WASHINGTON -- Oil company mergers have led to rising gasoline costs, and motorists should expect high prices at the pump if the industry continues to consolidate, a U.S. congressional report said on Monday, Reuters says. The Senate’s Permanent Subcommittee on Investigations issued the report after a 10-month investigation into gasoline prices. Senior company officials from BP, ExxonMobil, Marathon Ashland Petroleum, ChevronTexaco and Royal Dutch/Shell Group’s U.S. unit Shell Oil testified yesterday. The executives denied allegations that companies tried to boost U.S. gasoline prices over the last few years. They said price swings were caused by volatile crude oil markets, unexpected refinery shutdowns and pipeline disruptions.
The Democratic-led panel also alleged that Marathon Ashland Petroleum deliberately withheld supplies in early 2000 to keep fuel prices high. A Marathon spokesperson denied any wrongdoing by the company. Several other big oil companies failed to have adequate U.S. gasoline supplies on hand to meet demand during the past two years, the panel’s report said.
Democrats on the panel questioned BP about a 1999 internal memo that outlined options to boost prices. The options were immediately rejected by senior executives, BP said. BP never tried to purchase a competing refiner in order to shut it down, nor did it offer to supply gasoline in exchange for a competing refinery to close, said Ross Pillari, BP vice president of U.S. marketing. Those options “were rejected because it is inappropriate to have this kind of activity in the marketplace,” Pillari said.
Internal documents from several oil companies reviewed by panel staff show “the oil companies view it to be in their economic interest to keep gas inventories low and the supply and demand balance tight,” said Subcommittee chair Senator Carl Levin (D-Mich.). “Sudden increases in gasoline prices are costly to the consumer and disrupt our economy because the cost of transportation, which is based on the cost of fuel, effects the cost of all of our goods and services.” For every one penny per gallon increase in gasoline, oil firms’ collective income soars by $1 billion a year, he said.
Republican senators on the panel took a different view. Sen. George Voinovich (R-Ohio) said volatile gasoline prices simply reflected the global crude oil market. In the past four years, U.S. crude oil has swung from a low of $11 per barrel to a high of $33 per barrel, Voinovich said, “and it only makes sense” for gasoline prices to follow suit.
Levin said he was holding a two-day hearing to discuss how gasoline is priced and why it has become so volatile. The subcommittee’s Democratic staff found that the oil industry mergers of the last few years and the closing of many refineries over the last 20 years reduced the number of gasoline suppliers, which has led to higher fuel prices.
“If concentration in the oil industry continues to increase, higher prices can be expected,” the report said.
The subcommittee report said the growing number of “vertically integrated” energy companies that find oil, refine the crude into gasoline and then sell the fuel under their own brands has led to “anticompetitive” results, including higher wholesale and retail gasoline prices.
The panel said motor fuel prices have become more volatile than ever: “Gasoline prices now regularly vary more in one month than they previously did in entire years.”
This spring, U.S. retail gasoline prices increased faster than at any other time in the past 50 years. Subcommittee staff said last year’s gasoline price increases helped push the U.S. economy into a recession “and this year’s increases are threatening the current recovery.”
Prices have eased in the past few weeks, however. The Energy Department said on Monday that the nationwide average gasoline price was $1.393 per gallon, down 23 cents from one year ago. Prices are higher on the West Coast and tend to be cheaper in the South and the Gulf Coast regions.
The federal government has forecast that the nationwide price of unleaded regular gasoline will average $1.46 a gallon throughout the summer driving season.
The subcommittee looked at the effects of the larger number of mergers and acquisitions in the oil industry that has led to a significant concentration in refining assets, including the Marathon and Ashland Oil merger of refining operations (1998), the BP merger with Amoco (1998), the Exxon merger with Mobil (1999), the BP/Amoco acquisition of Atlantic Richfield (2000), the Chevron merger with Texaco (2001), the Phillips acquisition of Tosco refineries (2001) and Phillips’ announcement of a merger with Conoco (2001).
The panel said this wave of mergers followed a consolidation of assets within the refining industry in the last two decades. In 1981, 189 firms owned 324 refineries, but by 2001 only 65 firms owned 155 refineries. “During this period the market share of the ten largest refiners increased from 55 percent to 62 percent,” the report said.
A wave of oil company mergers in the past five years has helped consumers by creating bigger companies that can cut costs and operate more efficiently, the executives said. “As a result, the mergers have created strong competitors. We see no connection between mergers and fluctuations in gasoline pricing,” said David Reeves, president of ChevronTexaco’s North America products division.
“Consolidation has not lessened the level of competition in our industry. If anything, competition is growing even more intense,” said Gary Heminger, president of Marathon Ashland.
A jump in gasoline prices typically reflects a tight supply of crude oil, a fire or accident at a U.S. oil refinery, or an unexpected problem with a pipeline, the executives agreed.
The government also plays a role in higher prices by requiring dozens of gasoline varieties to meet federal anti-pollution rules, they said.
The American Petroleum Institute said that numerous federal and state investigations over the last three decades into gasoline prices have found no evidence of collusion or anti-competitive behavior in the oil industry. “Fuel prices are driven by market forces. Because crude oil is the largest non-tax cost component of a gallon of gasoline, the price of gasoline is determined largely by the demand and supply of crude oil worldwide,” API said.
“Gasoline prices are also affected by refinery and pipeline interruptions and by constraints that numerous specialized fuels across the country place on refineries and pipelines,” added API.
Separately, London-based BP CEO Sir John Browne said the moment for the company to make major acquisitions had passed. “To be big just for the sake of it is a waste of time. If the return on capital is not high enough, shareholders are not getting what they deserve,” Browne told the El Pais newspaper in Madrid. “For BP, the time for big acquisitions has passed,” he said.
“There are no more Amocos left--it’s over,” he said. “The best way of growing is to do it for yourself, not through acquisitions. And in upstream, our production is growing faster than the other ‘big two,’ Shell and Exxon,” he added.
