'Big Oil' Eyed in Gas Price Blame Game

By Grant McCool
May 11, 2002

NEW YORK (Reuters) - Is "Big Oil" holding American car owners and businesses over a barrel by boosting gasoline prices every spring and summer for peak driving season?

The sudden price increases have become an annual event that consumer groups blame on the industry and companies blame on environmental laws mandating expensive fuels -- but this time, federal regulators say they're taking sharp aim at the problem.

The Federal Trade Commission said Wednesday it had begun collecting gasoline prices from tens of thousands of U.S. service stations to detect quickly any price spikes and investigate the reasons for them.

The probe was prompted by pressure from politicians, consumers and environmentalists who believe a spate of mergers helped companies muscle out independent refineries and manipulate prices before peak weeks of consumption.

"When you don't have competitive markets you are going to have high prices," said Tyson Slocum, energy research director with consumer group Public Citizen, which believes anti-trust laws do not sufficiently protect gasoline buyers.

Nobody doubts that prices at the pump have jumped wildly across the $1-$2 a gallon range in the last three years. The debate is over what causes the price surges.

The oil industry says they have been caused by closure of refineries that convert crude into gasoline. That's happened as clean air laws have been introduced that require a plethora of gasoline blends that can be used in some states but not in others, creating spot shortages.

Mergers, the critics say, have contributed to what has become almost a rite of spring in the United States of low pump prices rapidly disappearing in the rear-view mirror. With less competition, prices are rising, they say.

"Logically, the fewer players there are, the more economic ability they have to manipulate the market as we are seeing with Enron completely manipulating the power market in California," said Frank O'Donnell, spokesman for the Clean Air Trust environmental group.

Bankrupt electricity trader Enron Corp. is being investigated for exploiting the California market during the state's 2000-2001 power crisis. Company memos released this week laid out complex trading strategies with names like "Death Star" and "Fat Boy" to exploit the electricity grid and boost profits.


The American Automobile Association, with millions of driver members, said there was "outrage" over price hikes because they upset financial plans of people on fixed incomes, students, the working poor and families.

"Our concern is not that gasoline prices be as low as possible, our concern is that gasoline prices be as stable as possible," said AAA national spokesman Geoffrey Sundstrom.

Gas prices have jumped this year, with California and the Great Lakes states of the Midwest feeling the most impact, despite the fact that oil companies reported worse first-quarter refining profits than a year ago, partly on lower demand.

Prices soared a record 23 cents a gallon in March and by last week, drivers were paying a national average of $1.39 a gallon for regular gasoline. The U.S. Department of Energy forecast average summer prices of $1.44 a gallon, 10 cents less than last year's record, despite producer's export cuts since January and Middle East tensions potentially further threatening supply.

Legislators in Hawaii, which has the highest retail gas prices, last week approved imposing price controls, making it the first state to attempt to cap gas prices. The average price for gasoline in the West Coast region, including Hawaii was $1.52 cents a gallon last week.

Industry representatives contend that tight government regulations on refinery locations and environmental opposition to new plants have left the business straining to provide enough of high-tech fuels demanded by green laws.


About 160 refineries operate in the United States, half the number that were running in 1980, forcing the oil industry to expand the size of its remaining plants and lean more heavily on foreign imports to keep up with voracious motorist demand.

Poor returns in the refining business for much of the last decade cut back investment in new refineries and pipelines. A wave of mergers reduced the number of companies available to build new infrastructure.

Since 1998, the FTC has approved the mergers of Exxon and Mobil , Chevron and Texaco , and BP with Amoco and Arco . It also approved the marriage of independent refiners Valero and Ultramar Diamond Shamrock and is considering an application to merge Phillips Petroleum and Conoco .

After two years of winter heating oil supply scares and summer gasoline price spikes, political scrutiny is intensifying on how to protect consumers.

A U.S. Senate subcommittee that examined mergers and high prices, did not accuse companies of illegal price-fixing, but cited internal documents to charge they sent indirect signals.

The investigation led by Michigan Democrat Carl Levin accused companies of deliberately limiting refinery output in order to charge more and maximize profits. Levin told hearings last week that for each 10 cent increase in the gasoline price, $10 billion is shifted to the companies.

Some analysts, like Jon Wright at HSBC Securities in London have argued that oil companies were "acting like mini-OPECs" by reducing refinery runs to limit supply as soon as profits deteriorate. The Organization of Petroleum Countries (OPEC) cartel has a history of ordering supply cuts that often boost crude prices.


Oil industry executives denied allegations they colluded to make more money by reducing refinery output to withhold supplies from certain areas.

They blamed price volatility on everything from crude oil prices to refinery and pipeline disruptions, but especially clean air laws that have contributed to the development of 14 to 19 different blends of gasoline, so-called boutique fuels.

"That creates an enormous problem in supplying gasoline to different localities and they all have to be supplied by the same pipeline system, the same refineries, the same terminals and on and on," said John Felmy, chief economist of the American Petroleum Institute industry group.

Felmy said the need to supply so many; different kinds of gasoline "has led to price volatility that is especially acute because the rules that were put in place have fundamentally different requirements for winter versus summer."

The API called for "greater flexibility" to meet the goals of the 1970 U.S. Clean Air Act, which was intended to reduce toxic emissions and improve public health.

Clean Air Trust's O'Donnell charged industry was "complicit in the numerous blends" because it "lobbied states to adopt different fuels rather than have states use federal reformulated gasoline."

Industry analysts said U.S. energy policy-makers can avert bouts of sticker shock by helping refineries build the supplies needed to meet peak demand during summer driving season and still produce cleaner-burning fuels. A move toward a single fuel standard by reducing the myriad number of gasoline requirements in different regions would help, analysts add.

"My sense is the Environmental Protection Agency and the industry can work together because we know what the EPA wants," said Larry Goldstein, president of the non-profit Petroleum Industry Research Foundation.