Manipulation of Gas Prices

If the oil industry “were simply passing on higher costs, their profit margin wouldn’t change,” Slocum says. In 2003, the five largest oil companies operating within the United States—ExxonMobil, Chevron-Texaco, ConocoPhillips, BP, and Royal Dutch Shell—raked in more than $60 billion in after-tax profits. And 2004 is shaping up to be Big Oil’s best year ever. For the first three months:

• ChevronTexaco’s profit jumped 33 percent to $2.56 billion and profits for its U.S. division for oil refining quadrupled from the same period last year to $276 million this year 
• ConocoPhillips, the biggest refiner and fuel marketer in the United States, also had a profit increase of 33 percent to $1.62 billion 
• ExxonMobil, the world’s largest corporation, raked in profits of $5.44 billion from January to March 2004, more than its entire 2002 total 

A study by the Consumer Federation from October 2003 notes that in the last 15 years about 75 refineries have closed. So, in 1985, refinery capacity was equal to the daily consumption of petroleum products, whereas by 2000, “daily consumption exceeded refinery capacity by almost 20 percent.” (Not only are U.S. oil imports increasing, so are imports of refined fuel products.) Gasoline stocks have also declined precipitously since the early 1980s, from ten days above minimum operating needs to just two days by 2003. A New York Times article from June 15, 2001, quotes a document from Chevron written in November 1995 that spelled out the strategy: “If the U.S. petroleum industry doesn’t reduce its refining capacity, it will never see any substantial increase in refinery profits.” The result, according to the Consumer Federation, is that operating income in the refining and marketing sectors has gone from about $1 billion in 1995 to $19 billion in 2003. 

California Scamming 

I t’s no coincidence that today’s gas crisis seems similar to the California electricity scam of 2000- 2001. Slocum of Public Citizen says now, as then, “The ability of individual companies to manipulate supplies for their own profits is widespread.” He notes that some of the same culprits are involved, such as BP, which “has a subsidiary called BP Energy that was fined $3 million for intentional manipulation of the California energy market.” The tactics are also similar: consolidate control over a market, tighten supplies, and then wait for a small disruption. In California, electricity companies deliberately idled plants while supplies were tight and then waited for prices to skyrocket on the spot market. In transcripts of telephone conversations, energy traders called their successful attempts at manipulation “exciting,” “cool,” and “fu-un.” In the gasoline market, refinery capacity has declined by 20 percent since the 1980s. The U.S. Energy Information Administration estimates that refining capacity will continue to decline by 50,000 barrels per year until 2007. The result is high rates of refinery utilization—96 percent by early May—leaving them susceptible to accidents.  

This may be part of the oil industry’s strategy because, “Every accident or blip in the market triggers a price shock and profits mount,” observes the Consumer Federation of America. Thus, “A pipeline breaks here, a refinery goes out there, or a blackout shuts down production for a day someplace else. Because stocks are so tight, prices shoot up, and stay up for an extended period of time.” Californians are feeling the brunt of this energy crisis with the nation’s highest gas prices, nearly $2.50 per gallon in southern California as of early June. Analysts predict the price may hit $3 this summer. Only 13 refineries controlled by a handful of oil companies feed the state’s supply. That’s down from 37 refineries in 1983. Now Shell is planning to demolish a refinery in Bakersfield, California that supplies two percent of the state’s gasoline and six percent of its diesel, despite the fact that it has the highest profit margin of any of Shell’s U.S. refineries. The oil companies can manipulate the markets because, says Slocum, “Political contributions buy you a certain amount of immunity from prosecution and investigation.” 

The Bush administration is also using the same political strategy it developed during the California electricity crisis. It argued that environmental regulations caused the tight supplies. Its solution was to gut clean air laws to allow more power plants, a position quietly abandoned once Enron went belly up. Now the Bush administration is saying the only thing that can alleviate high gas prices is to drill for oil—in the Arctic National Wildlife Refuge, the Gulf of Mexico, and national parks and monuments across the country. Bush also wants his energy bill passed, which doles out more than $7 billion to Big Oil. Yet prices are likely to drop on their own by the fall. Key to the oil industry strategy is price volatility. If prices stayed high, consumers would demand the development of cheaper sources of energy. Addi- tionally, the oil industry knows that with a presidential election looming, cheaper gas prices beforehand will help propel the Bush administration to another oil-friendly term. 

To bring down gas prices, some Democrats have said, President Bush should release crude from the strategic petroleum reserve, which holds 660 million barrels. Few analysts expect that doing so would reduce gas prices by more than a few pennies and some suggest the Democrats are just proposing the easiest thing to do because, “it’s not going to ruffle the feathers of any powerful interests.” Saudi Arabia and other Persian Gulf countries supply about 2 million of the 10 million barrels of oil the U.S. imports daily. As the strategic petroleum reserve has enough oil to make up a disruption from the Middle East for more than 300 days, observers say the Bush administration could stop adding to the reserve—which it is doing at the rate of 100,000 barrels a day—if it were serious about increasing supplies of crude oil.  

A more effective solution is for the federal government to mandate that refiners increase their supplies of gasoline and release it into the market when prices increase, thereby limiting price-gouging. Longer-term suggestions include increasing fuel-efficiency standards, which dropped during the Clinton administration and are lower now than in the 1980s. Oil consumption would drop by one- third, almost 7 million barrels per day, if passenger vehicles had to average 40 miles per gallon. 

There is general agreement that alternative energy sources need to be developed, but there is no easy solution. Hydrogen-based fuel cells are no panacea. Sources for the hydrogen include: natural gas, an already over-tapped energy source; coal, the dirtiest of fossil fuels; or radiation-spewing nuclear power plants. 

Wind, tidal, and geothermal energy are cleaner sources of electricity, but battery-powered vehicles generate just as much pollution as gas-powered ones. The difference is, the pollution is in the form of solid waste from the batteries rather than air pollution from hydrocarbons. Oil junkies want to develop marginal sources, such as Canada’s vast fields of tar sands that may hold more than 1 trillion barrels of oil—more than all known reserves in the Persian Gulf. But tar sands require tremendous amounts of water to process and natural gas to heat and extract the oil, and leave behind enormous environmental damage from the waste. Ultimately, the problem is not so much fossil-fuel powered vehicles as the single-passenger vehicle. It’s inherently wasteful to have two-ton machines carrying a single person to the store for a quart of milk. 

A real solution would involve robust networks of bus and rail—with suburbs, towns, and cities redesigned for walking and biking. An impressive model is the Brazilian city of Curitiba, which uses extensive bus networks, pedestrian walkways, bike paths, and planned growth to limit car usage, with the result that its residents use 30 percent less gasoline on average than 8 other Brazilian cities. But such planning would strike at the heart of the over-consumptive U.S. way of life and our car- and oil-driven economy.