Oil Industry Collusion to Increase Prices?

Wow, if this is true there needs to be a major investigation. The Foundation for Taxpayer and Consumer Rights is circulating internal memos from Mobil, Chevron and Texaco that shows that these major oil companies worked to limit refinery capacity in order to drive up the price of gasoline and increase their profits:

The Foundation for Taxpayer and Consumer Rights (FTCR) today exposed internal oil company memos that show how the industry intentionally reduced domestic refining capacity to drive up profits. The exposure comes in the wake of Hurricane Katrina as the oil industry blames environmental regulation for limiting number of U.S. refineries.

The Mobil memo shows the higher ups at that company attempting to prevent a new refinery from opening because that refinery would drive down the price of gas by a few cents per gallon. The Texaco memo shows them discussing how surplus refining capacity on the West Coast drives down the price and profit because there's too much gasoline. This in direct contradiction of their public claim that the increase in gas prices is driven by the shutting down of old refineries resulting in not enough refining capacity. The Chevron memo is incredibly blunt about the need to reduce refining capacity in order to boost profit margins.

The FTCR is also publicizing a study by a petroleum industry consultant on the underlying causes of the increase in gas prices, particularly in California. That study argues that the vast increase in gasoline prices over the last few years cannot be blamed on the things the oil industry typically blames them on. For instance, the skyrocketing price of oil from the middle east:

Increases in the prices charged for oil by OPEC countries are not primarily responsible for the dramatic increase in gasoline prices in California. Much of California's crude oil is harvested locally by major refiners who control their own fields. OPEC nations only supply approximately 20% of the oil delivered to refineries in California.
Fields controlled by the oil companies in California or Alaska provide the majority (66%) with the remaining 14% coming from non-OPEC foreign locations (Figure 2).

The report also points to increased profiteering by the oil companies, and to the fact that the government of California has every reason to keep the prices going up:

Inflated profits for California oil companies from their refining operations - including an increase of 61¢ per gallon in profits from January 17 to April 18 -- were a principal factor in the jump in gasoline prices (Figure 4).

California, which also collects a gasoline excise tax, is one of only 9 states that maintains a sales tax on purchases at the pump. Gasoline price increases in California will increase collections of the 7.25% state/local sales tax during 2005 by an estimated 6¢ per gallon (40%) or approximately $1 billion- creating the largest gas tax increase in the
history of the state (Figure 6).

California's percentage sales tax provides economic incentives for government officials to promote high prices at the pump. The sales tax has created an implied partnership between the oil industry and California government as both dramatically benefit from the rise at the pump. The risk that elected officials constantly searching for
additional tax revenue will become "hooked" on high pump prices is real.

This increased profit-taking by oil companies comes at a time when they are publicly declaring that environmental regulations are killing their ability to make money. But let's look at the first quarter reports from the four biggest oil companies. All of them reported record profits and staggering increases over the first quarter of the previous year. BP was up 165%, Conoco-Phillips was up 44%, ExxonMobil was up 125% and Chevron-Texaco was up an astonishing 294%. It's hardly a surprise that the last few years have produced profit margins that are off the scale:

By just about any measure, the past three years have produced one of the biggest cash gushers in the oil industry's history. Since January of 2002, the price of crude has tripled, leaving oil producers awash in profits. During that period, the top 10 major public oil companies have sold some $1.5 trillion worth of crude, pocketing profits of more than $125 billion.

"This is the mother of all booms," said Oppenheimer & Co. oil analyst Fadel Gheit. "They have so much profit, it's almost an embarrassment of riches. They don't know what to do with it.

So we essentially have a big lie here. The oil companies plead poverty, claiming that excessive government regulation, particularly environmental regulation, drives up the cost of production and reduces refining capacity, making it more difficult for them to be viable and make money. But internally, they complain of too much refining capacity driving down profit margins and they conspire to make sure that new refineries never get built or get saddled with so many requirements that it's no longer profitable to build them.

The answer to this is not necessarily more government regulation. Although the major corporations complain about too much government regulation, they have learned to use that regulation to their benefit to keep smaller companies out of the market and reduce competition. By driving up costs, such regulation actually helps protect the largest companies from competition because only the largest companies can afford to comply. An incredible amount of lobbying effort is expended to keep regulations in place that benefit the larger companies in this way. The same thing goes on in other industries. One of my good friends is a lobbyist for a huge trucking company and he has told me of their efforts to keep burdensome licensing regulations in place because they've already complied with them and new companies have not, so it helps keep new companies out of their market by driving up their costs.

In the same manner, when it comes to oil refineries, the big companies that own existing refineries want the strictest possible regulation in place for new plants that might be built because it drives up the cost of building a new refinery and thus makes it less likely that new plants will open and more likely that refinery capacity will stay down and profits will stay up. Besides, older plants are usually grandfathered in to such regulations. Thus we have collusion between big business and big government and the consumers/taxpayers are the ones who end up getting screwed.

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Ed Brayton--thanks for doing this research and writing your courageous yet truthful comments. I suspect that nearly the entire U.S. public is conscious of the collusion and price fixing within the oil industry and the role played by the American Petroleum Institute as a conduit for conducting such illegal practices. The trouble is, Congress will never be able to prove the charges. This is mainly because it is nearly impossible for "outsiders" to gain access to substantive industry records and so easy for the industry to hire the best attorneys to thwart those efforts. Nationalizing the production and sale of all energy-related products is the only long term solution for the general public, I believe, in spite of our common detestation of entertaining such socialistic ideas. But the oil industry has time after time shown that it is quite effective at disproving legitimate accusations. It never intends to obey the antitrust laws nor be fair with us about pricing. Its excessive greed may never be sated. Therefore, serious consideration should begin NOW toward a step-by step governmental takeover of the industry. With sufficient courage, financing, and public support, Congress might accomplish that objective within a ten year period of time. Why wait until everyone is forced to pay $10 per gallon or more for gas? Believe me, extremes like that are coming and sooner than most people think. Personally, I fight off the continuous gouging at the pumps by investing in oil, but that's not a solution I'm proud of nor is it a practical one for most working persons. Would you give me your comments? Cliff Johnson

By cliff johnson (not verified) on 28 May 2007 #permalink

Cliff -

I think this is an abysmally bad idea, for a multitude of reasons, not the least of which being, that it would put far too much power in the hands of an all ready too powerful government. All one needs do, is look to countries that already have nationalized oil companies to get a notion of the danger in it.

Venezuela is well on the way to a dictatorship that I think is largely due to the economic power it's government has, due to it's oil revenue. Keep in mind, that I am a great believer in certain socialist principles. I just think that taxation is the only way to do it. If the government is allowed to generate profit revenue, it becomes all too easy for democratic principles to lose their hold. Taxation forces at least some of the populace to attempt to maintain some control over their governance. By no means is it perfect, but if the government is able to produce it's own revenue it becomes all to easy to cross a threshold into ambivalence - next step, totalitarianism.

I also tend to think that the rising cost of fuel is a good thing. The more it pinches our pocketbooks the more impetuous there is to find alternatives. This is good for more than just weaning us from fossil fuels. For those of us who support science and especially, science education, this is a huge boon. Keep in mind that I am a member of the working poor. I am at the end of the spectrum of those who feel the pain of higher fuel costs the strongest. But I am also a parent who would like to see his children and theirs, ad infinum, inherit a better world than this one. For environmental reasons, for the sake of breaking our dependence on foreign oil and it's entanglements, for the preservation of existing supplies, to cover other uses we have for oil than mere fuel, higher fuel prices are ultimately a good thing.