Unleaded Gasoline: Bubble? Manipulated?

By: David Champeau | Fri, Oct 28, 2005
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For the last year Americans, and the rest of the driving world, have been paying record prices for gasoline (petrol for our British friends). This move higher in price started in 1998 when unleaded gasoline prices, as measured from the wholesale level using the futures contract on the New York Mercantile Exchange (NYMEX) hit a low of under 40 cents a gallon. In the next 7 years the price skyrocketed 6 fold to hit a high of over $2.40 a gallon during the week that Hurricane Katrina destroyed New Orleans and other parts of the Gulf of Mexico coastline.

For the last year or more we have heard a lot of talk about oil shortages, no new super giant field discoveries and not enough refinery capacity to supply the products created from crude oil such as unleaded gasoline, heating oil, diesel fuel and jet fuel. Books have been written, hundreds of web sites track the data coming from the various national and international agencies and TV specials have been broadcast all trying to explain this situation.

But one thing that does not get a lot of attention is "What are the oil companies and refinery companies doing? Are they building new refineries?" President Bush again this weak mentioned the need to build new refinery capacity to meet the ever growing demand for refined products.

But as usual our President speaks with a forked tongue. According to numerous independent reports, over the last 15 years the major oil companies have colluded with the federal government to close down independent refineries and have even shut down some of their own refineries all in an attempt to keep the price of gasoline and other refined products higher.

According to a report by US Senator Ron Wyden dated June 14, 2001 "major oil companies pursued efforts to curtail refinery capacity as a strategy for improving profit margins; that competing oil companies worked together to subvert supply; that refinery closures inhibited supply; and that oil companies are reaping record profits, yet may benefit from a proposed national energy policy that would offer financial incentives to expand refinery capacity."

Let's look at this report in some more detail. It states that "In the mid-1990s too much refining capacity, not too little, concerned the nation's major oil companies. At that time, the oil and gas industry faced what they termed "excess refining capacity," a circumstance they viewed as a financial liability that drove down overall profit margins. The industry reduced the total amount of potential supply by closing down more than 50 refineries in the past decade. Since 1995 alone, 24 refinery closings have taken nearly 830,000 barrels of oil per day."

During the period from 1985 to 2000 the price of unleaded gasoline on the NYMEX stayed in a range between 40 and 70 cents a gallon except for the 1991 spike when the US invaded Iraq. A full 15 years of consistent pricing. (One would think the Federal Reserve was holding the value of the US dollar steady.)

The report then cites internal oil company documents revealing a concerted effort to raise refining margins and profits by curtailing refinery capacity.

From Chevron, "A senior energy analyst at the recent API (American Petroleum Institute) convention warned that if the U.S. petroleum industry doesn't reduce its refining capacity, it will never see any substantial increase in refining margins...However, refining utilization has been rising, sustaining high levels of operations, thereby keeping prices low."

From Texaco, "As observed over the last few years and as projected well into the future, the most critical factor facing the refining industry on the West Coast is the surplus refining capacity, and the surplus gasoline production capacity. The same situation exists for the entire U.S. refining industry. Supply significantly exceeds demand year-round. This results in very poor refinery margins, and very poor refinery financial results. Significant events need to occur to assist in reducing supplies and/or increasing the demand for gasoline."

The document also quotes from a deposition where an oil company executive admitted to meeting with another oil company executive for the purpose of keeping supply off the market, 'The President of ARCO Products Company William Rusnack admitted in a deposition taken May 15, 1997, that he met with Tosco CEO Thomas O'Malley to discuss opportunities to work together to control supply of the cleaner burning gasoline, thus propping up the overall price. "... explore whether or not there was any mutual benefit, any mutual interest, any profit for both ARCO and Tosco to find a way to have ARCO purchase or Tosco sell CARB [cleaner burning California Air Resources Board] gasoline to ARCO, recognizing that the agreement that was in place at that time did not provide for the supply of CARB gasoline."'

The document also reveals how one oil company colluded to force a shutdown of a competitor, 'An internal Mobil document highlighted the connection between an independent refiner producing CARB gas, the depressed price that would result, and the need to prevent the independent refiner from producing. "If Powerine re-starts and gets the small refiner exemption, I believe the CARB market premium will be impacted. Could be as much as 2-3 cpg (cents per gallon)...The re-start of Powerine, which results in 20-25 TBD (thousand barrels per day) of gasoline supply...could...effectively set the CARB premium a couple of cpg lower...Needless to say, we would all like to see Powerine stay down. Full court press is warranted in this case."

'The Powerine Oil Company refinery closed in 1995. Despite documented attempts to work in conjunction with major oil companies to restart the Santa Fe Springs, Calif. refinery, the major oil companies stood in the way and the refinery remains closed.'

According to Energy Information Administration, the following refineries were shut down between 1995 and 2001:

Year Refinery Location
1995 Indian Refining Lawrenceville IL
Cyril Petrochemical Corp. Cyril OK
Powerine Oil Co. Sante Fe Springs CA
Sunland Refining Corp. Bakersfield CA
Caribbean Petroleum Corp. San Juan Puerto Rico
1996 Tosco Marcus Hook PA
Barrett Refg. Corp. Custer OK
Laketon Refg. Laketon IN
Total Petroleum Inc. Arkansas City KS
Arcadia Refg. & Mktg. Lisbon LA
Barrett Refg. Corp. Vicksburg MS
Intermountain Refg. Co. Fredonia AZ
1997 Gold Line Refg. LTD Lake Charles LA
Canal Refg. Co. Curch Point LA
Pacific Refg. Co. Hercules CA
1998 Gold Line Refining Ltd. Jennings LA
Petrolite Corp. Kilgore TX
Shell Oil Co. Odessa TX
Pride Refg. Inc. Abilene TX
Sound Refg. Inc. Tacoma WA
1999 TPI Petro. Inc. Alma MI
2000 Pennzoil Rouseville PA
Berry Petroleum Stephens Ark.
Chevron Richmond Beach WA
2001 Premcor Blue Island IL

Refinery Capacity Lost Due to Refinery Closures Between 1995 - 2001

  < Numbers in Barrels per Calendar Day >
1995 191,750 bbl/cd
1996 268,750 bbl/cd
1997 87,100 bbl/cd
1998 123,650 bbl/cd
1999 51,000 bbl/cd
2000 25,700 bbl/cd
2001* 80,515 bbl/cd
Total Capacity Lost 828,465 bbl/cd

While all this has been happening we have seen the oil companies report record profits due to the high price of crude oil and refined products. But the record profits of the oil companies are not due to any shortage of oil in the world or of refining capacity; the record profits are due to the oil cartel working with the federal government to create a false shortage of product (coupled with a media that enjoys creating a frenzy). This was enhanced in November 2001 when President Bush ordered the Strategic Petroleum Reserve to be filled with real crude oil thus removing another 700 million barrels of crude oil from the market. The loser in all this is the middle class that is paying the record prices at the pump.

To add insult to injury the Bush administration now wants to throw incentives at the oil majors to build more refining capacity. These incentives will be in the form of a tax breaks and a reduction in environmental regulations. What we have here is a contrived crisis created by the big oil and government cartels working together so that the ignorant masses will accept a preconceived result.

Senator Wyden ends his report with this: "If this approach becomes reality, the U.S. government will reward the same oil companies who perpetuated the gasoline supply crunch, those companies who may have deliberately worked to close refineries and reduce supply. These companies, already enjoying record profits because of their actions, would reap even higher profits by recognizing the cost savings of relaxed environmental standards. As a result, oil and gas profits would continue to rise, the public would be saddled with the costs of dirtier air, and consumers would remain unprotected from high gas prices."

Senator Wyden's report can be found here: http://republican.sen.ca.gov/web/38/pubs/oilinvest.pdf


David Champeau

Author: David Champeau

David Champeau

David Champeau has a blog where he spouts off every morning and a web site where he keeps his charts of interesting markets.

Copyright © 2005 David Champeau

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