Big Oil attacked over record gas prices
Critics tell House panel that mismanagement, lack of competition are behind record prices; call for gas reserve, possible oil company breakup.
NEW YORK (CNNMoney.com) -- Big Oil went on the defensive Wednesday, getting grilled before a House panel and denying accusations that mismanagement and a lack of competition are the reasons behind this spring's record gasoline prices.
Gas prices hit $3.10 a gallon Wednesday, according to AAA. It's the fourth record day in a row, and the surge has been attributed to low gasoline supplies caused by a lack of refining capacity.
"They have no interest in building spare capacity because that would undermine their pricing power," Mark Cooper, research director for the Consumer Federation of America, said prior to a hearing by a House Judiciary Committee antitrust panel in Washington Wednesday.
At the hearing, monitored on television in New York, Cooper was just as blunt.
"This is a picture of fundamental market failure," he said. "And Congress and the administration have stood by and done nothing to help consumers."
Cooper pointed to the record earnings at oil companies and said in any other industry this would attract new businesses.
But he said the domestic refining industry has continued to consolidate, allowing operators to shun building refineries, run existing ones at full throttle and thus cause many of the accidents and outages the nation has experienced over the last few months.
"This is just mismanagement," he said. "But they get away with it because there is no competitive discipline."
Others at the hearing said Congress should use its power to regulate monopolies and break up the big oil companies if it is found they have violated the law.
"There is near unanimity among economists that there is a concentration of power," said Connecticut Attorney General Richard Blumenthal, who also voiced support for a proposal to sue OPEC for price fixing. The oil companies "have clearly demonstrated that they will abuse it."
But the American Petroleum Institute, an oil industry group, in an e-mail sent out prior to the hearing, said nearly 30 state or federal investigation over the past 30 years have failed to turn up any evidence of price fixing.
On the refinery issue, API economist John Felmy told the committee that, while a new refinery hasn't been built in decades, overall refining capacity has increased at a rate that's the equivalent of adding one refinery a year.
And the nation's top four refiners - ConocoPhillips (Charts, Fortune 500), Valero (Charts, Fortune 500), Exxon Mobil (Charts, Fortune 500) and BP (Charts) - account for less that 50 percent of the country's refining capacity, a concentration that's smaller than many other industries, said Ron Planting, another API economist.
Felmy said in a phone interview that whenever the industry tries to add refining capacity, it faces opposition from surrounding communities. Moreover, Felmy questioned why the industry would make expensive refining expansions when President Bush is calling for a 20 percent reduction in gasoline use by 2017.
API also produced numbers showing the amount of gasoline being produced was increasing. "I think the refining industry is doing all it can," said Felmy.
Felmy said several other contingencies are contributing to the high gas prices. Those include higher crude prices since the start of the year, attributed to tensions with Iran and violence in Nigeria; a decline in gasoline imports because of a strike in Europe; strong demand in the United States and higher prices for ethanol, which is blended with gasoline to make it cleaner burning.
"We recognize that consumers are frustrated by these prices," said Felmy. "But price controls could make them worse."
But the Consumer Federation's Cooper said the refining industry hasn't even tried to build new refineries and has instead closed 50 since the 1990s rather than make investments to make them comply with pollution laws.
"They would rather not try and blame their neighbors," he said.
As for the push into alternative fuels, he said, "So now we have to suffer through years of higher gas prices? They would recoup their costs before that time."
To bring gasoline prices down in the short term, Cooper urged Congress to use its antitrust authority and investigate whether the refining industry has become too monopolistic.
He also called for creating of a strategic gasoline reserve to help ease price spikes when a refinery is taken offline, brushing aside suggestions from Felmy that such a reserve would be costly to build and operate.
"It may cost us a penny or two more, but [paying these premiums] of 60 cents or $1.20 is ridiculous," he said. "They want us to be penny wise and pound foolish."
In the long run, Cooper said reducing demand is key, a concept advocated by many industry observers.
"Refining capacity is not the issue, the issue is we need to reduce demand," said Ben Schreiber, energy advocate for U.S. Public Interest Research Group, calling for an increase in fuel efficiency standards. "We are not taking the simple steps we need to take to reduce energy consumption."