PRICE GOUGING CONTROVERSY PLAGUES INDUSTRY

Aug. 20, 1990
Bob Williams Senior Staff Writer U.S. refiner/marketers are scrambling to defuse controversy over wholesale gasoline price spikes following Iraq's invasion and takeover of Kuwait. Charges of price gouging have sparked moves by states to take legal action or introduce legislation related to the sudden runup in gasoline prices that totaled about 18/gal in the days after Iraq's invasion.
Bob Williams
Senior Staff Writer

U.S. refiner/marketers are scrambling to defuse controversy over wholesale gasoline price spikes following Iraq's invasion and takeover of Kuwait.

Charges of price gouging have sparked moves by states to take legal action or introduce legislation related to the sudden runup in gasoline prices that totaled about 18/gal in the days after Iraq's invasion.

Even as renewed concern over energy security apparently is helping industry politically on U.S. exploration/production issues, public outcries over the gasoline price controversy have triggered talk in Washington of reviving the "windfall profits" tax and other punitive measures aimed at the industry.

The Bush administration early in the month called for oil companies to show restraint in pricing measures, while the Department of Justice promised tough enforcement of antitrust laws regarding price gouging (OGJ, Aug. 13, p. 17).

STATE ACTION

Efforts are under way in some states to target alleged unreasonable or illegal gasoline pricing practices.

Connecticut Gov. William O'Neill last week signed an emergency measure making it illegal under the state's trade laws to charge "unconscionably excessive" prices for fuel during disruptions caused by natural disasters, oil spills, or conflicts.

In addition, the attorneys general of Connecticut, California, Maine, Massachusetts, New Hampshire, Pennsylvania, and Vermont have asked the Justice Department to investigate recent oil prices hikes.

North Carolina Atty. Gen. Lacy Thornburg filed suit against Exxon Corp., alleging deceptive trade practices. Exxon blamed a computer error.

Thornburg charged Exxon quotes wholesale prices it then does not honor and imposes retroactive wholesale price increases.

Thornburg based his allegation on documents purportedly showing Exxon had raised its wholesale prices by as much as 6/gal after having contracted and sold the gas at the lower price. A North Carolina superior court judge issued an injunction to halt the alleged practice.

Thornburg said records show that in some instances distributors had picked up gasoline loads and made deliveries to service stations before being told of the price hikes. Further, charged Thornburg, distributors must build a cushion into resale prices to compensate for the alleged retroactive price hike that is passed onto consumers.

Thornburg even raised the specter of the Mar. 24, 1989, Exxon Valdez tanker oil spill off Alaska in criticizing Exxon over the alleged pricing practices, saying, "Exxon might get away with dumping on Alaska, but they're not going to get away with dumping on North Carolina."

A computer systems error caused some invoicing problems at North Carolina and South Carolina terminals, Exxon Co. U.S.A. Marketing Vice Pres. Gordon Thomson said. Thomson said the suit seems to relate to its computer pricing error, adding that at the time Exxon heard of the lawsuit it was about to send distributors this message:

"Exxon has been informed that some of its distributors who picked up product at Exxon terminals on the afternoon of Aug. 3 were invoiced at one price then reinvoiced at a higher one. This resulted from an inadvertent administrative error in making the price change. It was never Exxon's intention to change a price invoice. We will honor the price originally invoiced."

EDUCATION EFFORT

Company officials are pressing efforts to explain gasoline marketing and pricing practices to a largely skeptical public.

Some recent national public opinion polls suggest U.S. consumers see the price spike after the invasion as caused by industry greed and not market forces.

The public relations fallout from price gouging claims hits an industry still reeling from a string of accidents in 1989-90 that calls into question oil companies' environmental and safety records.

What's crucial is how well industry handles its job of educating the public on market forces and gasoline pricing and where gasoline prices move in the weeks ahead.

The issue could have repercussions across a host of issues ranging from pending environmental legislation to energy taxes when Congress reconvenes in the fall.

Part of that education will include telling consumers what a bargain U.S. gasoline has been through the price shocks of the past 20 years.

Oil & Gas Journal calculations show the inflation-adjusted price of gasoline following Iraq's invasion of Kuwait remains only about 8 higher than its present day low in 1988. Adjusted for inflation, the price of leaded regular gasoline at the pump today is lower than at anytime since 1918 except for 1972-73 and 1986-89.

The highest price U.S. consumers paid for gasoline since 1950, adjusted for inflation, was in the 1970s and early 1980s when crude allocation and price controls were still in effect.

By contrast, a posted price of about $25/bbl for West Texas intermediate crude oil adjusted for inflation would be $21.66/bbl, or about half the inflation adjusted peak in 1980 and 250% more than the inflation adjusted average price during 1950-1973.

What that suggests is that the extremely competitive nature of the gasoline market in the U.S., when allowed to function free of regulatory intervention, has kept U.S. gasoline consumers largely shielded from spikes in feedstock costs.

API RESPONDS

American Petroleum Institute Pres. Charles DiBona pointed out that oil company executives and wholesale gasoline suppliers have been making decisions about millions of barrels of crude oil and billions of gallons of gasoline to ensure an adequate supply of petroleum products to American consumers.

"To do this," he said, "companies replace current supplies on a continuous basis. When prices rise initially, a refiner's margins and profits increase because he has already purchased some supplies at a lower cost.

"If companies quit business at that point, they could walk away with those profits. But if they want to stay in business, they must immediately replace their supplies to keep refineries running and get new quantities of fuel to the consumer. The replacement supplies, of course, are bought at higher prices.

"The marketplace offers no guarantee that companies will sell all of their more costly stocks at these higher prices. When prices fall, refiners lose money as they sell off at lower prices what they bought at higher prices."

DiBona noted the drop in spot market oil and gasoline prices less than a week after the Iraqi invasion, adding that gasoline made from crude bought when prices peaked after the invasion may have to be sold at a loss today.

He said, "We know Americans believe gasoline prices never seem to fall, but in fact in 1988 gasoline prices when adjusted for inflation were at the lowest level experienced since World War 11 and perhaps ever.

"The 1989 prices were only slightly higher."

DiBona said that in the 6 weeks preceding the crisis, spot crude prices rose 11/gal vs. a 2/gal hike for spot market gasoline prices and no rise in retail prices. In the first week after the invasion, spot prices for crude and gasoline rose another 20/gal each.

In the first full week of August, spot prices dropped about 5 from that peak. As of Aug. 10, crude oil spot prices were about 23/gal higher than they were in mid-June.

"But because refiners and gasoline wholesalers have absorbed a good share of this price increase, consumers today are paying about 14 more for a gallon of gasoline than they did 2 months ago," DiBona said.

He dismissed as "naive" criticisms of companies raising gasoline prices in response to tightening supplies on grounds that supplies weren't tight when the crude was purchased.

"First, if any one refiner held prices down in the face of tightening supply/demand conditions while others-say, those purchasing supplies on the spot market-raised their prices, that company quickly would be denuded of supply. In a competitive market, selling prices must reflect today's supply/demand conditions, including perceptions of what the future holds-and anyone selling above or below that either will have too few customers or too many.

"Second, this criticism fails to account for the reverse phenomenon, when selling prices suddenly fall.

"Last winter, for example, U.S. refiners aggressively sought home heating oil supplies in world markets during the very cold spell we experienced in December. These supplies were purchased at premium prices and were delivered in January, when the weather became extraordinarily warm and prices plummeted. So the oil companies who bought could not recover their costs, losing out on the risk they had taken in supplying previously increased consumer demand."

PRICE FREEZES, CUTS

A number of U.S. companies froze or cut wholesale products prices in response to Bush's request, and market forces have trimmed a few cents from those levels. American Automobile Association noted that U.S. retail gasoline prices dropped about 3.4/gal during Aug. 10-13.

Energy Sec. James Watkins praised the major refiner/marketers who quickly responded to Bush's call for restraint in gasoline pricing.

"I commend the actions of these oil companies and urge others to follow their example if they have not done so already," Watkins said.

As of presstime last week companies that implemented gasoline price cuts or freezes included Amoco Corp., ARCO, BP America, Chevron Corp., Getty Petroleum Corp., Mobil Corp., and Phillips Petroleum Co.

ARCO on Aug. 8 froze its wholesale gasoline prices for 1 week.

Amoco Aug. 9 froze wholesale gasoline, distillate, and jet fuel prices throughout its 30 state marketing territory through Aug. 15. It also said it may lower prices in individual areas as market conditions warrant. On Aug. 10, Amoco cut wholesale gasoline prices by lo/gal in Atlanta and Fort Lauderdale-Miami and 0.8/gal in Tampa.

Phillips Aug. 10 cut its average wholesale gasoline price by 1.8/gal after slicing it the day before at some terminals by as much as 4.5/gal.

HOW LONG RESTRAINT?

Even as it grapples with the public's current outcry and imposes price freezes and cuts, the oil industry must contend with further products price hikes that are inevitable with higher crude oil prices.

Texaco Refining & Marketing Inc. Pres. Glenn Tilton earlier this month told a House subcommittee hearing in Washington that refiners were not yet recovering in the market a significant portion of crude cost increases incurred since tensions between Iraq and Kuwait began. Crude oil prices have jumped more than 50% since early July, but gasoline prices rose less than 20% in the same period, Tilton said.

Chevron Chairman Ken Derr said, "If the price for crude oil is skyrocketing, the only way we can recover the enormous increased costs for our imported oil and ensure continued supplies for our millions of customers is to raise the price we charge for our finished product."

Further, said Derr, Chevron is "woefully underrecovering its costs," adding that the company has raised its dealer wholesale prices for gasoline 5-8/gal since the invasion while feedstock costs have jumped by almost 25/gal since early July.

Phillips Chairman C.J. Silas said his company's profit margin for gasoline is less today than during the past 2 months. Because Phillips buys about 20% of its gasoline on the spot market, the company is losing money on those transactions to keep supplies steady for customers, he said.

BP America Pres. James H. Ross called the free market pricing system the best means of protecting consumer interest by efficiently allocating scarce supplies and encouraging conservation.

"Should some gasoline refiners and marketers be required to maintain artificially low prices, they would be outbid in the world market, creating localized supply shortages.

"Moreover, with artificially low prices there is an incentive to consume and a disincentive to conserve," Ross said.

Copyright 1990 Oil & Gas Journal. All Rights Reserved.