Welcome to NOW.
Let's figure out these gasoline prices. How did it happen that we now live in a country where a gallon of gas that costs deep into the two dollar dollar-range is the norm? Prices are up 56% over the past two years. This has been great for stockholders of oil companies but it is killing lower-income people who have to drive a lot to work or for work.
The typical explanation for what now seem permanently high prices is that darn law of supply and demand. We've had a team looking into gasoline prices and it's not so simple.
It may surprise you to learn that recent spikes at the pump have less to do with hurricanes or pricey crude oil, and much to do with the business decisions of an industry that is right now enjoying record profits.
Senior Corespondent Maria Hinojosa and Producer Peter Meryash have our report.
MARIA HINOJOSA: Every time you fill up your car with gas it's still something of a shocker. Over the summer prices topped three dollars a gallon.
But just as Americans were paying more than ever for gas
the oil companies reported they had made more money than ever
billions upon billions of dollars.
SENATOR RON WYDEN (D-OR):
The American people, my constituents want oil companies to be good at what they do. But they also think they should be good citizens. And these huge profits right now meet the dictionary definition of unseemly.
MARIA HINOJOSA: Polls show that public opinion is blaming the big oil companies for these high prices
and a NOW investigation has found the public has good reason. In fact, after reaching out to industry analysts, consumer advocates, members of Congress and whistle-blowers, we've found the industry has taken active steps to keep prices and profits at record highs.
The reason they're making world-record profits is 'cause they're charging world-record prices for gasoline and heating oil that doesn't cost them world-record production costs to make.
MARIA HINOJOSA: But the oil companies say, it isn't their fault they blame high crude prices point fingers at destruction from Hurricanes Katrina and Rita imply it might be your local gas dealer.
No way, says Tim Hamilton, who represents about 400 independent station owners in Washington state. He says his colleagues are getting squeezed and the latest government figures back him up on average, retailers took in only six cents of the two and a half dollars we paid per gallon.
If there's one sector of the economy that has been hurt worst by the price hike, it's the local gasoline dealer. But, unfortunately, due to an effort by the oil companies, and, a lack of understanding, they often get blamed for this. And it's not their fault.
MARIA HINOJOSA: Well, what about the hurricanes? Yes, Katrina and Rita did temporarily shut down a significant part of oil and gas production in the U.S. and prices spiked. But look at this chart
why were gas prices rising well before the hurricanes hit?
And what about the price of crude? Sure, it does account for about half the cost of gasoline. And when OPEC raises its price, the oil companies make plenty of money from the crude they produce themselves.
But look at this chart
why did the price of gas increase three times as much as the price of crude in the month leading up to Katrina?
Jamie Court is a consumer advocate in Los Angeles who's been tracking the oil companies.
In times of peak demand and low supply, they can charge $3 per gallon for gasoline, but the fact is it doesn't cost them more than a dollar-something to make that gasoline.
MARIA HINOJOSA: And the companies are making record profits.
Only nine months into 2005,
Royal-Dutch Shell profits 21 billion dollars;
British Petroleum 15 billion;
Chevron 10 billion.
And the most profitable company in the world by far, Exxon Mobil, just reported more than 25 billion dollars in profits for the first nine months of this year. In fact, in just this past quarter, Exxon had made three times the total profit Time-Warner made all of last year.
So, if the gas station owners
and the hurricanes
and the cost of crude don't account for all of the price hikes
what else does?
Oil companies have manipulated supply so that when there's-- gonna be a peak season of demand, they then withhold supply. And when there aren't adequate inventories, the system is rigged for a shortage, even though it's artificial.
You're using these terms "rigged," "control," I mean, these are not terms that most people kind of accept in a free market society.
Well, I think the only thing free about this market for oil companies in the United States of America is they're free to do whatever they want. That's the market.
MARIA HINOJOSA: After crude is drilled from the ground, it needs to be refined turned into gasoline, diesel or home heating oil.
But since the peak in 1981, more than half of the refineries that used to operate in the U.S. have been shut down. And that, charge critics, has been part of an industry strategy going back years.
In this Rand Corporation survey, "key members of the
refining industry" complained of "
substantial excess capacity
" in the 1980s and '90s
producing poor profits.
According to one quote
those times were "'
ugly for refining. [executives] know what caused it, and they don't want to do it again.'"
SEN. RON WYDEN:
There is no doubt that during the 1990s, if you just look at the oil companies' own internal documents, that yes, in fact, what they did is look at how to limit production in order to boost their profits not my words the words of the oil industry.
MARIA HINOJOSA: Oregon's senator Ron Wyden
who's been following this issue for years
is referring to internal industry documents that came to light during Congressional investigations and court cases.
One example, a Chevron memo from 1995, which included this warning from an energy analyst
"if the U.S. petroleum industry doesn't reduce its refining capacity, it will never see any substantial increase in refining margins
That's margins, as in profit margins.
Senator Wyden charges the oil companies have actually rigged the market.
You're making a charge that they're controlling that, controlling so that they can make more money?
SEN. RON WYDEN:
Yes, what I'm saying is anti-competitive practices contribute significantly to the profits that the oil companies make and to the pain that our citizens are seeing.
It's utter nonsense to make an argument that the industry has somehow tried to reduce capacity.
MARIA HINOJOSA: John Felmy is the chief economist for the oil industry's trade group in Washington, DC.
If you look at what we have done as an industry, we've both expanded capacity, and we're planning on expanding capacity even more.
MARIA HINOJOSA: But that Rand survey found: "increasing capacity and output
[was] now frowned upon" by many refiners.
We have internal documents that say that the industry wanted to keep the market tight, wanted to keep capacity low." And that, in effect, in the year 2005, that's what you have. A very tight market.
We have a very tight market, because we have expanded our refinery capacity. We have increased our conversion capacity, and we've run our refineries harder than we've ever run 'em before. Unfortunately, that hasn't kept up with demand. We're doing everything we can right now, but we can't do it without additional help.
MARIA HINOJOSA: So, this multi-billion dollar industry has asked Congress for help
we'll get to that in a moment.
Now, refineries have been faced with tough environmental rules and community opposition forcing many to close or making it difficult to open new ones. But critics charge, the oil companies themselves play a role in this too.
Look what happened two years ago in Bakersfield, California.
Shell Oil, one of the industry's biggest companies, had recently taken this refinery over. Some 400 people worked here and business seemed to be going strong.
It was "one of the few Shell U.S. refineries to turn a profit" according to this company memo, which praised the "world-class performance" of the employees there.
One of them was this man who asked us to hide his identity.
He believes Shell wanted to tighten the supply of gasoline and diesel in California and that the company intended to close this refinery down in order to do that.
So just over a year after Shell buys the refinery, Shell is now telling its employees that they wanna sell the refinery?
No, that they wanna demolish the refinery.
They wanna get rid of it entirely?
Yes, correct. They would shut it down and demolish it.
MARIA HINOJOSA: Shell needed a public reason to close down the refinery, this former employee contends. So first, they said, there wasn't enough of the right crude available near the plant.
We have concluded that there is simply not enough crude to ensure the viability of this refinery in the long term.
MARIA HINOJOSA: But for many, Shell's public explanation just didn't add up. In fact, Shell's crude supply for the refinery came from the nearby oil fields in Kern County, some of the most productive in the country.
California the next day came out and said that wasn't true-- that we had at least a 25 to 30 year supply of oil left.
MARIA HINOJOSA: Still, Shell repeated the claim that there wasn't enough available crude to members of Congress:
Explaining in this letter to California's Senator Barbara Boxer THAT "
declining access [to crude was] a financial drain."
The company went even further, telling the Senator
the "refinery lost 24 million dollars in 2001
33 million dollars in 2002
[and] was projected to lose 5.7 million dollars in 2004."
But that too didn't make sense to our whistle blower, who provided us with these internal company memos. One, written just days before Shell's letter to Senator Boxer claiming losses, showed Bakersfield at the time, had the highest profit margin of any Shell refinery in the United States.
The other document showed the refinery was well on its way to making more than 37 million dollars in profit for the year.
So on the one hand, you have a head of Shell saying to a Senator, "We're losing money and we're gonna lose money in 2004." But a week before, internal documents are saying-
Quite the opposite. They were telling the employees in the plant that we were making a lot of money. They were telling the public that we were losing money. When they had probably already made over $10 million in the first few months.
Why would Shell Oil company want to make it seem as if Bakersfield was losing money?
Because it would make it look better for them to shut it down if we were losing money.
Some people might be thinking this guy worked at the refinery, he was about to lose his job. Maybe he's just ticked off
you're just an angry employee.
Whether I was angry about them shutting the refinery down is irrelevant, because they were lying. They weren't saying the truth.
MARIA HINOJOSA: Shell continues to insist it did not make economic sense for the refinery to stay open. After the release of those documents, critics fought to keep Bakersfield running and Shell ended up selling the facility to a competitor earlier this year.
The reason we've seen these price spikes -- the reason we've seen the profit margins go up, is because a small number of oil companies have been able to consolidate and take control of this market. Independent refiners, if they still existed, wouldn't allow this to happen because they would fill gaps in the market.
MARIA HINOJOSA: Two decades ago, a quarter of American refining was done by independents. But since then, many of those have shut down, refineries like Powerine, a small operation in Southern California.
It wanted to re-open after a temporary closure but that didn't sit well with oil giant Mobil, which worried that if Powerine resumed production, gas prices would drop.
That would be good for consumers but bad for Mobil. In internal company emails, a Mobil manager wrote: "Needless to say, we would all like to see Powerine stay down. Full court press is warranted in this case
And to keep prices high, Mobil used another tactic here
buying up the gasoline Powerine had produced. That Mobil manager believed that was a major reason gas prices had jumped 2 to 4 cents a gallon.
James Carter, an Exxon-Mobil executive was asked about that tactic at a Senate hearing.
This has been thoroughly investigated. It went to the California Supreme Court, and our company was not found to be in violation of any regulations or laws.
That is not the question here, whether or not you violated a law by doing this. The question is whether or not that was a way of maintaining the control over the supply of a product. This is what we are talking about here today.
We were protecting our investment. We thought that was the best way to level the playing field.
MARIA HINOJOSA: Enter televangelist Pat Robertson. His investment outfit, CENCO, bought the refinery and tried to re-open it. But Robertson says he encountered community opposition and, what he alleges, was oil company manipulation.
I'm not going to name names, because, this is on the advice of my counsel, but we had a transaction with a major money center bank to provide working capital in excess of $100 million for the crude oil for this refinery, but this bank was approached by a large multi billion dollar oil company that said if they financed the CENCO-Powerine startup we will withdraw our business from the bank.
MARIA HINOJOSA: This was in 2001 and at the time, Robertson made an insightful prediction.
PAT ROBERTSON: If this refinery is not allowed to go forward, there will not be another refinery built in California, and within several years the price of gasoline at the pump could easily go to 3 dollars a gallon, so the consumers in California are going to be hurt very badly if this kind of trend continues in the oil industry.
MARIA HINOJOSA: To this day, the Powerine refinery remains closed.
And there's yet another tactic oil companies use to keep prices high, says Tim Hamilton. The industry limits supply domestically by exporting it overseas.
They first limited our refinery capacity so we can barely-- can't make any more if we need it, then they take and they pick up our product and they export it to Chile, Mexico, all over the world, and they sell it for less than what they sell it for here.
MARIA HINOJOSA: Last year, the ORANGE COUNTY REGISTER published a startling story: three tankers carrying 17 million gallons of gasoline had sailed out Of San Francisco Bay that February on their way to Guatemala, El Salvador and Canada.
A Chevron-Texaco spokesperson told the newspaper: "On occasion
we have the ability to make more gasoline than we need to supply our customers
we then sell that gasoline that isn't needed for our own system."
But at the time, according to the newspaper, "
California's oil refiners were reporting a fuel shortage ... [and] gasoline prices had jumped 40 cents since the New Year."
If you take two percent of your supply and you haul it off to some foreign land and dump it at less than you're selling for here and then 98 percent that remains behind goes up at the pump, man that is a ton of money, and they've done it year after year after year.
MARIA HINOJOSA: More than 45 million barrels of gasoline were shipped abroad last year. That's almost 2 billion gallons.
Those exports are so small compared to our total demand that they're meaningless anyway. But most of it is product that is considered more of a waste product than actually something that could be used.
I wanna be clear. Are you saying that nothing that is exported can be used domestically?
No, I'm not saying that nothing can be used, but most of it- at least a majority of it cannot be used in the United States.
MARIA HINOJOSA: Just this August, the LOS ANGELES TIMES reported "21 million gallons of diesel" were exported to Chile
just two months before prices in California spiked. The shipped diesel "could have been sold" for use in the state, according to the paper's account.
At Senate hearings this week, that issue came up again.
Did you export fuel outside of the United States prior to Katrina in 2005? It's just a simple question.
No, it's much more complex than that.
MARIA HINOJOSA: Oil executives were called to Washington to explain why consumers are hurting while big oil companies are awash in cash.
The polls show that our people have a growing suspicion that the oil companies are taking unfair advantage of the current market conditions to line their coffers with excess profits.
MARIA HINOJOSA: As we heard earlier, the industry says it needs more help in order to build more refineries
less restrictive environmental laws.
Senator Wyden says in the last energy bill, crafted from the president's Energy Task Force, and signed into law this summer, Congress already showered the industry with subsidies 6 billion dollars worth, according to one consumer group's assessment.
What Wyden believes is needed now is stricter government oversight.
Should the government be regulating gas and oil prices like they regulate electricity?
SEN. RON WYDEN:
Look, I believe in markets. I believe in people making a profit. This is an area where I don't think you need a whole lot of new laws. But what you've got to do is you've got to get the consumer watchdogs back on the beat. The Federal Trade Commission, Department of Energy, the Justice Department, they have essentially been AWOL. They've got no presence at all as watchdogs, as people trying to step in when a company acts in a way that's out of bounds.
MARIA HINOJOSA: And Tim Hamilton's convinced almost nothing is out of bounds when it comes to the oil companies.
In the free enterprise system, if you fail to meet your customers' needs, and you do it regularly, you're gonna get punished. And - your competitors are gonna eat your lunch. And you're gonna be hurt, disciplined. In the oil business, if you fail to meet your customers' needs, you make another hundred million dollars. If you drop the ball really bad, you make a couple billion. It's so totally contrary to any principle of free enterprise.
MARIA HINOJOSA: And he warns, American consumers should fasten their seat belts.
We're stuck. We're totally relying on these products to heat our homes and to drive our cars and they're gonna take us on one hell of a ride over the next 10 years no matter what anybody tells you.