Gas Supplies Manipulated, Report Says

The gasoline business is dominated by a handful of oil companies that can manipulate supplies to increase prices and profits, and California is a prime spot for such maneuvers, congressional investigators said Monday.

A 396-page report by the Democratic staff of the Senate permanent investigations subcommittee does not accuse oil companies of violating federal antitrust laws, but notes that when only a few players control supply, then those companies have enormous power to control prices. The problem is worsened by the closure of dozens of refineries during the last 20 years, the report said.

“In a number of instances, refiners have sought to increase prices by reducing supplies,” said the report, commissioned in June by Sen. Carl Levin (D-Mich.), who chairs the subcommittee. The report, citing internal oil company documents from the 1990s, contends that refiners employ a variety of strategies to boost prices, including reducing refinery production and exporting supplies out of the country.

Levin ordered the investigation, which is the subject of hearings today and Thursday, when a second summer of gasoline price spikes plagued the Midwest. This year, prices jumped again across the country as crude oil prices leaped; on Monday, the U.S. average price for a gallon of self-serve regular gasoline was $1.393, down about a penny from last week but up nearly 29 cents since early February, the Energy Department said.

The oil industry disputed the subcommittee report’s findings, arguing that gasoline prices are set largely by market forces, including supply, demand and competition. Some of the blame for gasoline price spikes can be laid on government regulation, which requires more than a dozen gasoline formulas to fight air pollution in different parts of the country, said John Felmy, chief economist of the American Petroleum Institute.

“There are conditions in the market that have led to a reduction in the number of refineries. Our point is what’s caused that is government regulation and not any attempt by firms to merge and increase concentration,” Felmy said. California’s prices are some of the highest and most volatile in the nation because the gasoline business here is particularly concentrated, with the top four refiners controlling nearly 80% of the refining capacity and the top six refiners operating about 85% of the retail outlets in the state, the report said.

In addition, California is an island in the gasoline world, consuming since 1996 a unique cleaner-burning gasoline that is produced by few refineries outside the state. The California refineries, running at full production, are barely able to satisfy the state’s 1-million-barrel-per-day appetite for gasoline and frequently must rely on expensive imports to keep California motorists supplied, the report stated. (The gasoline market in California is the second-biggest in the world, tied with Japan for the No. 2 spot after the United States as a whole.)

In such a situation, any slight supply disruption is enough to send prices soaring, but at times, the report contended, prices are kept high by other means.

The report cited industry documents from unnamed companies that indicate some West Coast refiners routinely sell gasoline out of state, even at a loss. One document, produced by an unnamed refiner, said the company planned to export gas to “improve market conditions” and that the firm was willing to “take [a] hit on price to firm up market.”

The report also included a 1996 presentation to senior Arco managers outlining a strategy to export gasoline so a surplus would not develop in California. A spokesman for BP, which now owns Arco, said that the document was a consultant report never acted upon by Arco, adding that the company does not export gasoline out of California.

Because so much gasoline is sold in California, any price increase is unusually costly to the state’s economy, the report said, pegging the toll of a 1-cent increase in the price of a gallon of gasoline at $420,000 per day, or $153 million per year.