April 30, 1996
JEFFREY KAYE: High prices at the gas pumps, particularly in California, have fueled anger and worry among motorists.
BEVERLY CHRISTENSEN: I think it's disgusting. I've read several reasons why and none of them ring true.
VINCE VASQUEZ: We used to go for long rides and used to go, I mean, we used to just go, but now with the price of gas, we just can't do that anymore.
JEFFREY KAYE: Nationally, gas prices rose an average of about 18 cents a gallon in the last two months. In California, some stations are charging more than $2 a gallon for premium gasoline.
ANTONIO CARPIO: We used to spend, uh, $150 a month. Now we, probably $200, or something like that.
JEFFREY KAYE: The high prices have produced a flurry of political reaction. Republican leaders have called for repeal of the 4.3 cent a gallon gas tax passed in 1993 as part of a deficit reduction package.
SEN. BOB DOLE, Majority Leader: So gasoline has never been higher, and one way to lower that price is to repeal the gas tax, the Clinton gas tax, 4.3 percent.
JEFFREY KAYE: Yesterday, President Clinton directed the sale of oil from the nation's emergency reserves.
PRESIDENT CLINTON: I instructed the Secretary of Energy to immediately begin the orderly sale of about 12 million barrels of our nation's strategic petroleum reserve to try to moderate the price of fuel.
JEFFREY KAYE: In California, state officials held hearings today and last week calling the oil industry to account. Oil companies say a combination of factors have driven up gasoline prices. They say as a result of the cold winter, refineries produced more heating oil at the expense of gasoline. That reduced the supply of crude oil. The oil companies let supplies dwindle in anticipation of the possibility of cheaper oil coming in from Iraq later this year. In the meantime, crude oil from other sources increased in price and is now as expensive as it's been in five years. Government actions have also added to the price of gasoline, according to the industry. Federal environmental requirements mandate that cleaner-burning gasoline, which is more expensive to produce, be used in about 1/3 of the country. California has gone further. It alone has required an even more advanced form of reformulated gasoline be used starting this year. That increased the cost of production since oil companies spent hundreds of millions of dollars on new refinery equipment, costs that have been passed on to motorists at the pumps. Gas price increases might also be felt in other areas as trucking companies pass on their extra costs.
WILLIAM GARNETT, Think Fresh Transports: The increased cost, which is about 10 percent that we're passing on to our customers, is going to be factored into their business and marked up, and it's going to result in at some point in time the, the consumer paying anywhere from 10 to 20 percent more for any given perishable item.
SEAN LIPMAN: I don't think anyone's really seen a trickling through yet, so I don't think you've had as much of an uproar yet because people haven't felt it immediately. And once it starts going into goods and services, everyone's going to get really--start questioning why it is.
JEFFREY KAYE: Oil company critics are already questioning industry explanations, and today, the U.S. Justice Department announced an investigation into the dramatic price hikes.
CHARLAYNE HUNTER-GAULT: Now, two views of the rise in gas prices. David O'Reilly is president of Chevron Products Company, the refining and marketing arm of Chevron Corporation, the fourth largest oil company in the United States, and Ed Rothschild is the energy policy director for Citizen Action, a consumer group. Thank you both for joining us. Starting with you, Mr. O'Reilly, we've just heard some of the reasons in the taped piece for the increase in gas prices. Do you agree with all of those, and do you have anything to add?
DAVID O'REILLY, Chevron Products Company: (San Francisco) Yes, Charlayne. I agree with many of them. For example, crude prices have gone up about 16 to 18 cents a gallon this year as a result of that very, very cold, hard winter. That cold, hard winter that we've had, particularly in the Northern Hemisphere here in the United States included caused the diesel and heating oil season to go on much longer than is typical. In fact, diesel was in such great demand that the industry was producing a lot of it much, much later than normal. Normally in the spring, refineries switch over to more gasoline production, were unable to do so as early as they normally would, therefore, gasoline inventories are lower than they typically should be at this time of the year, and that has caused an increase in price, supply and demand at work; however, I might point out that industry through-puts at refineries are particularly high, and if we get into a normal balance, I would expect the balance to be restored here in the near future.
CHARLAYNE HUNTER-GAULT: Mm-hmm. Mr. Rothschild, what do you think about that? I mean, you've heard all the reasons articulated and Mr. O'Reilly elaborating? Do you buy that?
ED ROTHSCHILD, Citizen Action: Well, I don't really buy it. There was a problem in the winter but let's go back a little bit further. Let's start in June or July of 1995. That was when the oil companies started reducing their inventories, their stocks of crude oil and gasoline and other products to abnormally low levels, so that by the time we got to the winter season, we were already in very, very dangerous circumstances, so if there is a problem, like an abnormally cold winter, they would have to draw down stocks even further. And if that then cascaded to the driving season, we were still going to be in trouble, and that put upward pressure on prices. The oil companies last year, and maybe a year earlier, started a new management system of their stocks called "just in time inventory management," where they reduced it in order to save money, to reduce their costs. Of course, it has the other effect.
CHARLAYNE HUNTER-GAULT: Wait a minute. Explain that to me.
ED ROTHSCHILD: If you reduce your inventories, in other words, the petroleum that you have in storage tanks, it costs the companies less. It costs them money to keep oil in storage. By not doing that, they save money, make more money in profits, and also put pressure on price, because they have less supply available, so in the event there is a cold winter, they have to make up all the supply from production and have less inventory to draw upon. Now, in the springtime, when we need gasoline, all the gasoline is being made by refineries. Some of them are down in maintenance, we don't have that inventory, and so prices are skyrocketing and the companies are benefiting.
CHARLAYNE HUNTER-GAULT: And the companies knew that they were going to benefit from this? I mean, is that what you're saying?
ED ROTHSCHILD: When they make a management decision to carry less inventory, they know what they're doing. They're reducing their costs and they're reducing supply to do that.
CHARLAYNE HUNTER-GAULT: And are they deliberately doing this to, to increase the price?
ED ROTHSCHILD: I don't necessarily know whether they're doing it to increase the price. They were doing it to reduce costs, but the effect of reducing supply they very well do know has an upward pressure on prices, and that's what we've seen happen.
CHARLAYNE HUNTER-GAULT: MR. O'Reilly, what do you say to that?
DAVID O'REILLY: Well, I think that the--I disagree first of all. There is, there is no, there is no plan afoot to, to impede supply. I think this has been the outgrowth of the factors that I just covered. Let me kind of put this in perspective. The industry has become a lot more efficient, and there are lots of benefits from that efficiency. If you just look at the price of gasoline at the pump, it was $1.38 in 1981, just about the time that President Reagan deregulated it. Last--even last Friday, the average nationwide price was $1.36. This--this is--this price, had it followed inflation, would have reached well over $2 a gallon. It has not, and keep in mind that during this time gasoline taxes have gone from 15 cents a gallon to 42 cents a gallon. This is an industry that's getting more and more competitive. The efficiencies that Mr. Rothschild has been talking about are absolutely correct but by and large, those are being passed along to the consumer. The data shows it.
CHARLAYNE HUNTER-GAULT: Mr. Rothschild.
ED ROTHSCHILD: Well, what the data show are a number of things. The industry has downsized considerably. They've closed refineries; they've closed gasoline stations; they've fired thousands of people to reduce their costs. Those costs, yes, are going to show up in gasoline. Where else would they show up? But the fact is that they've also become less competitive. Right now, we've got a handful of companies, including Chevron in California, Chevron is one of four companies. They have about 75 percent of the market in Los Angeles, similarly in four companies having that kind of market in San Francisco. When you have the kind of domination of the market and you have low inventories, and then you have a refinery go out on top of that, it's no surprise that the companies can reap the benefit by driving up prices. They're the ones that are manipulating the situation, and this has nothing to do with taxes, by the way. Taxes didn't raise the price of gasoline; the companies did.
CHARLAYNE HUNTER-GAULT: Manipulating the situation, Mr. O'Reilly?
DAVID O'REILLY: No. First of all, let me dispense with the tax issue. I wasn't implying that taxes had to do with the near-term situation. I was just merely implying that the industry is getting an awful lot more efficient because the price of gasoline has stayed the same, while other things have gone up, despite the tax increases, over the long haul. Now, as far as, as far as manipulation, I think that's just, that's just pure speculation and almost demagoguery. We have a situation where most, in most markets this is a very dilute market. Let's start with a nationwide picture. There is no company in the United States that has more than 8 percent of the market. We have about 6 percent of the gasoline market. Even under the most, even in the areas where we focus, in California, we have 17 percent of the market. There aren't four or five companies that combine to make 75 or 80 percent of the market. There are many players in this market.
CHARLAYNE HUNTER-GAULT: He's right about that, isn't he, Mr. Rothschild?
ED ROTHSCHILD: Well, first of all, he's wrong. No. 1, no one can sell gasoline on a national basis. Consumers buy gasoline where they live and where they work, so it's a metropolitan market. The companies have focused on metropolitan areas. Chevron focuses on Los Angeles, among some others, like ARCO in California. They pulled out of areas over the last 10 years where they had less than 5 percent market share and concentrated. Now you heard them say that they have 17 percent. I don't know if that's California or Los Angeles, but the fact is when four companies have about 17, 20 percent, that's pretty close to 75 percent of market share, so they have an enormous amount of market power and competitors are squeezed. It's interesting to note--
CHARLAYNE HUNTER-GAULT: Well, let me just ask him about that. What do you say to that, Mr. O'Reilly?
DAVID O'REILLY: You know, it just isn't true. I mean, this is--this is a very, a very dilute market. We have--true, we have more market share in California than we have in other states, but there are many other players in the California market. So I just plain disagree. I think what we got to come back to here is recognize that this industry is doing--getting more efficient, that gasoline has been a good value over this period of time, and I certainly have a lot of empathy for the many, many customers, and we have a million and a half to two million customers a day, who have pulled up to their, to their gas stations recently and found this sudden increase in price.
CHARLAYNE HUNTER-GAULT: So are you saying--
DAVID O'REILLY: But there are many other factors at work here, and, and there have not been dramatic shifts in market share like has been implied over the last year or so.
CHARLAYNE HUNTER-GAULT: So are you saying this is just a blip, this current escalation of the price?
DAVID O'REILLY: It's very hard to predict, but I can tell you that the market is at work. For example, OPEC has just announced that they're looking into increasing OPEC quotas. This is a result of high crude price attracting more volume. Similarly, in the parts of the United States where gasoline prices have gone up, it is documented and known that cargoes of gasoline from areas that are surplus in the world are headed in those directions. So you have a correcting mechanism. The market is correcting the situation. So I would expect the market to turn around. I can't tell you exactly when or by how much, but I know that if history repeats itself, the market will turn around. This is a very competitive business.
CHARLAYNE HUNTER-GAULT: How about that, Mr. Rothschild? I mean, have--and especially the point he made that gas prices for the most part, with the exception of this little moment here, have remained fairly stable.
ED ROTHSCHILD: Well, if you look at it over time, you can see that there are periods of time when there's increases. What happens, because there's less competition, the prices go up very quickly. The oil companies never delay price increases. They go up very quickly, stay higher longer, and then somehow just come down very, very slowly. That's the market at work. If it was more competition, we would see a balance in that. I find it very interesting, you shop around for gasoline, there are non-branded independent companies, stations that don't have their own refineries that are charging five to ten cents a gallon less for their gasoline, the same type of gasoline, than companies like Chevron and Mobile and Exxon all over the country. Why is it that independent stations that don't have their own refining like Chevron does can charge so much less? Where are they getting their gasoline from?
CHARLAYNE HUNTER-GAULT: Briefly, Mr. O'Reilly.
DAVID O'REILLY: Well, we have, we have a very large refining and marketing system, and if the business was as good as was implied we should have made an awful lot of money in the first quarter. We buy 1/2 million barrels a day of oil. We don't produce enough to supply our own refining system. Our refining and marketing business made a 1 percent return. That's 1/3 of what you would get by just leaving your interest--leaving your money in a passbook account.
CHARLAYNE HUNTER-GAULT: Briefly--
DAVID O'REILLY: If the business was that good, we would have made a lot of money in the first quarter in refining and marketing.
CHARLAYNE HUNTER-GAULT: So I just want to ask you very quickly your reaction to the Justice Department announcement of investigating price gouging.
DAVID O'REILLY: I'm--we've had investigations of the industry before, during periods of price instability, which thankfully, as I described earlier, occur very infrequently.
CHARLAYNE HUNTER-GAULT: All right.
DAVID O'REILLY: Without fail, they have found that the market has been responsible. And I'm confident that this investigation will find likewise.
ED ROTHSCHILD: That's also not true.
CHARLAYNE HUNTER-GAULT: All right. I'm sorry, but we have to leave it there. And we'll see what happens. Thank you both for joining us.
ED ROTHSCHILD: Thank you, Charlayne.