Top executives from five major oil companies defended the profits gained on energy price spikes following Hurricanes Katrina and Rita before a joint Senate Committee hearing yesterday. The hearing came amidst growing political demand for enacting a national ban on “gouging.”
Lee R. Raymond, chairman & CEO of Exxon Mobil Corp. argued that proposals such as a windfall profit tax on oil companies and price gouging laws would only prolong fuel crises. ExxonMobil reported third-quarter earnings of nearly $10 billion.
Raymond pointed to the oil crisis in the 1970s. “First price controls and then punitive taxes were tried to manage petroleum markets. In addition to contributing to record gasoline prices consumers were paying by March 1981, they contributed to shortages and gasoline lines.”
He touted a free market approach as the most effective means to counter the fuel disruptions. “Even before the hurricanes made landfall, shippers rerouted tankers, refiners recalibrated output, traders reallocated resources, investors moves capital, and consumers began to change their consumption patterns,” Raymond said. “Prices for products did increase, of course, but there was no panic and no widespread shortage. Retailers responded to short-term supply disruption, consumption decreased, and imports increased to make up for the shortfall.”
Deborah Platt Majoras, Federal Trade Commission Chairman, echoed Raymond’s warning that regulating the industry could prove to be harmful to a recovery.
“Experience from the 1970s shows that price controls produced longer lines at the pumps—and prolonged the gasoline crisis,” Majoras said in a prepared statement. “While no consumer likes price increases, in fact, price increases lower demand and help make the shortage shorter-lived than it otherwise would have been.”
Denton Cinquegrana, markets editor for the Oil Price Information Service, told FleetOwner that in late 1998 oil companies were struggling to turn a profit. That was when crude oil traded for just over $10 per barrel. In December of 1998, national diesel retail prices averaged 97.3 cents per gallon, according to EIA. In February 1999, diesel sold at the lowest monthly price since EIA tracked prices in 1994 at 95.9 cents per gallon.
“If oil companies control the price of oil how could they let it go down to $10 per barrel?” said Cinquegrana. “It was the way prices went up that was at issue. It went up fast and it was expensive— but that was based on market fundamentals that demand was still there but supply wasn’t.
“It’s really hard to prove there was gouging,” Cinquegrana continued. “For example, after the first hurricane you saw that picture of the BP station that sold regular gasoline for $5.97. That probably was gouging— but there was also panic and fear. This happens when you see a mile-long line outside a gas station.”
In Arizona, state Attorney General Terry Goddard testified that there is considerable evidence that there has been price gouging. “In the month prior to Hurricane Katrina, Arizona fuel prices were at or around the national average price,” said Goddard. “Then, although Arizona receives its fuel from California and West Texas—not the Gulf Coast areas afflicted by the hurricane—Arizona prices spiked to approximately 15 cents above the national average in the hurricane’s aftermath.”
Approximately two-thirds of Arizona’s fuel comes from California alone, Goddard added.
According to an American Trucking Assns. spokesperson, “ATA has been vocal in the past that states should always watch for price gouging during crises, and we continue to do so. ATA recognizes that there is little that can be done to bring down fuel prices in the short term. As such, our focus has been, and continues to be, on long-term efforts that would reduce U.S. dependence on foreign oil. This includes a single national diesel fuel standard, more refining capacity, the exploration of ANWR and expanding the area where companies can drill for oil and natural gas along the U.S. coastline.”
For more information on diesel prices, go to www.fleetowner.com/diesel.xls.