With record-high gasoline prices and record-high oil company profits, the question is inevitable: Has the energy industry somehow manipulated prices?
Watchdog groups have been complaining for years that consolidation in the oil and gas industry has allowed a handful of corporations to control a substantial portion of the U.S. market, allowing them to artificially inflate prices. But the industry steadfastly denies any suggestion of price-gouging, noting that its operations are dependent on factors it has little control over: oil prices, global demand and refinery production.
Several lawmakers, including Sen. Pete Domenici, R-N.M., recently announced that Senate hearings will be held to sort it all out. But numerous government inquiries over the years have failed to turn up little, if any, evidence of price manipulation.
Not that it’s easy to decipher the world of oil and gasoline production. The energy companies keep a tight lid on information about their refinery operations and without such data, the markets can fluctuate wildly, based on rumor and innuendo.
And prices keep soaring. For the week ended Aug. 22, the average gallon of self-serve regular in the Los Angeles area was $2.766 71.3 cents higher than a year earlier (though only 3 cents higher than a week earlier). Statewide, the average price was $2.750, 69.9 cents higher than year-ago rates. California still had the highest gas prices in the nation, and Chicago gained 10 cents to tie with San Francisco as the priciest city, at $2.786.
Meanwhile, oil prices inched towards the $68 a barrel mark late last week, a factor that will almost certainly exacerbate California’s history of high gas prices.
Background: California is ‘an island’
California has the nation’s biggest energy headache, where strict clean-air regulations, a dearth of refineries and virtually no major distribution system all contribute to higher prices.
The state is required to make a cleaner-burning gasoline that is not available in most parts of the country. That’s because the California Air Resources Board imposed special requirements in 1996 to reduce smog and harmful emissions. The federal government added another mandate that requires 70 percent of California gasoline to contain a minimum level of oxygen.
Refiners initially used a chemical compound known as MTBE to make gasoline burn cleaner, but MTBE was banned in 2003 for polluting groundwater. The de facto alternative is the corn-based additive ethanol.
California officials have repeatedly asked the federal government to lift the ethanol requirement, arguing there are other ways to make clean gas. Plus, they say, it causes pollution. The Bush Administration recently refused to lift the mandate.
Those requirements put pressure on supply because California has just 13 gasoline refineries, down from 31 a decade ago. And only those facilities are able to make California’s reformulated gasoline. Just 10 percent is imported into the state, adding extra costs when supply problems hit.
That’s a far different scenario than, say, the state of New Jersey, which has among the nation’s cheapest gas prices in the nation because it has a direct pipeline to Houston, home of several large oil producers.
Pro: The Case for Manipulation
For years, public interest groups have complained that the federal government has allowed oil companies to control large portions of the domestic market.
In California, five major oil companies hold 95 percent of the refining capacity. The refiners typically market gasoline through their own retail networks, further controlling prices.
Encouraging the speculation about price-gouging are the staggering earnings results by the world’s largest oil companies. Exxon Mobil Corp.’s second-quarter profit rose 32 percent to $7.64 billion. BP Plc posted a 29 percent jump, to $5.59 billion, and Royal Dutch Shell Plc reported a 34 percent increase, to $5.24 billion.
These results all reflect higher oil prices. But why are those prices so high?
Some watchdog groups are focusing more attention on the increased volatility of energy markets in New York and London as a result of the 200 hedge funds that trade exclusively in energy.
Peter Fusara, chairman of Global Change Associates Inc., an energy consulting firm in New York, believes that hedge fund activity alone may account for up to $8 per barrel of the total price of crude oil. He cites a 55 percent growth in intraday trading of crude oil on the New York Mercantile Exchange for the sometimes violent and volatile trading of recent months.
Many traders have moved to the unregulated over-the-counter exchanges that do not require companies like ExxonMobil or Goldman Sachs & Co. to disclose information about trades.
“The lack of information on prices and large positions in OTC markets makes it difficult in many instances, if not impossible in practice, to determine whether traders have manipulated crude oil price,” said Tyson Slocum, research director at Public Citizen, a consumer advocacy group.
Public Citizen has suggested in Congressional testimony that the federal government order oil companies to increase the size of their storage capacity to address supply and demand fluctuations and to raise fuel economy standards for automobiles.
Cons: Industry Conditions
Oil executives strongly deny any suggestion that the industry has engaged in collusion to drive up the price of gas. They say that a wide range of factors can influence the price of gas, including the potent combination of religion and politics in oil-producing nations, geography, weather, military diplomacy and government regulations.
Then there’s production itself. Refiners complain that their supplies are stretched thin because they are forced to make several types of gasoline blends for different parts of the country to comply with a patchwork of regulations. That prevents the easy movement of fuels into areas with shortages, like California.
Another explanation is that domestic crude production fell 4.2 percent in July from a month earlier, one of the steepest month-to-month declines in the past 35 years. There was also a 3 percent drop in gasoline deliveries in July, the largest year-over-year drop since 2002.
Giant energy producers acknowledge that they didn’t foresee last year’s 3 percent surge in global gasoline demand, with half of it coming from China. They say they are struggling to respond to rising demand by increasing the number of rigs for drilling, which has caused operating costs to increase. Those costs now average roughly $13.75 a barrel, according to a report from brokerage firm A.G Edwards Inc.
As for California, oil executives laid the blame on the cost of clean-burning reformulated gas, and the fact that the state’s few refineries are between 30 and 50 years old and tend to break down often, causing prices to spike.
Compounding the problem is the growth of neighboring states such as Arizona and Nevada that rely on gas exports from California. In addition, refiners switch from making a summer blend of gasoline to a winter blend in late September to early November, which usually causes prices to spike as well.
Beyond all these explanations, the oil companies routinely point to past investigations by the California Energy Commission, the U.S. Energy Information Administration and California Attorney General Bill Lockyer that found no evidence that oil companies or refiners had manipulated the price of gasoline.