Gasoline Supplies Should Be Regulated and ‘Shortages’ Should Be Prevented

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Los Angeles Business Journal

The following commentary by FTCR’s Research Director Judy Dugan, was published in the Los Angeles Business Journal on Monday, May 8th, 2006.

Anyone whose hair stood on end during the latest round of record oil company profits ought to start bracing now for next quarter’s reports.

Half of California’s dollar-a-gallon price spike since Jan. 1 for regular gasoline has come in the last 30 days, thus wasn’t included in first-quarter earnings. It is hard to imagine oil companies continuing to spin their defiant excuses — the price of crude oil, the price of ethanol — when they are increasing prices so much faster than their costs.

This cartel-like behavior has broken the laws of supply and demand; it should be controlled with updated regulation and antitrust laws that rely less on direct evidence of collusion and more on the visible result.

The oil industry has sent out an army of spin-doctors to deny, deny, deny that oil companies are profiteering, but their believability is now nil. For instance, even using the most skilled accounting methods and taking advantage of every possible loophole, San Ramon-based Chevron reported a profit increase over a year ago of 49 percent. But that’s not the really shocking figure. It was a 262 percent increase in profits on refinery and sales operations — Chevron‘s so-called downstream income. This comes directly on the backs of motorists, particularly in California.

If drivers smell a rat at the gas pump, their noses are telling the truth. Instead of competing on price and increasing refined gasoline supplies during the current spike in crude oil prices, refiners are doing the opposite, and in concert. There is no other reason for pump prices for jump a dollar on, at most, a 30-cent-a-gallon rise in crude oil prices and state taxes, since manufacturing costs, federal taxes and other prices — including for ethanol — were relatively stable. As further proof of profiteering, the price rise in Washington state, which doesn’t use ethanol, was just as rapid.

Lawmakers’ expressions of amazement at oil company behavior have a familiar ring: Could oil companies really be restricting and manipulating refinery supplies too keep prices up? Is there really so little competition? As recent history proves, the answer is an uncomplicated “Yes.” Federal investigations and document leaks to consumer groups over several years demonstrate that market supply manipulation is widespread.

One internal BP Oil memo from 1999 talked of “significant opportunities to influence the crude [oil] supply/demand balance” to raise prices. Even more explicit internal documents, from Mobil and others, discussed ways to restrict refinery output in California buy buying up others’ output and preventing new production. Michigan Sen. Carl Levin said in a 2002 investigative hearing: “In certain regions of the country, the refining market is so concentrated that oil companies can act to limit supply’ without adequate competition to challenge them.” To anyone who wonders if such activity continued, recall Shell Oil’s 2003 attempt to shutter its profitable Bakersfield refinery without offering it for sale. A consumer rebellion initiated by the Foundation for Taxpayer and Consumer Rights led to its sale and successful continued operation.

Regulation needed

This puts the lie to oil industry whining about being unable to boost capacity because of environmentalists. It wasn’t tree-huggers trying to close Bakersfield. Oil companies could also increase capacity at existing refineries more easily than building from scratch, but they won’t unless forced to.

Even in recent weeks, California refineries switched to production of oil formulas to sell in other states, keeping supplies tight in the state. Inexplicable refinery “shortages” recently boosted statewide prices higher as other states leveled off.

It was the monopolistic Standard Oil Trust (what we would now call a cartel) that gave birth to the Sherman antitrust law in 1890. It and its successors have grown dusty. Today, oil industry mergers and new technologies allow the few dominant companies to monitor one another’s production, refinery and storage levels, coordinating their actions without direct communication. Independent oil industry analyst Tim Hamilton, who has conducted industry studies for FTCR, told Senate investigators in February: “The evolution of PC computers, Internet communications and other modern technology, allow the industry to legally use tacit collusion that nearly mirrors the monopolistic powers of the Standard Oil Trust.”

Conservation is necessary to reduce oil consumption, as is development of alternative energy. But in the here and now, gasoline supplies should be regulated like electricity in this car-dependent state. Refinery operations should be fully public, to help prevent mysterious “shortages.” And antitrust laws should acknowledge how modern corporations can limit competition without lifting an overtly collusive finger.
Judy Dugan is research director of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

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