Manipulation of Gas Prices




I

f
you think surging gas prices is another case of OPEC sticking it
to the Great Satan, think again. While prices of crude oil hover
around $40 a barrel and gasoline above $2 a gallon, it’s the
oil companies who are making out like bandits. The oil industry
and its supporters point to the summer driving season, environmental
regulations for reformulated gasoline, surging demand in China and
the United States, and a shortfall of crude oil production as the
factors underlying this year’s ballooning gas prices.  


But
consumer groups, government agencies, and internal documents from
the oil industry reveal that the gasoline market is being deliberately
manipulated to boost profits. Tyson Slocum, research director of
Public Citizen’s Energy Program, says, “The scarcity is
manufactured. These companies act as if the summer driving season
snuck up on them.” Slocum points to consolidation within the
oil industry during the last decade as the underlying reason for
repeated spikes in gas prices. As a result, “America no longer
has access to adequately competitive gas markets.” Slocum states
the problem is not so much with crude oil supply, but with the “downstream
component” of refining and marketing. Public Citizen released
a report in March authored by Slocum that noted five of the largest
oil companies now control 50 percent of U.S. refinery capacity (versus
34 percent in 1993) and 62 percent of the retail gasoline market
(versus 27 percent a decade ago). 


This
gives the oil industry unprecedented ability to manipulate the market.
After a spike in gasoline prices in the Midwest in the summer of
2000, the Federal Trade Commission launched an investigation. It
released a report in March 2001 that concluded the price increases
were due in part to “decisions by firms to maximize their profits”
by such methods as “curtailing production [and] keeping available
supply off the market.” 


Even
more damning, the FTC report stated that one unnamed oil company
executive “made clear that he would rather sell less gasoline
and earn a higher margin on each gallon sold than sell more gasoline
and earn a lower margin.” The federal government could force
prices down, but with a White House soaked with more oil than Prince
William Sound, it’s taken to blaming “environmental extremists”
for the crisis. Since 2000, the oil industry has pumped out more
than $68 million to politicians—80 percent of that going to
Republicans. Every penny increase in gas prices costs U.S. consumers
more than $1 billion. Since January 2000, consumer groups estimate
that increasing prices for gasoline and natural gas have cost consumers
$250 billion. Even before the latest price surge, household energy
expenditures increased by an average of 35 percent, or $500, from
1999 to 2003.



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.







 





A.K. Gupta is
an editor at the



Indypendent



, the newspaper of
New York City Indymedia. He was also an editor at the



Guardian
Newsweekly



from 1989-1992.