House diesel price hearing has market speculators focus

Nick Snow
Washington Editor

WASHINGTON, DC, May 7 -- A US House subcommittee's hearing to examine the adverse impacts of rising diesel fuel prices on truckers became the latest forum for Democrats to demand crackdowns on oil market speculators and Republicans to call for expanded access to remaining domestic resources.

Members of the House Transportation and Infrastructure Committee's Highways and Transit Subcommittee generally agreed that diesel prices have risen faster than gasoline prices, and that increases are reflected in higher food and merchandise costs. But they broke along party lines in suggesting ways to address the problem.

"The conventional wisdom is that speculation provides liquidity to the market. But when you have a huge entry of people who have no intention of taking delivery of a commodity but are merely interested in making money by bidding prices higher, that's a different matter," Rep. Peter A. DeFazio (D-Ore.), the subcommittee's chairman, said in his opening statement.

The hearing's stated purpose was to discuss fuel surcharges which many motor carriers, independent drivers and fuel brokers have imposed in response to higher diesel prices. DeFazio has introduced a bill, the Trust in Reliable Understanding of Consumer Costs (TRUCC) Act, which would require that fuel surcharges be passed on to the persons who actually buy the fuel, and to disclose that surcharge and other charges in writing.

But DeFazio decided to set the stage for this discussion with an examination of possible causes for recent dramatic increases in oil and product prices. Oil industry executives who have appeared before other congressional committees have said that supply and demand account for only part of the soaring prices, the subcommittee chairman told the first panel of witnesses.

Oversight weakened
US energy commodity market oversight was seriously weakened with passage of the 2000 Commodity Futures Modernization Act, which set the stage for speculators to take large positions and push prices up, DeFazio said. The housing market collapse and declining dollar has pushed more traders into energy commodities and prices have climbed, he said.

But two of the three witnesses said growing oil demand in a market with dwindling surplus production capacity has had a bigger impact. "This week, refiners were paying as much as $2.86 for the gallon of crude oil they need to make a gallon of gasoline or diesel. That's most of the price at the pump. When you add about 74¢ in gasoline taxes (or almost 54¢ in diesel taxes) to each gallon, you've accounted for the vast majority of what people are paying," said American Petroleum Institute Chief Economist John C. Felmy.

Felmy said while overall US petroleum demand, including demand for gasoline, has flattened, demand for diesel has remained strong, continuing a long-term trend both globally and domestically. "Demand for diesel has remained strong in the face of higher prices at the pump in large part because its use is less discretionary," Felmy testified. "Consumption is mostly business-related. Fuel is an indispensable cost component and just one of the costs in the manufacturing-distribution chain. Also, keep in mind that, unlike Europe, taxes on diesel in the US are higher than on gasoline, and the new ultralow-sulfur diesel formulations cost more to produce too." he said.

Ryan Todd, an oil analyst who covers major US oil companies and independent refiners for Deutsche Bank Securities Inc. in New York, suggested that continued congressional efforts to blame high crude and product prices on speculators diverts attention from the real cause. "The problem with conspiracy theories or talk of price gouging is that it gives the oil companies far more control than they actually have. Certainly, during the recent run in crude oil and gasoline prices, the oil companies have become much more price takers than price makers," Todd said.

Trying to catch up
Decades of low returns and underinvestment during the 1980s and 1990s when oil prices were low has made it necessary for the industry to try and catch up, both in terms of resources under development and qualified personnel, Todd said. "Higher prices, rather than increasing supply, have actually constrained it. While new unconventional sources have become economic, resource nationalism around the globe has restricted international oil company access to less than 20% of the world's reserves. Rising fiscal takes, including the US, have driven up the cost of doing business or eliminated access altogether in some cases. An incredibly tight global service and construction industry has further exaggerated the cost and time of doing business," Todd said.

But Tyson Slocum, energy program director at the consumer advocacy group Public Citizen, agreed with DeFazio that speculators are exerting an unhealthy influence on energy commodity markets. "A certain amount of speculation or hedging is essential. But we have a financial bubble resulting from too much speculation. About 95% of the trades today do not involve taking delivery," he said.

Slocum said other parts of the federal government have not upheld their responsibilities, including the Federal Trade Commission, which he said allowed oil companies to merge and restrain growth in refining capacity. "In just the last few years, mergers between giant oil companies such as Exxon and Mobil, Chevron and Texaco, and Conoco and Phillips, have resulted in just a few companies controlling a significant amount of America's gasoline, squelching competition," he said in his written statement.

Recent record oil company profits justify reimposition of a windfall profits tax, particularly since several of those companies spend more money buying back stock than increasing exploration and production or refining capacity, Slocum said. The levy which existed from 1980 through 1988 was ineffective not because of the tax itself but because oil prices fell shortly after it was enacted, he said.

Felmy and Todd disagreed. The windfall levy of the 1980s simply reduced domestic supplies and increased imports, Felmy said. "Siphoning away earnings from the industry for new tax schemes won't help address the current market situation. It won't increase investments, it won't produce more supply and it won't help consumers. It will hurt oil and natural gas company owners, 98.5% of which have no connection with the oil industry other than through the pensions they receive invested in oil company stock, or through their 401(k) programs, individual retirement accounts and other stock holdings," Felmy said.

Government intervention impacts
Todd said a windfall profits tax would simply be another example of government intervention producing unintended consequences. "In a tight global balance, the government, through ultralow-sulfur diesel and ethanol, has mandated tougher-to-make fuels, requiring more refining and plant maintenance. Suggestions for windfall profit taxes would further raise the cost of supply, while a suspension of the gasoline tax in summertime would only artificially increase the demand for gasoline while robbing the government of infrastructure revenue," he said.

Slocum maintained that a windfall profits tax would not reduce production unless it was excessively punitive. "The proposals I've seen would reduce executives' bonuses and shareholders' dividends but not materially affect production," he said.

DeFazio still was interested in the possible impact of speculators on oil prices. "What would it hurt to have trades no longer opaque and off the books?" he asked Felmy.

Felmy replied, "API has not taken a position on this matter. I would have to defer to the Commodity Futures Trading Commission, which regulates commodities trading and is better acquainted with it."

"But it's part of an administration that's opposed to regulation," DeFazio declared.

Todd suggested that speculation can exaggerate trends, but it doesn't create them. "There's some fear volatility built into the market. A certain amount of increased visibility would show that tight markets and not speculation are the primary cause of higher oil prices," he said.

Contact Nick Snow at nicks@pennwell.com.

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