Gas spike: conspiracy or 'ethanomics'?

Senate committee probes possible price-gouging by oil firms as pump prices take fastest jump in 50 years.

By , Staff writer of The Christian Science Monitor

Oligopoly is a fancy word, but its meaning for most Americans may be steering-wheel simple: higher gasoline prices.

The shrinkage of the oil- refinery industry to a smaller number of firms has given major oil companies the ability to keep supplies of gasoline artificially tight and thereby boost prices, Senate investigators argued at a hearing yesterday.

As summer approaches and more Americans hit the road, gasoline prices have been rising – and becoming a hot topic from ordinary driveways to Pennsylvania Avenue.

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"Oil companies can act to limit supply and from time to time spike prices to maximize profits," Sen. Carl Levin (D) of Michigan, charged at the hearing. "Because there is insufficient competition, there is little-to-no challenge to that action," added Levin, who chairs the investigatory arm of the Governmental Affairs Committee.

Prices spiked in the spring of 2000 and 2001. And in the past few months, gasoline prices have increased faster than at any time in the past 50 years.

"Price spikes are becoming a way of life in the United States and not without consequences," Senator Levin said.

The Senate's Democratic-majority investigators, after reviewing internal oil-company documents and interviewing oil executives and analysts, do not accuse the companies of illegal price fixing – of discussing prices or other measures with one another. But in a 400-page report, the investigators hold that the firms did appear to make indirect signals to one another.

They cite several documents showing refiners sought in the mid-1990s to prevent imports into California to make the market "tight." The industry denies the charges. There is "no evidence of collusion or other anti-competitive activity," states the American Petroleum Institute, a trade group.

A Federal Trade Commission investigation into causes of price increases in Midwest markets in the spring and summer of 2000 found "no evidence of collusion or anti-competitive behavior in the oil industry," notes James Carter, regional director for US ExxonMobil Fuels Marketing Company.

Gas-price volatility, he says, reflects a highly competitive market.

The issue may not be so simple. Thomas Stauffer, a Washington energy economist, says the "biggest single factor" in the price spikes has been rules of the Environmental Protection Agency requiring additives to make gasoline cleaner. And, he adds, these regulations have been crafted to make ethanol from corn the "only solution."

This has resulted from the political power of Archer Daniel Midlands, the largest supplier of ethanol, and the corn lobby, Mr. Stauffer charges. Ethanol costs $100 a barrel when its price is compared to oil itself.

These "reformulated fuel requirements" erect artificial barriers between different gasoline markets and "create opportunities to manipulate price and supply," notes Geoffrey Sundstrom of the American Automobile Association's national office in Orlando, Fla.

"Whether or not that has actually happened is up to the investigators to prove," he says. "We don't have any documents or proof that someone did something wrong."

The AAA, Mr. Sundstrom says, would like to see the nation move toward a single cleaner-burning gasoline, or at least narrow the list. Right now there are 14 or more different fuels that have to be blended and sold.

The investigators' report says gasoline price increases last year helped push the US economy "into a recession, and this year's increases are threatening the current recovery."

Over the course of a year, the report notes, each 10-cent increase in the price of gasoline raises oil-companies revenues by $10 billion.

The report's basic argument is that mergers in the oil industry over the last few years and the closing of many refineries over the past 20 years have increased concentration in the refining industry to a point where supply and prices could be manipulated.

"No new grass-roots refinery has been built in this country since our own Garyville, Louisiana, Refinery started up more than 25 years ago," Gary Heminger, president Marathon Ashland Petroleum, acknowledged at the hearing. He claimed the investment payback has been limited by new regulations.

In one case cited by investigators, an internal memo subpoenaed from BP PLC "confirms" that the company was looking for ways to limit gas supplies in the Midwest in the summer of 1999. The memo noted several possibilities, including shutting down refining capacity and exporting gasoline to Ontario.

But BP has said it rejected these ideas.

• Kris Axtman in Houston and Gail Russell Chaddock in Washington contributed to this story.

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