Oil firms’ profits gush

Published on

Critics want to reinstitute price controls

Chicago Tribune

As the price of gasoline soars, nearing last summer’s record levels, oil companies are raking in huge profits. Just this week, ExxonMobil, Chevron, Unocal and others delighted shareholders by handily beating profit expectations.

The oil companies, noting that gasoline prices were historically low in inflation-adjusted dollars for most of the 1990s, contend that their current windfall is merely the favorable phase of a highly cyclical industry. But outraged consumer groups say the oil industry is manipulating the market and needs to be more tightly regulated.

“This is a pure speculative run-up on the price of gasoline,” said Jamie Court, executive director of the Foundation for Taxpayer and Consumer Rights, a California-based consumer watchdog group. “Crude oil hasn’t gone up at the rate gasoline prices have spiked. They are pocketing everything in profit.”

Court suggested a return to price controls similar to those instituted by President Richard Nixon in 1971 and lifted by President Ronald Reagan in 1981.

A.G. Edwards & Sons analyst Bill O’Grady, while acknowledging that the winnowing of the industry to a few dominant companies creates the possibility of manipulation, nevertheless defends the industry’s pricing.

“Profits are not a bad thing,” O’Grady said. “You have to have profits in order for companies to go out and explore new oil fields.”

But others contend that the industry has the ability to control supply and set prices. Moreover, they note, the oil business serves a largely captive market: It’s hard to tell the mother who has to drop her children at day care or the traveling salesperson to cut down on the consumption of gasoline when the price rises.

Thursday brought only more bad news for consumers. U.S. gasoline futures prices reached $1.109 a gallon on the New York Mercantile Exchange, a touch below the all-time high $1.11-per-gallon price at the advent of the Persian Gulf war in August 1990, before settling at $1.104.

“Gasoline inventories are tight, and you’ve got a lot of people scared to death that there won’t be enough supply who are driving prices up,” said O’Grady. He suggested that convenience store owners have helped to raise prices by aggressively using the futures market to lock in supplies of gasoline.

Also Thursday, U.S. Sens. Charles Schumer (D-N.Y.) and Susan Collins (R-Maine) issued an energy report that forecasts demand for petroleum in the U.S. will increase 17 percent in the next 10 years, with consumption rising to almost 23 million barrels a day from almost 20 million barrels.

Given the current supply situation, crude oil prices will shoot up by 123 percent, the report said.

Structural problem

Bill O’Neil, commodities analyst with Merrill Lynch in New York, described the crunch primarily as a structural problem.

“The problem is with the infrastructure of U.S. refineries, and it has developed because relatively low prices in the past created no incentive to develop refining capacity,” O’Neil said.

The problem is compounded by the lack of a cohesive energy policy, which he predicted would take years to develop. “It’s not a light-switch problem,” O’Neil said.

David Sykuta, president of the Illinois Petroleum Council, which represents the major oil companies, agreed. “If people were just carting money away in wheelbarrows, how come refineries are shutting down?” he said.

This year St. Louis-based Premcor Inc. closed its refinery in Blue Island. With its capacity to produce 80,000 barrels a day, the refinery accounted for about 2 percent of the Midwest’s total refinery capacity. Currently, 157 refineries operate in the United States, roughly half the number operating in 1980.

The merger effect

Refining problems aside, consumer groups place much of the blame for high prices on oil industry consolidation through mergers and acquisitions.

“These prices are not the result of a free competitive market,” said Tim Hamilton, an advocate for independent gasoline retailers and consumer groups. “Without a doubt the megamergers in the industry have given the oil companies the ability to raise prices to the consumer. It’s been very beneficial to a handful of people, especially from Texas.”

As Court put it, “You could basically control the price of gasoline over a table of eight in a restaurant.”

Sykuta, meanwhile, derided price caps as a wacky California notion. “It’s unfair to say these companies are doing an evil deed to the public,” he said. “The oil business has to be one of the most cyclical. It’s a constant stream of gloom and glut. That’s why the companies are so big; there are few companies that can afford that kind of risk.

“Even in its consolidated state, the oil industry is more competitive than any other major U.S. industry,” he said.

But even O’Grady has questions about the impact the tremendous size of the companies may be having on the market.

“The oil companies may be getting to the size where they start behaving like OPEC countries,” O’Grady said. “Why should they behave any differently than an OPEC country? We expect people to behave in their best self-interest.”

Ordinarily, that would encourage new entrants to the market. But O’Grady said that most of the untapped oil appears to be in locations that are politically and geographically undesirable, such as Kazakhstan and the Caspian Sea.

“We’ve got to come up with a way of reducing demand or generating new supply capacity or both,” he said. “It may take another year of high prices to reduce demand.”

Consumer Watchdog
Consumer Watchdoghttps://consumerwatchdog.org
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

Latest Videos

Latest Releases

In The News

Latest Report

Support Consumer Watchdog

Subscribe to our newsletter

To be updated with all the latest news, press releases and special reports.

More Releases