Oil industry reacts to gasoline allegations

Oil companies and associations Wednesday had their first opportunity to explain to Congress why gasoline prices have soared in the Chicago/Milwaukee area. Oil industry representatives testified at House commerce and judiciary committee hearings that also heard from government officials and consumer groups.

br>Patrick Crow
OGJ Online

Washington, DC�Oil companies and associations Wednesday had their first opportunity to explain to Congress why gasoline prices have soared in the Chicago/Milwaukee area. Oil industry representatives testified at House commerce and judiciary committee hearings that also heard from government officials and consumer groups.

The National Petrochemical & Refiners Association said the refined product shortages that created the price spikes were the result of higher oil prices, low stocks, regional supply disruptions, and a new grade of reformulated gasoline (RFG).

Bob Slaughter, NPRA general counsel, said, �The refining industry has been coping with difficult times. According to the National Petroleum Council, the refining industry�s return on invested capital over the past 10 years averaged 4%. During much of the same period, refiners were called upon to invest about $20 billion in environmentally-related expenditures.

�The outlook for the next 10 years is for continued difficulties. Refiners will face a blizzard of regulatory initiatives over the next 10 years. These environmental initiatives are largely uncoordinated and, if history is any guide, their impact on energy supplies will be ignored or downplayed.

�They also are very expensive," said Slaughter. "The gasoline sulfur reduction program will cost the refining industry $8 billion, according to the NPC. Diesel sulfur reduction, if done in conformity with EPA�s proposal, will cost around $10 billion. And the cost of responding to methyl tertiary butyl ether-related problems will take the combined total above $20 billion.

"And these are just three programs facing the industry.�

Price perspective
Red Cavaney, American Petroleum Institute president and CEO, said gasoline prices needed to be examined in perspective.

�The average retail price of gasoline reached $1.22/gal in 1999. This is the second lowest average annual pump price [in inflation-adjusted 2000 dollars] of the entire 81-year history of recorded pump prices. Average prices in 1998 were lowest. Prices started rising in March 1999 and continued to increase into 2000, reaching $1.71 in June.

�Motor gasoline prices have declined sharply since 1981," said Cavaney, "when real pump prices reached a high of $2.53 [in 2000 dollars]. So the real cost of gasoline to consumers today remains below its 1981 peak.

�The decline can be attributed largely to lower crude costs, but manufacturing, distribution, and marketing costs are lower as well. Only taxes have increased.�

Cavaney said the combined costs to manufacture, distribute, and market gasoline fell from an average of 69�/gal in 1981 to 54�/gal in June 2000, while during the same period, taxes rose from an average of 31� to 44.2�.

Unocal patent
Cavaney said the Unocal Corp. patent infringement case has created uncertainty and risk for companies making reformulated gasoline.

In the case, a federal court upheld a Unocal patent, awarding a 5.75�/gal royalty against other refiners in California because the gasoline they produce in order to comply with California Air Resources Board standards matches a gasoline formula Unocal patented before the CARB standards were implemented (OGJ, May 1, 2000, p. 35).

Cavaney said, �Refiners, importers, and blenders have publicly indicated that they may avoid possible infringement of the patents by making less RFG, and RFG imports have declined.�

On Tuesday, four members of the House of Representatives filed a bill to waive Unocal�s patent and permit the Justice Department to license RFG patents. They said their bill would allow owners of the patents to receive reasonable fees but would now allow them to deny licenses.

William Ichord, a Unocal Corp. vice-president, said, �Unocal�s patents are not a barrier to the manufacture and sale of RFG, and there is certainly no reason to think they have been a factor in the rising price of gasoline sold in the Midwest, or anywhere else.�

He noted the company is not collecting any royalties, and if it were, the impact on gasoline prices would be less than 2�/gal.

�Furthermore," said Ichord, "we believe that our patented formulations may offer refiners a more cost-effective way to produce RFG that meets federal air quality standards. If that is the case, then refiners might reduce the relative cost of manufacturing RFG by licensing our patents and using our formulations.�

Ichord said, �Unocal is once again repeating its offer to discuss license terms for use of its patented gasoline formulations with all interested parties. The final decision is up to the nation�s refiners, blenders, and importers.�

Transport limitations
Jerry Thompson, a Citgo Petroleum Corp. vice-president, said, �The US pipeline and distribution system was designed to handle a half dozen grades of gasoline. Today, it has to cope with more than three dozen grades of 'boutique� gasolines.

�Keep in mind that no refinery can manufacture all of these fuels, so they have to be shipped all over the country to where they are needed. Each of these fuels has to be kept separate from the time they are manufactured.

�Our nation can no longer substitute fuels from areas of abundant supply into areas of insufficient supply because they are literally different fuels," Thompson continued. "A patchwork of fuels has unintentionally constrained manufacturers� ability to refine and supply gasoline to the marketplace.

�The result," he said, "is that situations that previously could have been corrected very quickly take much longer for the system to correct. This longer correction time creates shortages, which in turn create price spikes.�

Thompson said the problem is that �this nation�s only energy policy is driven by the Environmental Protection Agency. In reality, it�s not a policy at all but a patchwork quilt of regulations and requirements that has been added to every year since the Clean Air Act was passed in 1970.

�This hodgepodge of regulations fails to take into consideration the American people�s needs or the refiners� ability to produce and distribute this increasingly complex range of products.�

Pipeline problem
J. Louis Frank, president of Marathon Ashland Petroleum LLC, noted that Midwest refineries can supply only about 75% of the region�s demand. The rest, about 1 million b/d, comes via pipeline.

He said, �In March, one of these critical pipeline systems, the Explorer Pipeline, experienced a line failure followed by a 6-day outage, which resulted in a shortfall of about 8 million bbl of products to the Midwest.

�Explorer was repaired and returned to service, but part of the system must operate at a reduced capacity pending completion of safety tests. As a result, the region continues to suffer a shortfall of up to 50,000 b/d of pipeline deliveries.�

Frank said, more recently, Wolverine Pipeline, which carries about 34% of Michigan�s petroleum needs from Chicago, experienced a release that resulted in a 9-day interruption of supply to that area. It has returned to service, but it, too, is running at reduced capacity.

Frank urged the Department of Transportation to facilitate the full operation of both pipelines as quickly as possible.

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