US Senators grill oil executives over profits, prices

By Nick Snow
Washington Correspondent

WASHINGTON, DC, Nov. 10 -- Five major oil company executives faced sometimes hostile questions about the relationship of record third-quarter profits to dramatically higher product prices during a joint hearing of two Senate committees on Nov. 9.

Exxon Mobil Corp. Chief Executive Lee R. Raymond, Chevron Corp. Chief Executive David J. O'Reilly, ConocoPhillips Chief Executive James Mulva, BP America Inc. Chief Executive Ross Pillari, and Shell Oil Co. Pres. John Hofmeister testified.

More than 20 senators asked questions following statements from executives to the combined Energy and Natural Resources Committee and Commerce, Science and Transportation Committee.

Additional testimony came from Federal Trade Commission Chairwoman Deborah Platt Majoras and attorneys general Peter C. Harvey of New Jersey, Henry McMaster of South Carolina, and Terry Goddard of Arizona.

Lawmakers made it clear to the oil company executives that record profits amid rising product prices are a major concern among voters. "At two town meetings in my state this weekend, the number one question was about your profitability," noted Sen. Larry Craig (R-Ida.).

"It's not terribly fun to defend you, but I do," he continued. "But it's awfully difficult to understand regional price anomalies in this country."

Energy and Commerce Committee Chairman Pete V. Domenici (R-NM) urged the executives to more fully explain what goes into oil and gas pricing from the wellhead to the retail customer. "Most Americans want to know how the price of oil is set. Many think that somebody rigs the prices, and somebody else is getting ripped off," he said.

Raymond responded that the question was "extraordinarily complex." He noted that the oil companies represented at the hearing contribute "a relatively modest amount to total world supplies. Many companies operate in many countries, but the big actors in the production equation are Russia, the Middle East countries, and OPEC."

For example, Saudi Arabia tells refiners what the lifting price will be for the following month, apparently based on prices that are paid around the world, and limits sales only to refiners, who base their product prices on local market conditions, Raymond said.

Supply priority
When Hurricane Katrina seriously disrupted refined product supplies from the Gulf Coast, ExxonMobil immediately froze prices in the affected states, Raymond said.

"Outside those areas, the directive was to minimize the price increase while recognizing that if it was kept too low, our stations would run out of gasoline," he continued. "It was a delicate balancing act. The concept was not related to gouging, but to maintaining adequate supplies at our stations around the country."

Mulva said that ConocoPhillips also immediately froze prices at its company-owned outlets in the states hit by Katrina. "For our independent marketers and dealers, we urged them to use restraint in setting prices. ConocoPhillips has always been against price-gouging, and we are ready to open our records to show that we do not condone it," he said.

Chevron's O'Reilly said, "We've seen a situation of tight supplies for the last few years. Hurricanes Katrina and Rita magnified this situation. These price fluctuations reflected the fact these storms shut in one third of the US production and one quarter of its refining capacity. These situations were aggravated by some panic buying."

BP America's Pillari said, "While consumers experienced price increases around the country, those same increases created an ability to attract supplies from other parts of the world."

Shell's Hofmeister said that expenses have risen along with oil company profits. "The cost of a deepwater rig is now up to or over $300,000 a day. The cost of drilling a deepwater well is up to $2 billion. The cost to expand a refinery is more than $1.5 billion," he said.

Executives emphasized that it's more economic to add capacity to existing refineries than construct a new one.

Raymond said, "We have invested $3.3 billion over the last 5 years in our US refining and supply system. Over the last 10 years, ExxonMobil has built the equivalent of three average-sized refineries through expansions and efficiency gains at existing US refineries."

Regulatory relief
Oil companies need regulatory relief instead of incentives, the executives said. Mulva said, "If we can have accelerated permitting to expand, we can bring on new capacity much more quickly. In exploration and production, we have numerous independent companies in addition to the integrated ones that develop oil and gas. All of them need more access."

Most senators were more interested in prices, however, particularly for diesel fuel. "My number one concern is the business of agriculture. It costs the price of a bushel of wheat to buy one gallon of diesel fuel. Gasoline has come down. Diesel has not. When we get to the railroads, we are charged extra because of higher diesel prices," said Sen. Conrad Burns (R-Mont.).

Sen. Olympia Snow (R-Me.) raised similar concerns about heating oil prices, noting that her constituents are paying 30% more going into the 2005-06 winter heating season than a year earlier, when they paid 20% above what they paid in the 2004-05 period.

O'Reilly noted that heating oil comes from the same part of the refining barrel as diesel fuel, which is in more demand as Europe converts its automotive fleet from gasoline to diesel. "That is why we are trying to expand our capacity to produce more diesel domestically," he said.

Other senators appeared hostile. Sen. Barbara Boxer (D-Calif.) charged that Shell found a buyer for its Bakersfield refinery only after state officials stepped in. "It was a struggle to get Shell to cooperate. In retrospect, we believe there was an effort to short the market even more," she said.

Hofmeister said that Shell announced plans to close the plant only after shopping it around unofficially and being unable to find a buyer. "This is one of the country's oldest refineries. It's on multiple sites and is one of the smallest," Hofmeister responded.

Sen. Ron Wyden (D-Ore.) said, "Your companies have been charging record prices and making record profits, but also getting record tax breaks. The president said they aren't needed, you just said they aren't needed, yet Congress 2 months ago gave you billions of dollars of new tax breaks."

When the five executives said they did not expect to get tax breaks as a result of this past summer's energy legislation, Wyden said he would introduce an amendment, as a member of the Senate Finance Committee, to take them back.

"Senator, I look forward to that debate on the floor, since a majority of those breaks were directed toward small refiners," Commerce, Science, and Transportation Committee Chairman Ted Stevens (R-Alas.) responded.

Later, Sen. Mary L. Landrieu (D-La.) said that the incentives to which Wyden alluded are directed more at independent producers, who produce 85% of the nation's oil and 65% of its gas. "They need these incentives because they're smaller, they don't have the international reach, and they can't protect against volatile prices."

Price gouging
The three attorneys general suggested that a federal price gouging law is needed.

Harvey of New Jersey said, "We're here today because serious questions have been raised about why major oil companies posted record profits this past quarter while consumers were struggling to pay higher prices following Hurricane Katrina."

He said that while New Jersey has a price gouging law, it was not triggered because the governor did not declare a state of emergency. Instead, the attorney general's office investigated gasoline price increases under the state's motor fuels statute and found more than 500 violations. It sued Amerada Hess Corp., Sunoco Corp., and Motiva Enterprises LLC.

"I'm not talking about attacking profits. I'm talking about attacking profiteering," Harvey said. "There is a difference." He said that a federal law is needed to prevent price abuses by refiners.

The FTC chairwoman disagreed. "The omission of a federal price gouging law is not inadvertent. Regardless of how repugnant price gouging is, a law attacking it is an indirect form of control, which would be detrimental," Majoras maintained.

"Higher prices attract supplies from other markets. They also signal consumers to decrease demand," she continued. "The recent increases in prices led to higher decreases in demand than we've seen in 20 years, and this shouldn't be disregarded. It's been demonstrated over the last 75 days that if we don't like high gasoline prices, we'll quit using so much and prices will come back down."

Contact Nick Snow at nsnow@cox.net.

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