June 21, 2000
Industry and policy analysts discuss the nation's skyrocketing gasoline prices, which are currently highest in the Midwest.
MARGARET WARNER: It isn't just the Midwest suffering from a sudden spike in gas prices. Nationwide the average price for a gallon of regular unleaded gas has jumped from $1.42 on May 1st, to $1.65 reported this week.
To explain, and debate, what's behind this, we're joined by Bob Slaughter, general counsel for the National Petrochemical and Refiners Association, which represents 98% of U.S. refiners; Assistant EPA Administrator Bob Perciasepe, whom we just saw in Elizabeth Brackett's piece; Vahan Zanoyan, president and CEO of Petroleum Finance Company, a Washington-based consulting group; and Wenonah Hauter, director of Public Citizen's Energy and Environment Program. Welcome all.
Mr. Zanoyan, why are we seeing this sudden surge in prices all across the country?
VAHAN ZANOYAN: In gasoline prices?
MARGARET WARNER: Yes.
VAHAN ZANOYAN: I think there are basically two reasons. Number one is the increase in crude oil prices and the change in the crude oil price structure. If you want to get into the details of that, I can do it in a minute. And second was a delay in building up sufficient gasoline inventories back in February, March, April in preparation for the driving season. So supplies are tight across the board, not just one type or another type of gasoline. Supplies in general are very tight. And crude oil prices are still extremely high.
MARGARET WARNER: So one part of the problem is from the original source, i.e., from the imports -- and the second is from how we're handling it here.
VAHAN ZANOYAN: Basically, yes.
MARGARET WARNER: How do you see it, Mr. Slaughter?
BOB SLAUGHTER: Well, certainly, refiners' input costs have gone up substantially over the last year and a half. Crude oil represents about one third of the price of gasoline, and, as people know, crude oil prices have gone from roughly $10 a barrel 18 months ago to over $30 a barrel today. Plus on top of that, we have significant costs for new environmental requirements. Over the last ten years, the refining industry spent more than the book value of our industry in order to implement new environmental requirements. We support the need for environmental progress and so we made those investments, but they do have costs. And this new reformulated gasoline product that was on the -- available in service stations as of the first of June is an additional costly product. It is more expensive to produce and it also takes more oil to produce it.
|Effects of clean-burning fuels|
MARGARET WARNER: Those are your regulations, Mr. Perciasepe.
BOB PERCIASEPE: Yes. One thing I think we can categorically say from an EPA perspective is that the clean-burning gasoline, the reformulated gasoline, is not the cause of these price increases around the country. In fact, on a national level, the average price of clean-burning gasoline across the country is virtually the same as the average price of gasoline that isn't meeting these environmental regulations. Our concern is that in every city that uses it, that we get these prices to be fair to the environmental benefits that they are receiving.
MARGARET WARNER: And we should point out that these -- this cleaner-burning fuel is required just in the smoggiest cities in the country; is that right?
BOB PERCIASEPE: That's right. Congress required that the 10 or 11 smoggiest cities in the United States use this clean-burning gasoline back in 1990.
MARGARET WARNER: Is that true that in -- if we leave the Midwest for a minute and we just look nationwide that the price of non-RFG gas, this non-extra especially clean gas, is no higher than regular gas?
BOB SLAUGHTER: Well it varies by location. Of course, in the Midwest it is significantly more expensive than conventional gasoline.
MARGARET WARNER: But nationally?
BOB SLAUGHTER: Prices of gasoline are determined by their markets rather than their production cost. And the production costs of reformulated gasoline is higher. It is more expensive to produce and it takes more crude oil to produce it. The price at which we can sell it depends on the market and the relative supply of the product into that particular market.
MARGARET WARNER: How do you see this?
WENONAH HAUTER: Well, we believe that the oil industry has had five years to comply with this new regulation for cleaner gas, and they haven't prepared. And if we're going to see this type of market failure, there should be an accounting. The oil industry has enjoyed windfall profits. Last quarter companies like Texaco had as much as a 500 percent profit. And this is an election year. We know election-year politics are in play. Members of Congress are very dependent on the oil industry for campaign contributions. In fact, in the last election cycle, they spent about $120 million.
MARGARET WARNER: But you're not suggesting that that's responsible for the increase in the last two months?
WENONAH HAUTER: What I'm suggesting is that we should have an entirely new energy strategy. And part of it is that we should have an accounting from the oil industry for what's happened -- price gouging. It's very easy to blame this on OPEC, on foreign policy, but we should look at domestic policies, for instance the tax breaks that the oil industry gets, none of this is being discussed.
MARGARET WARNER: Let's discuss the price gouging charge because Mr. Slaughter - and I hate to keep coming back to you - but you're the industry man here. Vice President Gore is talking about the possibility of price gouging. And he also pointed out that the oil companies had a 500% increase in their profits earlier this year.
BOB SLAUGHTER: Well I'd like to say that those percentage increases in profits, the baseline for that is back to when oil was selling for $10 a barrel and there was almost no one in the industry who was making any money at all. So I think that's an unfair figure to be used. Secondly, whenever there is a supply disruption, which has price impact, the industry is investigated -- on the state level or the federal level. We expect it. It's part of the democratic process. Every one of these investigations basically finds no wrongdoing on the part of the industry, complete absolution. And we expect that in this case as well. Refiners are doing what they do best which is supply gasoline to consumers. And all of these reports, all of these studies, essentially find that we're faultless.
|Is there price gouging?|
MARGARET WARNER: What's your view on this charge or suggestion or question about whether unconscionable profits are being made, whether there's some sort of price gouging going on?
VAHAN ZANOYAN: I'm afraid I agree with Bob here. Oil companies have seen a big increase in their profits; no question about it. But one should look beyond that if we're talking, for example about gasoline prices and what's happening there. A lot of the profits come from the options side, which is the crude-oil production and supply side. It's the crude-oil prices that have reason from 10 to 30, which is tripling.
MARGARET WARNER: But we should point out that this 10 we all keep talking about, that was at the time two years ago where there was a huge oil glut worldwide. That was unnaturally low.
VAHAN ZANOYAN: Spring '99.
MARGARET WARNER: Yeah.
VAHAN ZANOYAN: It depends, the 500% from what bases is it measured? If you look at the industry in general and we look at a lot of oil companies, the downstream side, which is the refining and marketing is not the most glamorous part of this business. It is extremely difficult to make money there. That's where return on capital is the lowest usually. And it's not an easy business. It's also the business which is more regulated, environmentally and climate-control wise, than the option. It is the option side which generates most of the revenues and profits in these companies. This is a fact. And so the profit increase in these companies has come largely from the option side. That's come largely because crude-oil prices have risen which is why people point back to OPEC, because they were the original source of causing the increase in crude-oil prices.
MARGARET WARNER: And how much of a difference do you think today's increase will make? They increased it about 3%. In March they increased their output 7% or so.
VAHAN ZANOYAN: I think today's decision is interesting because it has -- it says 700,000 barrels a day approximately increase in the quarter, but actually production might be slightly higher than that. There's no real way to monitor this; it's not a precise science. The question is: that may have an impact even in the short term on the crude-oil prices but frankly that is a little bit too little, too late to relieve the pressure, the tightness from the U.S. gasoline market.
MARGARET WARNER: You're talking about this summer or in general?
VAHAN ZANOYAN: I'm talking about this summer. That may be more interesting for the U.S. in terms of further down the line when the time comes later in September, October, to get ready for the heating-oil season. That kind of increase in crude oil from now may help alleviate those problems but they're not going to do much for the gasoline season which we are in the middle of right now.
MARGARET WARNER: What do you think will be the impact of this OPEC decision today?
BOB SLAUGHTER: Well, we don't like to predict whatever direction prices may go in. I mean historically increases in crude supply generally have been reflected in the marketplace in terms of supply and price. It certainly takes a while for any additional oil from the Middle East to get here and through refineries -- that's roughly 6 to 8 weeks.
MARGARET WARNER: Mr. Perciasepe, the AAA, going back to what might relieve prices this summer, they have called on the EPA to relax these... this cleaner-burning fuel requirement at least for the summer. Any chance of that?
BOB PERCIASEPE: First of all, as I said before, we don't see the cost of producing the clean-burning gasoline as the cause of these higher prices.
MARGARET WARNER: Even a little?
BOB PERCIASEPE: We expect it to be a small price increase but not anywhere near the price increases that we've seen in particular in the Midwest. And, in fact, the wholesale prices of gasoline are dropping fairly quickly in the Midwest. In the last five days they've dropped about 25 cents. What we're curious about is why has it taken until June for the wholesale prices to drop once all the clamor started about the prices? And also when is it going to show up at the retail level. It's the fairness issue to the consumers of the clean-burning gasoline; they should be getting this clean-burning gasoline, the air quality benefits at a fair price.
MARGARET WARNER: So you're suggesting that the refining industry knew about this for a long time -- and you said the same thing.
BOB PERCIASEPE: Yes.
MARGARET WARNER: And just didn't prepare.
|Compliance with environmental laws|
WENONAH HAUTER: In fact, we should really look at the policy-makers who are in charge of this rather than expecting the oil industry to be in charge of complying with environmental regulation. It's rather naive to think that the oil industry that really opposes environmental regulation is going to cooperate with this type of cleaner -- creating this cleaner-burning fuel. We need to look to members of Congress to make sure that consumers are being taken care of. And that's why the connection between the oil industry and campaign finance -- or the amount of money that the oil industry spends on campaigns is an important issue and especially during an election year. And, in fact, we should look at other issues related to the oil industry like the $2.4 billion consumers could save in taxes if the oil industry didn't enjoy so many subsidies.
BOB SLAUGHTER: Margaret, cleaner products are not free. I think that the EPA does consumers a disservice by indicating that cleaner products are free.
MARGARET WARNER: But what about his point that you all had a long time to prepare for this?
BOB SLAUGHTER: It's very difficult to prepare adequately when your main input costs goes from $10 and then up to $30 and back. Supply situations, you know, we are the stewards of America's energy supply. We supply products to consumers 24 hours a day. Refineries run 24 hours a day, 365 days a year. And you can make plans but things are always going to happen in the distribution and production system, and we're stretched very thin by these new requirements.
MARGARET WARNER: I want to put one other issue on the table before we go. That has to do with demand. We've been talking about supply the whole time. U.S. demand for energy keeps going up. I think our dependence on foreign oil has doubled in 15 years both as a percentage term in and in terms of how many barrels of oil a day. Is that something we should be addressing?
WENONAH HAUTER: We need to do more to be energy efficient. We need to look at our auto efficiency standards. For the past several years, Congress has not allowed the Department of Transportation to do that. One of the suggestions that we would have is a windfall profits tax and spend that money on giving tax rebates for more energy efficient automobiles.
MARGARET WARNER: How much of this problem or situation do you think is attributable to the very high demand?
VAHAN ZANOYAN: Well, it's high demand and also ten years at least of neglect in the United States. We've had at least a decade of extremely fast economic growth, unprecedented economic growth, which generates more demand, no question about it. At the same time I think overall the investment in the U.S. energy sector has lagged behind partly because there are much more attractive other places on the planet where this kind of investment goes and partly because much stricter environmental regulation here than in other places so that's one of the reasons why U.S. dependence on imported crude oil has increased.
|American dependence on fuel|
MARGARET WARNER: You mean because we're not....
VAHAN ZANOYAN: Our dependence on natural gas has increased because the production is falling there and production capacity in crude oil has fallen in the United States. Also, we don't have enough capacity and power generation -- in certain parts of the country we may get brownouts this summer. It's a fundamental issue. I cannot say it's anybody's fault. It's not a matter of fault. It's a matter of this is the way various companies, organizations, agents behave under certain economic conditions. The part that I don't believe exists or at least I haven't seen evidence of it is this gouging or collusion of some sort within the oil industry.
MARGARET WARNER: Once again, he's pointing now to environmental regulations as making as sort of restricting development here in the U.S. Anything to that?
BOB PERCIASEPE: I think the point he's trying to make is related to exploration perhaps and extraction. I have to say the price of the oil on the national market probably has something to do with the amount of investment people would make versus environmental regulations. It could be as powerful and probably more powerful. In other words, if the price of oil is very low in the national market, as it's been in the past, companies don't invest in the exploration.
MARGARET WARNER: You get the last word, Mr. Slaughter, briefly on this demand question.
BOB SLAUGHTER: Refiners need to do everything they can to meet increasing demand for both gasoline and diesel. We've not built a refinery in America for over twenty-five years.
MARGARET WARNER: All right. We have to leave it there; I'm sorry. Thanks very much.