Although the price of gasoline has not spiked as dramatically as in 2000 and 2001, pump prices have increased nearly 30 cents per gallon since February. Industry sources say we can expect another 10-cent increase before the Fourth of July holiday. It’s an annual event, the result of a strategy by oil companies to curtail refinery capacity as a way of improving profit margins.
That strategy can be traced to the mid ‘90s, when the industry began the process that has resulted in the closing of 24 refineries, taking nearly a million barrels of capacity off the market every day.
That the strategy has worked well is illustrated by comparing production and profit figures for Texaco for the years 1998-2000 where domestic production declined from 750 thousand barrels per day in 1998 to less than 600 barrels per day two years later.
Net income increased from approximately $600 million in 1998 to nearly $2.7 billion in 2002.
Other companies did equally well. Chevron’s net income grew from $2 billion in 1999 to $5.2 billion in 2000, ExxonMobil profits jumped from less than $8 billion to more than $17 billion, and BP Amoco saw its profits increase from $5 billion in 1999 to $11.9 billion a year later.
So the question: How can it be that income increases four times while production declines by 20 percent? What’s going on?
Sen. Ron Wyden (D-Ore.), who has spent years investigating the industry, has some answers.
He begins by rejecting industry claims that restrictive environmental standards, growing demand and production cutbacks by the Organization of Petroleum Exporting Countries (OPEC) are responsible for price increases of gasoline.
“There is more to the story,” Wyden says, charging that the major oil companies deliberately destroyed refining capacity as a strategy for improving profit margins, that they worked together to “subvert” supply and, as a consequence, are reaping record profits.
He accused the nation’s major oil companies of a “strategic effort to orchestrate a financial triple play”: reduce supply, raise prices at the pump and pressure Washington to relax environmental regulations.
“Internal oil company documents reveal that in 1995 and 1996 [oil] companies strategized about opportunities to tighten supply as a means of increasing profit margins,” he added.
This concern over the impact of excess capacity on profits was echoed in a Texaco document of March 7, 1996, in which company officials said the “most critical factor” facing the industry was gasoline production that exceeded year-round demand. “Significant events need to occur to assist in reducing supplies and/or increasing demand for gasoline,” the memo concluded.
Despite hope for heavenly intervention, the major refiners took a more earthly approach to increase profits, entering into 44 supply-sharing agreements to control the quantity of gas on the California market.
The industry took other steps to control the market through a series of mergers that saw 124 companies and 169 refineries wiped off the map between 1981 and 2001, as big firms gobbled up smaller firms and big firms were gobbled up by bigger firms. By 2001, “four-firm concentration” – the share of the market held by the top four refiners – was 60 percent or more in 28 states and more than 70 percent in 11 of them. And this, in turn, has given refiners the ability to limit supply and spike prices to maximize profits.
So what can be done? Hawaii, where the legislature has passed a bill giving the state authority to regulate gasoline prices, offers one possibility.
But regulating the price of gasoline on a state-by-state basis will not – and cannot – solve the problem of price-gouging by the petroleum giants. As shown by the California energy crisis, states are no match for the political muscle of today’s corporate giants. Rather, federal action is required – beginning with strengthened enforcement of existing laws and regulations.
But in the final analysis, industries as critical to the national economy as the petroleum industry should be nationalized and run in the public interest. That’s the 21st century version of the “trust busting” of the early 1900s, a demand propelled, in part, by public outrage at the price gouging of Standard Oil.
The author can be reached at fgab708@aol.com
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