Review suggests Big Oil manipulated gas prices [THEY WOULDN'T DO THAT]

The Associated Press ^ | Nov. 26, 2006 | JEFF DONN

[Dubya]

BAKERSFIELD, Calif. - You'd think it was Texas.

Dusty roads course the scrubland toward oil tanks and warehouses. Beefy men talk oil over burritos at lunch. Like grazing herds, oil wells dip nonstop amid the tumbleweeds.

That's why the rumor sounded so wrong here in California's lower San Joaquin Valley, where petroleum has produced more riches than the gold rush. Why would Shell Oil Co. close its Bakersfield refinery? Why scrap a profit maker?

The rumor seemed to make no sense. Yet it was true.

The company says it can make more money on other projects. It denies that it intended to squeeze the market to drive up profits at its other refineries, as its critics claim.

Whatever the truth in Bakersfield, an Associated Press analysis suggests that big oil companies have been crimping supplies across the country for years. And tighter supplies tend to drive up prices.

The analysis, based on data from the U.S. Energy Information Administration, shows that the industry slacked off supplying gasoline during the price boom between early 1999 and last summer.

The industry counters that it has been working hard to meet untiring demand. It faults output quotas set by Mideast oil powers, global competition for oil from booming economies like China's, and domestic challenges like depleting wells, clean-air rules and hurricanes. They do make things harder.

"The industry is working very hard," said Joe Sparano, who heads the Western States Petroleum Association representing Shell and other drillers, refiners and marketers.

Yet the analysis found evidence of at least an underwhelming industry performance in supplying the domestic market when profits should have made investment capital plentiful:

During the 1999-2006 price boom, the industry drilled an average of 7 percent fewer new wells monthly than in the seven preceding years of low, stable prices.

The national supply of unrefined oil, including imports, grew an average of 6 percent during the high-priced years, down from 14 percent during the previous span.

The gasoline supply expanded by 10 percent from 1999 to 2006, down from 15 percent in the earlier period.

The findings support a conclusion reached by many motorists. Fifty-five percent of Americans believe that gas prices are high because oil companies manipulate them, a Pew Research Center poll found in October.

The oil business has been a profitable one. The six biggest refiners had $400 billion in profits since 2001, according to Public Citizen, a consumer group, and corporate reports.

Shell portrayed its Bakersfield refinery as old and unfit and said no attempts would be made to find a buyer.

Skeptics like Sen. Ron Wyden, D-Ore., suspected that Shell wanted to shut the refinery to sell pricier gas from its bigger refineries elsewhere.

"They were trying to squeeze the market in every possible way," Wyden said.

Shell spokesman Stan Mays denies that. He said it's "impossible to speculate" on whether Shell would have profited from closing the plant.

Government regulators eventually began to nose around, wondering whether Shell hoped to game the market, and the company finally hired an investment banker to scout buyers. In January 2005, it announced a sale to truck-stop operator Flying J of Ogden, Utah.

Flying J's 350 refinery workers process 2.7 million gallons of oil a day -- as much as Shell did.

"It's still a good refinery," engineering manager Andy Wheeler said. "There's still plenty of oil locally to produce."

A 2001 study by the Federal Trade Commission reported that some companies were deliberately crimping supply during a Midwestern gasoline price spike. One executive told regulators that "he would rather sell less gasoline and earn a higher margin on each gallon sold."

This year, the FTC reported that some oil companies were storing oil, to await anticipated higher prices.

The industry has shelved an average of 21 percent more unrefined oil from the start of 2004 through June, the AP analysis indicates. Last spring, stocks of shelved crude reached their highest level in eight years, despite the fabulous riches at hand.

Such a strategy could conceivably extend to drilling, too.

"If you think prices 10 years from now are going to be $100 a barrel, you might not be that enthused about producing as much as you can now," said energy economist Allan Pulsipher at Louisiana State University.

However upsetting to drivers, such tactics are usually viewed as legal. "A decision to limit supply does not violate the antitrust laws, absent some agreement among firms," regulators wrote in one FTC report.

"A handful of very large companies realize it's in their mutual interest to keep prices as high as possible," said Tyson Slocum, an energy expert at Public Citizen. "I don't think they're sitting around a table smoking cigars and price fixing, but I think there are sophisticated ways to manipulate the market."

[Dog Gone]

There's oil in California, both onshore and offshore. Trouble is, the residents there don't want oil companies to get it.

They'd rather have it bubble naturally to the surface and float ashore rather than see it turned into valuable resources.

[bert]

This is an aP article and not worth the toilet paper it is written on.

The AP is the enemy of America.

[em2vn]

A couple of questions for you. What is the relationship between the drilling rig number and refinery output, and demand?
Also, what oil companies were going belly up during this period?

[Dubya]

Those mean ole new people.

[Dog Gone]

There's no direct correlation between drilling rigs and refinery output. They should be viewed as separate industries. The vast majority of drilling companies do not have refineries, and many, if not most, refineries do not have drilling operations.

Drilling companies chase oil based on the price they can sell it to a refinery. That's whatever the world price of oil is, plus whatever adjustments there are for quality and transportation. There is no particular advantage for a drilling company to supply crude to its own refinery. That oil company could sell it on the open market for the same price its refinery would have to purchase imported crude, or crude from any other domestic supplier.

The biggest companies that went belly up (or agreed to be purchased to avoid bankruptcy) during that period were Mobil, Amoco, and Atlantic Richfield (ARCO). There were dozens of other smaller companies that disappeared as well.

[XBob]

ping

[ElkGroveDan]

There's oil in California, both onshore and offshore. Trouble is, the residents there don't want oil companies to get it.

California produces over 700,000 barrels of crude per day. Kern County alone has about 30,000 producing wells.

[Dog Gone]

Yep, plenty of existing production. It's the new stuff that California is preventing in large part.

[Dog Gone]

You amaze me with your all wisdom about everything. Have a good day.

You have a good one, too. With over 26 years in the oil industry, I'm going to have an opinion, and I'm guessing it's going to be more informed than most offered in support of this stupid AP article.

[Dubya]

You have a good one, too.

Thank you.

[em2vn]

I agree there were mergers but not to avoid bankruptcy.
My question about the capacity of the drilling rigs and the output of the refineries was to indicate that with a nearly 250% increase in drilling capacity there should have been a glut of crude that drove prices down. I don't think that was the case on the crude side or the refined side.

[Dog Gone]

I was there. Why else were these consolidations happening in times when oil prices were around $10/bbl?

If you have a different theory, I'd love to hear it. My family and my friends went through it. I still had a job. A lot of them didn't.

A 250% increase in drilling activity domestically is not going to impact the global market that much. Demand is that high, and it's a global market. There is no way that the US can drill enough oil prospects to cause a world glut. Even if the enviros cooperate.

We could make a major dent, but this story is all about how oil companies conspire to cause shortages. The media has poisoned the minds of the public. The proof is here on this thread in a conservative forum.

[William Terrell]

That's a very interesting chart. In the winter of 2002 I was paying $.99 per gallon for gas.

It would seem to me rather odd that the increase of oil production (more rigs) would increase with gas prices. Presumably, the rigs were getting oil to the surface. And, if drilling companies would certainly think they could sell it once it's on the surface.

The demand is certainly there.

It would seem to me that the bottleneck is at the refinery.

Another thing, I've read pretty much of the thread and I'm struck by another oddity. Why is it difficult to believe that oil companies would agree to use manipulative methods to drive the prices higher?

[Dog Gone]

There are several thousand domestic oil and gas companies, far more internationally.

There are far fewer automobile manufacturers. Yet we don't hear a peep of protest that my father bought a brand new Corvette in 1965 for $4,800 and you can't drive one off the lot today for 10 times that amount.

Where's the bottleneck? Where's the outrage?

[em2vn]

Are the drilling figures for domestic production or worldwide production? If the figures are for domestic production, was any part of that production exported? If so it seems extremely odd, since we are a gross importer of crude, that we would be exporting domestic production unless it was exported to be to be re-imported at an inflated price.
The above is present only as questions, not to be taken as a statement.

[Dog Gone]

A tiny fraction of Alaskan crude was sent to Asia around 2001. I don't think any of it still is, but it never amounted to more than about 60,000 bbls/day, which is like one boatload every three months.

Seriously, it does not matter whether we export or import crude. It's all priced the same, and if it's cheaper to import oil from Venezuela (just across the American Lake) than to ship it down from Alaska, then we'll do that.

Almost all folks get too political about this when thinking about it, and that's not the way things work. Oil is all priced the same, no matter where it comes from.

It will go to the place where it can be delivered most cheaply. It's no more complicated than that until governments make it so.

[em2vn]

I thought that all of the Alaskan oil was exported since it was cheaper to export than to haul to the lower 48.
I am somewhat of a Nixonsonia in that I can support some price controls if a good's price has a major disruptive effect on the overall economy.
To trust the oil industry or any industry to conduct itself in an ethical manner is unwise. In our current business climate I think that business leaders will engage in unethical conduct until they are forced to follow the law. Not all business leaders fall into that catagory but in my experience most will.

[rottndog]

Some Alaskan oil is exported--the amount is limited by law. I think it is less than 10%.

BTW, price controls ALWAYS lead to shortages. It did when Nixon used them.

[Dog Gone]

This is oversimplistic, but I'm going to generalize.

Mr. refinery manager wakes up tomorrow and finds that he can get crude various places just like every other day. He has to keep in mind what his refinery is machined for. Big difference between North Sea oil and West Texas Sweet.

Mr. refinery manager doesn't give a rat's **** where the crude comes from. He cares about price and quality. How much does it cost to get it into his front door.

He couldn't care less whether it's from Russia, Alaska, or down the road in Texas.

[Dog Gone]

I think all of the Alaskan oil goes to West Coast refineries today, especially considering the declining

You hate business and don't trust business leaders. I resent that, but respect your opinion.

I'd just suggest that you'd be living in a tent if American business wasn't doing some good.