Industry groups reply to anger over gasoline prices

April 27, 2006
Trade association officials cited aggressive reinvestment rates and already announced commitments to increase US refining capacity in response to public anger over high gasoline prices.

Nick Snow
Washington Correspondent

WASHINGTON, DC, Apr. 27 -- Trade association officials cited aggressive reinvestment rates and already announced commitments to increase US refining capacity in response to public anger over high gasoline prices.

They also called for action against those who attempt to excessively profit from supply problems. "The oil industry does not condone price-gouging. We support investigations and punishment of anyone who is found guilty," American Petroleum Institute Pres. Red Cavaney said.

But he also warned against reviving the windfall profit tax because the last one, which was in effect from 1981 to 1986, drove production growth out of the US and reduced the domestic oil industry workforce by one third.

Cavaney and API Chief Economist John C. Felmy briefed reporters a day after US President George W. Bush issued several orders addressing gasoline prices.

US Energy Information Administration figures show that the nationwide average retail regular unleaded gasoline price climbed from $2.24/gal on Feb. 20 to $2.914/gal on Apr. 24.

Cavaney and Felmy said crude oil prices rising in response to increased global demand, refining capacity lost during last year's hurricanes that has not been restored, and additional costs as refiners switch to ethanol from methyl tertiary butyl ether as a gasoline additive are mainly responsible.

In a separate statement, National Petrochemical and Refiners Association Pres. Bob Slaughter noted that crude costs are climbing because of political instability in some producing countries, refiners are beginning to produce ultralow-sulfur diesel fuel, and costs have increased for natural gas, construction materials, and labor.

'Difficult, challenging'
"The nation's refiners operate in an environment in which all these factors, together with strong demand for gasoline and other products, cannot be ignored. In short, our members must continue to concentrate on the serious business of providing secure supplies of refined petroleum products to consumers even under difficult and challenging global and domestic conditions," he said.

Cavaney said the perception of major oil companies as dominant worldwide market forces has been inaccurate for years. "Seven of the 10 largest oil companies in the world are owned by foreign governments, and only one of the three investor-owned companies in the top 10—ExxonMobil—is American," he said.

Only one of the 15 largest holders of oil reserves is publicly traded, he pointed out. Nearly 80% of the world's oil and gas reserves are controlled by national oil companies.

"One of the things you might want as a consumer is to have US companies that are big enough to stand toe-to-toe and compete for supplies against foreign government-owned oil companies," Cavaney said.

He noted that oil and gas industry earnings the past 5 years have averaged 5.9¢/dollar of sales, compared with 5.6¢ for all US business. In 2005, the figures were 8.5¢ and 7.7¢, respectively.

Standard & Poor's Corp. says the US oil and gas industry had a 19% reinvestment rate in 2004—the latest year for which figures are available—compared with 17.4% for all industry, according to Cavaney. The oil and gas industry also has spent heavily on alternatives to traditional hydrocarbons, he added.

"Over the last 5 years, US oil and gas companies invested nearly $100 billion in emerging energy technologies, including renewables, in North America alone—73% of the total $135 billion spent by US companies and the federal government," Cavaney said.

Refining capacity
He and Felmy said Bush was right when he said in his Apr. 25 speech to the Renewable Fuels Association that no new US oil refinery had been built in the last 30 years (OGJ Online, Apr. 25, 2006). But the API officials also pointed out that domestic capacity has grown at existing refineries.

"We've expanded capacity by the equivalent of 10 to 12 state-of-the-art refineries," Felmy said.

He and Cavaney also said federal lawmakers set a May 5 date for the switch to ethanol from MTBE in the Energy Policy Act of 2005. "The industry suggested and supported phasing down the use of MTBE. Congress decided otherwise," Cavaney said.

They pointed out that ethanol, unlike MTBE, can't be shipped through pipelines. Consequently, time and money are being consumed to develop sites at terminals and elsewhere for blending ethanol near points of sale.

Felmy questioned the need for gasoline formulation waivers. "Waivers can play an important part when you've had a supply shock, such as from last year's hurricanes. We've only seen spot shortages recently. Overall supplies are adequate although expensive," he said.

Slaughter said NPRA shares Congress and the Bush administration's interest in maintaining a secure and reasonably priced supply of petroleum products.

"We must remind policy-makers, however, that the most effective means of achieving this goal is continued reliance on market mechanisms, not price regulation or other actions that interfere with and distort the market realities that both refiners and consumers must face," he said.

Cavaney also warned against trying to regulate prices. "Historically, interventions in the marketplace haven't worked," he said.

Contact Nick Snow at [email protected].