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US Oil Industry Fights Blame For High Gasoline Prices
Dow Jones

WASHINGTON -(Dow Jones)- The American Petroleum Institute Monday tried to head off criticism that the oil industry is to blame for record high gasoline prices, saying high crude costs - and not a conspiracy to keep supplies short - is the primary driver.

Record prices at the pump have continued to put the oil industry on the defensive against consumer groups and Capitol Hill Democrats critical of Big Oil's profits.

The API, which represents the interests of firms such as Exxon Mobil Corp. ( XOM), Chevron Corp. (CVX), ConocoPhillips (COP), Royal Dutch Shell PLC (RDSA), and BP PLC (BP), said crude costs represent around 70% of the cost of gasoline.

"Add state taxes - which is the next most significant cost - and you can see why we're in pretty high price environment," said Red Cavaney, API president, in a media teleconference.

Despite gasoline inventories at their highest levels in 15 years, AAA Daily Fuel Gauge Report said the national average retail price of regular gasoline stood at a record $3.287 a gallon Monday. The price is 61.4 cents, or 23%, higher than a year ago.

Last week, the Consumer Federation of America all but blamed Big Oil for conspiring to raise prices to their current levels, in a report on gasoline prices. "For half a decade the major oil companies have exercised their market power," said Mark Cooper, CFA's research director.

Cooper blames refiners for the current "price pop" by lowering their output heading into the driving season, despite bearish factors that he says should be lowering prices - such as declining gasoline consumption, high inventory levels, and increased biofuel and oil production.

"These market responses are being counteracted by high crude prices driven up by speculators and reduced oil company refinery runs," said Cooper.

Prices are rising even in the face of falling demand: U.S. January oil demand figures posted late last week showed strong signs or demand erosion, down 445, 000 barrels a day, or 2.2%, compared with a year ago. That makes demand - at 20.114 million barrels a day - the weakest in any month since April 2005.

Federal lawmakers are sustaining their ongoing attack on Big Oil. Rep. Ed Markey, D-Mass., chairman of the House Select Committee on Energy Independence and Global Warming, is on Tuesday expected to lambast oil executives for high oil prices at a panel hearing.

"This gas price record is a perfect example of why we need these oil companies to go on the record with the American people to discuss our dangerous dependence on oil," Markey ahead of his hearing. "These companies are defending billions in federal subsidies needed for renewable fuels and clean energy while reaping over a hundred billion dollars in profits in just the last year alone."

House and Senate Democrats have repeatedly tried to kill tax breaks to the largest oil companies to fund new renewable energy technology, but the measures have failed on the Senate floor.

Executives, such as BP America President Robert Malone, and Shell's head of U.S. operations, John Hoffmeister, are scheduled to testify before Markey's panel Tuesday.

Chief API economist John Felmy said compared with the same period last year, first-quarter gasoline prices have only increased by 75 cents a gallon compared with a 94 cents a gallon of crude. For every dollar change in crude, gasoline prices rise around 2.4 cents a gallon, he said.

According to the government's Energy Information Administration, the national average price for all gasoline grades has risen more than 15 cents a gallon to $ 3.31 a gallon from the beginning of the year. Oil prices in the same period have risen around $10 a barrel to more than $102.

Gasoline prices have traditionally risen in that period as refiners prepare for the driving season, including changing the fuel specifications for the summer. That requires reducing capacity utilization, and many refiners take advantage of shut downs for maintenance.

Cooper said because of consolidation in the industry at the turn of the century, there's not the competition in the industry that other sectors enjoy. Large companies, such as ExxonMobil could smooth the price spike if they didn't lower refinery runs, he said.

"Their spring cleaning sets off a price spike - running up the price 10-30 cents," Cooper said, adding, "It's not the way a well-functioning market runs."

Felmy said record production, strong inventory levels and near-record imports - which help to soften prices by providing competition - "means we have a well- supplied market."

Felmy also rejected the argument that many Capitol Hill lawmakers are using - that oil companies were making larger profit margins that other sectors. Fourth- quarter 2007 profit - net income divided by revenue for the Dow Jones Industrial companies - averaged 7.1 cents on the dollar compared with 7.4 cents on the dollar for the oil and gas industry, he said.

"The argument that there's no competition simply fails when you see that refiners' returns are very low right now," Felmy added.

Credit Suisse published a report Monday that argued that refiners' margins have been slowly increasing after a spell at lower levels.

The investment bank analyst report added, however, that refiners were reducing crude runs to slow the production rate of gasoline and allow winter grade inventories to draw down ahead of the summer season. This was reflected in the DOE data released last week which showed a 1.7% decline in refinery utilization rates, Credit Suisse said.

Last Monday, for example, Valero (VLO) announced that it had been running its fluid cat crackers at 73% of capacity, due to stockpiling of gasoline inventories and weaker demand. "Other refiners are following suit in order to further tighten the gasoline market," the investment bank said.

The API's Felmy said that previously, crude costs represented less than 50% of the price of gasoline, but in recent months, the cost of crude has risen higher than the cost of gasoline on a percentage basis.

API's Cavaney also said that the industry was planning to add another 1 million barrels of new refining capacity by 2011, an average of nearly 200,000 barrels a year.

-By Ian Talley, Dow Jones Newswires, 202-862-9285; ian.talley@dowjones.com

(David Bird in New Jersey contributed to this report)


  (END) Dow Jones Newswires
  03-31-08 1629ET
  Copyright (c) 2008 Dow Jones & Company, Inc.
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