand, operating properly and aboveboard.

Coda: The critics launch investigations that they say prove their charges; the federal government’s investigations almost always find that industry officials’ hands are clean.

Ever since the United States’ first energy crisis a quarter-century ago, this is how fuel price spikes have played out politically. And in the midst of gas prices rising past $2 a gallon, the singers are pumping up the volume.

Anger and suspicion on one side are countered by reassurances from the other.

“There’s no question you’ve got a collective cartel here that controls the oil spigots,” said Tyson Slocum, an energy researcher at the Public Citizen consumer group in Washington, D.C. “With their increased market share, there’s no incentive to increase supply, so the prices go up.”

Not so fast, said Juan Palomo, a spokesman for the oil industry’s American Petroleum Institute, based in Washington, D.C. “We can understand people’s frustration when the prices go up, but we had record low prices just a couple of years ago,” he said.

“People need to vent about big oil, and I can understand that, but there’s a general lack of understanding about how markets work,” Palomo said.

After 20 years in the oil business, Darrell Bunge, executive director of the Minnesota Petroleum Council, said he’s resigned to his industry’s reputation as a perennial bad guy. “Public opinion is just skeptical and I don’t know any way we can change that,” he said. “We’ve been investigated to death over the years, but we haven’t been found to do anything wrong.”

The industry argues that today’s record high gasoline prices aren’t particularly painful when adjusted for inflation; by that measure, prices in constant dollars peaked at $2.71 in 1981. But that never quite offsets the sticker shock motorists suffer when they drive by a service station sign announcing prices of $1.90 or more, Bunge said.

“My theory is we’re the only product that consumers price shop at 30 miles per hour,” he said. “Our own street signs . . . act like billboards that outrage people.”

That’s one of the factors contributing to speculation in recent days that the price of gasoline could top $3 a gallon by this summer, surpassing the $2 peak a year ago. A company that makes the retail price signs reported late last week that Chevron has become the first oil company to ask about buying signs printed with $3.

Prices already have topped $2 a gallon in some parts of the Midwest and California, the highest prices in the nation.

Supply and demand

The oil industry’s explanation is straightforward: While demand for gasoline nationwide is running 1.6 percent ahead of last year, gasoline imports are down and production is running about 1.7 percent behind last year – primarily because refineries were forced to produce heating oil for a worse-than-expected winter. Throw in refinery breakdowns and “with all that happening at the same time, you see higher prices,” Palomo said.

Regional price spikes result from a complex infrastructure’s inability to turn on a dime, said Ron Planting, a refinery expert for the Petroleum Institute. “You had those high prices until other supplies could be brought into the region. You can’t just go next door and borrow a cup of sugar. Eventually the supplies came in, but with all the fuel grades and formulations, the system’s not as flexible as it was.”

Rejecting calls for a cut in the federal gas tax, the White House echoed that general explanation. “The singular reason that gas prices are rising is because of a problem with refinery utilization in this country,” presidential spokesman Ari Fleischer said. “Our refineries are running full-bore.”

The critics don’t buy it, saying such a simple explanation belies the market-busting power exerted by big oil companies _ especially in the wake of the gigantic mergers in the industry.

“It’s a rather frustrating situation, where the oil companies are able to create an artificial shortage (where are the lines at the pump?) that pushes prices up,” said Jamie Court, executive director of the Foundation for Taxpayer and Consumer Rights, based in Santa Monica, Calif. “And their price spikes have very little correlation to the cost of production, something that’s very easy for the companies to manipulate.”

The foundation analyzed last summer’s gasoline price spikes in the Midwest, concluding that companies artificially created shortages by shipping gasoline reserves out of the region. It also found that millions of gallons of specially formulated gasoline, mandated in the Chicago and Milwaukee metro areas, were exported, directly leading to motorists in those cities paying the highest prices in the nation.

Industry spokespeople have derided the study, saying the spikes were out of their control and pointing to the fact that they were cleared of wrongdoing, as they have been every time their pricing practices have been investigated. “Every time the price goes up, you hear all these charges about gouging, but the government has repeatedly said there’s nothing to it,” Palomo said. The Federal Trade Commission “found nothing, and that’s just the latest in a number of investigations.”

In fact, after a nine-month investigation, the FTC reported in March that while “no credible evidence of collusion” caused the price increases, “some strategic choices by some oil companies designed to maximize profits contributed to the temporary price increases.”

Those choices included curtailing production and holding available gasoline off the market.

Court said his organization is likely to do more research into this year’s price hikes.

Fleischer also defended the government’s watchdog role. “If there is price gouging, we are able to track it down and put an end to it,” he said Monday. “This is something that has risen virtually every time in the last 20 years that gas prices has come up, and every time the Department of Justice has looked at this matter.”

Public Citizen has taken a different tack, linking record high gasoline prices to record high oil company profits. The seven biggest companies logged profit growth of anywhere from 37 percent to 205 percent during the second quarter of 2000 _ the same time the big price increases occurred.

This year, Exxon Mobil once again led the pack, with a $5 billion first-quarter profit that was nearly 44 percent higher than a year earlier. That increase came as a result of increased profit margins, rather than increased oil production, analysts said.

Palomo said it’s simplistic to link gasoline prices directly to company profits, saying the profits in one quarter of a year have little to do with pump prices today. “And the companies’ profit margins are below most industries,’ ” he said.

Slocum also faulted the government. “Even when they investigate, nothing seems to stick,” he said. “Congress hasn’t been willing to take on the energy companies. And there’s no teeth in federal law. It’s going to take a consumer revolt for something to happen.”