RAY SUAREZ: On Capitol Hill this week, it seemed like a daily contest between Republicans and Democrats to see who's the most outraged over the surge in oil prices.
Senate Democrats staged a news conference at an Exxon station across the street from the Capitol yesterday to blame the president, vice president, and Exxon for pump prices that now top $3 a gallon.
SEN. DICK DURBIN (D), Illinois: We have followed the Cheney energy policy into this ditch. It's time for the president to call the vice president in and tell him, "Heck of a job, Cheney. You could have done a lot better."
And it's time for the oil company executives to be held accountable. Exxon-Mobil, record-breaking profits, money going straight from our credit cards at the gasoline pumps right into the boardrooms, so the CEO of Exxon can retire with a $400 million gold watch farewell gift.
RAY SUAREZ: This afternoon, House Minority Leader Nancy Pelosi joined in.
REP. NANCY PELOSI (D-CA), House Minority Leader: This energy bill that was passed in the course of last year was -- the policy was negotiated in private with lobbyists from the energy industry.
Even the Department of Energy, the Bush administration Department of Energy, said that it would increase the price at the pump, and it did.
RAY SUAREZ: New Jersey Senator Bob Menendez offered a short-term solution on Tuesday. He called on the federal government to stop collecting the gas tax during the summer months, in effect cutting the price of gas 18 cents a gallon.
The majority Republicans have their own ideas. Today, Senate Majority Leader Bill Frist said he would push Congress to send a $100 rebate check to millions of American taxpayers to offset their gasoline costs.
SEN. BILL FRIST (R-TN), Senate Majority Leader: It also includes strong federal anti-price gouging protection to protect consumers against anti-competitive behavior by oil companies or other suppliers of gasoline. A free-market system works, but it works best when there's full accountability and full transparency, when rules are vigorously enforced.
RAY SUAREZ: The money would come, in part, from a repeal of tax breaks for the oil companies.
SEN. CONRAD BURNS (R), Montana: But the companies have to be looked at also about how they price, how they refine, how they distribute, and is there a little gouging going on here?
RAY SUAREZ: But the Republicans linked their plan to opening the Arctic National Wildlife Refuge for drilling, something Democrats have blocked repeatedly.
The Senate Finance Committee got into the act, requesting the tax returns from the nation's top oil and gas companies. Not to be outdone, the Senate Judiciary Committee gave the Justice Department permission to prosecute member nations of OPEC for price-fixing, a move they agreed was little more than symbolic.
Meanwhile on the Senate floor, Oregon Democrat Ron Wyden held up debate on an emergency spending bill for five hours, insisting the government stop paying royalties to oil companies for drilling on federal leases in the Gulf of Mexico, arguing the companies should be paying the government instead.
SEN. RON WYDEN (D-OR), Senate Energy Committee: I cannot understand why the Senate would say, at a time of record profits, at a time of record prices, it would want to continue to dispense record royalty relief.
RAY SUAREZ: Wyden's heated rhetoric fueled a response by Energy Committee Chairman Pete Domenici.
SEN. PETE DOMENICI (R-NM), Senate Energy Committee Chairman: How much do you think the Congressional Budget Office says your amendment, this great amendment that's going to stop all of this thievery? Can you tell us how much it's going to yield to the taxpayers of the United States?
Because I'll tell you the answer: The Congressional Budget Office says zero! I don't know how in the world, I ask the distinguished senator, that that is going to yield anything to the people of this country.
Maybe you can explain it to us. I believe it's going to yield zero, because the amendment is meaningless the way it's drawn.
RAY SUAREZ: Majority Leader Frist himself may interrupt debate on the spending bill next week to push a vote on his $100 rebate check proposal.
And late this afternoon, President Bush said he wanted legislation that would allow him to raise fuel standards on all passenger cars. To date, the administration has only sought to increase fuel standards for SUVs, pickup trucks, and vans.
RAY SUAREZ: We get two views now on the high cost of gasoline, the profits, and the congressional proposals. Rayola Dougher is manager of energy market issues at the American Petroleum Institute, an oil industry trade group. And Tyson Slocum, he's the research director for the energy program at Public Citizen, a consumer advocacy organization.
Rayola Dougher, when you pay $3 for a gallon of gas, how is that divvied up? Who gets what cut from that $3?
RAYOLA DOUGHER, American Petroleum Institute: Well, right now, about 60 percent of what we're paying is just the cost of the crude oil alone. Another 20 percent or more are taxes.
And the remaining 20 percent is the cost to refine, and distribute, and retail the gasoline. And that can vary, you know, 55 to 60 percent, but that's what it is right now.
Most of the movement we see in the prices really has to do with the crude oil price. Oil companies don't set that price; the international marketplace sets it by all of the buyers and all of the sellers out there. And there's a real thin line right now between supply and demand, and that's what's really pushing a lot of the price increase we see now.
RAY SUAREZ: And every incremental nickel gets split up in roughly the same way, so nobody's taking a bigger share of these increases as the price goes up?
RAYOLA DOUGHER: Right, I mean, it's just proportional to -- if you think of a dollar, about last year, about 8.5 cents of every dollar of sales went to profits, and that's profits throughout the whole industry, from the producer to the refiner to the marketer down to the retail station.
And it was a really good year. The rest of U.S. industry earned about 7.7 cents. And in the past five years, they've earned 5.9 cents on the dollar, oil and gas industry, and the rest of the U.S. earned 5.6.
So they're about average, and have been for a while, and a little above average last year, you know, with these higher prices.
But they're set internationally. There's a very thin line right now between supply and demand. And it's been stacking up with Nigeria, with production out in the Gulf, with a lot of political instability, including with Iran. And it's just one thing after another. Every dollar barrel is about 2.4 cents at the pump.
RAY SUAREZ: Well, Tyson Slocum, you heard Rayola Dougher. Oil companies are just passing on their higher costs to consumers. Is that the way the math adds up for you?
TYSON SLOCUM, Public Citizen Organization: Well, we definitely respectfully disagree.
I mean, first of all, on average, it costs a company like Exxon-Mobil about $20 to produce a barrel of oil, whether that's in Nigeria, Azerbaijan, Alaska, or Texas.
They're then selling that oil to the American public at $70. So they're clearing, on average, about $50 profit for a barrel of oil.
So we have to remember that it's not just the Saudi royal princes that are getting wealthy when the price of oil shoots above $70 a barrel; it's all oil producers.
And a company like Exxon-Mobil is a giant producer. Exxon-Mobil alone produces more oil than the entire kingdom of Kuwait.
And then, when you look at the profits, the oil industry has been emphasizing to the general public and to lawmakers that they actually do not make that much money. They say that, on average, other industries make more.
But when you look at the rhetoric that the oil industry uses with investors and in its annual reports, they boast about their huge profit margins; they use a radically different measurement of profit when they talk to investors; they measure profits as a share of capital investment.
And so, for example, in 2005, Exxon-Mobil had a 46 percent rate of return on its U.S. oil production on profits as a share of capital investment. It had a 59 percent rate of return on its refining operations in the United States as a share of capital investment.
That's why, when the price of oil goes up and the price of gasoline goes up, oil companies reap huge profits. There's a direct relationship between the record profits that the industry is making and the record prices that customers are paying.
And that's why we at Public Citizen are calling for a windfall profits tax on the industry, not to end their ability to profit -- no doubt that they're working hard to deliver a product to the American people -- but this type of windfall profit is harming the U.S. economy; it's hurting hardworking Americans. And a windfall profits tax, the proceeds could be used to finance alternative energy.
RAY SUAREZ: Let's leave aside the issue of a tax proposal for just a moment, but follow Tyson Slocum's argument that if, as you say, all the companies were doing is passing on their added costs, and not really, you know, rising their prices, they wouldn't be earning record profits, as they are now.
RAYOLA DOUGHER: But their profits definitely are up. These are big companies. They're earning billions of dollars, but they're spending really hundreds of billions bringing product to market and reinvesting their returns, as well.
And their investments are way up over the past couple of years, 24 percent up. Last year, $124 billion dollars in investments, and that's in just oil and gas development. And they also have invested in alternatives and emerging technologies, another $98 billion there.
So the remainder, the 8.5 cents is what's left after all of this. They are pouring that back into operations and into investments in the future, because everything we consume today is brought to us by investments that were made many years ago.
And so, if you take away the ability to invest in the future, what you do is guarantee less supplies in the future, and that's what that tax is getting to.
RAY SUAREZ: Now, Tyson Slocum also mentioned a windfall profits tax, and that's one of the many ideas that's floating around Capitol Hill about how to give immediate relief to American consumers at the pump.
Would any of the policy proposals you've heard -- tax rebates, $100 check, taking away subsidies, the windfall profits tax -- result in lower gas prices, either in the near or middle term?
RAYOLA DOUGHER: No, I don't think they would, and they would actually set you up for less supplies in the future. They would actually make the situation worse.
We tried a windfall profits tax about 20 years ago, and it didn't work. And Congressional Research Service study shows that what it did was reduce production here in the United States by 1.3 billion barrels.
We can't afford to do that. We really have to have policies that would encourage more production, not less production, and we really need policies that encourage energy conservation and energy efficiency.
It's a demand side. I mean, this one side is the supply; the other is the demand. And we really have to address both and get a way from a lot of the rhetoric.
RAY SUAREZ: Would any of these policy proposals, Tyson Slocum, result in lower gas prices?
TYSON SLOCUM: Of course. I mean, there are two main things that the president and Congress could do. One would be to reduce demand by improving fuel economy standards. And the president is too little, too late in his proposal today.
What we need to do is to strengthen fuel economy standards to about 40 miles a gallon over 10 years. That will significantly reduce demand and will send a strong signal to markets that, for once, America is going to get serious about curbing oil consumption, because one out of every four barrels of oil in the world are consumed in the United States. And so we are the global consumption market.
The second thing that Congress and the White House can do is enact a windfall profits tax, and the proceeds of that tax could be used to finance the kinds of things the president was talking about: investments in alternative energy; increased investment in mass transit, in energy efficiency.
The president also outlined investments in alternative energy, but didn't explain how he was going to pay for it. The federal budget is running about a $500 billion deficit in 2006. The federal government doesn't have the money to invest this.
The oil companies are reaping record profits at a time when consumers are paying record high prices. It doesn't make a lot of sense for consumers to continue to pay record prices when all of the oil companies are going to do is pay out large compensation packages to their CEOs and also invest in more oil.
The president himself said that we are addicted to oil. That's a problem. We need to invest in alternatives, and the oil companies are not going to do that.
RAY SUAREZ: Let's go back to the market mechanics of these prices. Reports say that inventories are at an eight-year high, that there is no shortage of oil.
RAYOLA DOUGHER: Sure.
RAY SUAREZ: During this period, where we've seen this large run up in prices, there's been no shortage of oil. So why are they going up this way?
RAYOLA DOUGHER: You know why? Because the prices are set out there globally by all of the buyers and all of the sellers in the world market.
And one of the reasons our crude inventory is going up -- and it makes sense, given the world -- you're looking out, and especially in the futures market, looking at those prices and seeing that those prices are going to be even higher.
So you're buying more crude, as much as you can now, storing it up, and part of that storage is also building up because of the gasoline stocks and inventories being drawn down rapidly, too, so you have two things going on at once.
So we do have plenty of crude right now in the United States, but the price of those barrels was already determined out there in the world market, not here at home.
And we're buying all we can, and our refiners are buying all we can, because they're looking out there and seeing prices are going to be higher in the future, at least that's what the -- you know, the futures market direction. So that makes sense, and that is what you'd be doing right now, if you could.
RAY SUAREZ: Tyson Slocum, same question. If oil inventories are at an eight-year high, why does it cost so much more to buy a gallon of gas?
TYSON SLOCUM: Well, a lot of it does have to do with problems in the speculative market where prices are set. Many people don't know that the price of oil is not set by OPEC; it is set by energy traders, a lot of whom are in New York.
RAY SUAREZ: But what are they responding to, to raise the price?
TYSON SLOCUM: Well, they're responding to pure speculation. I mean, a lot of it -- the Wall Street Journal recently reported that new players, like hedge funds and other investment vehicles, are pouring hundreds of billions of dollars and they are treating these crude oil futures markets like it's a Las Vegas casino.
And that's not a responsible use of these futures markets. They need to be used for traditional hedging activities, not for wild speculation. So you've got a small group of financial players that is reaping hundreds of millions or billions of dollars in profits, and American consumers are paying the price.
RAY SUAREZ: But, quickly, do you agree with Rayola Dougher that part of this speculative pressure comes from an anticipated shortage down the road?
TYSON SLOCUM: I don't know how realistic that is. I mean, Iran isn't really going to shut off oil, because they'd be shooting themselves in the foot. There are some problems in Nigeria, but the same goes in Venezuela. There aren't real threats to global oil shortages; a lot of this is just pure speculation.
RAY SUAREZ: Guests, thank you very much.
RAYOLA DOUGHER: Thank you.