Big Oil Takes the Stand

[Bill Pup60]

By Robert Aronen
November 9, 2005


According to the Lundberg survey, gasoline prices are back to pre-hurricane levels, and they continue to drop. With only three refineries and 5% of the national refining capacity offline, lack of refined production no longer poses an immediate problem for the markets.
However, about once every decade, oil prices increase, and lawmakers feel it is their duty to trot out the oil executives to find out if any price gouging has occurred. Wednesday, the Senate is grilling executives from ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), and the U.S. units of BP (NYSE: BP) and Royal Dutch Shell (NYSE: RD). These executives will be asked to explain their companies' recent record profits and what they intend to do to lower prices for U.S. consumers.


In my fantasy world, this is how I picture the questioning (enter dream sequence):


Republican: Welcome, gentlemen. I think you all know why we are here today. The American people are outraged at record high gasoline prices. What is the oil and gas industry doing to reduce fuel prices for the American people?


Oil executives: We are in a commodity business and price is set by the market. In the case of recent hurricanes, 12% of the national refining capacity was put out of service, along with more than 2 million barrels per day of oil and gas production in the Gulf of Mexico. The two hurricanes exaggerated the tight supply situation that has been building for years. With little change in demand, prices increased. With production returning to near pre-hurricane levels, prices have retreated to pre-hurricane levels.


Democratic Senator Dorgan: As I suspected, your industry will do nothing to lower prices. What I am proposing is that you pay a windfall profits tax on the portion of the price of a barrel of oil that exceeds $40, with the proceeds going to the American people as a rebate. What do you think of that?

Oil executives: Obviously, we are opposed to your proposal because it will not solve the current tight supply in the marketplace. Increasing taxes on our industry will prove a disincentive for companies to increase production, reducing supply. Providing consumers with a rebate will artificially lower prices at the pump, increasing demand. Paradoxically, this will lead to even higher prices and likely fuel shortages.


Republican: Of course, Senator Dorgan is in the minority here, but you know we have to do something to appear as if we are doing something. Many people feel that the recent price increases were the result of price fixing and gouging by the industry. How do you respond to these charges?


Oil executives: We don't engage in price fixing or gouging. Oil, natural gas, gasoline, heating oil, and other refined products are all commodities whose prices are set by the laws of supply and demand. There are hundreds of exploration and production companies, dozens of refining companies, and thousands of independent retailers. It is only natural that in a period of tight supply, the laws of supply and demand will drive prices upwards.


Democrat: We are also debating another proposal that would require the oil industry to donate 10% of its profits to the Low Income Home Energy Assistance Program (LIHEAP). Don't you think that in this time of record profits, the oil industry should share its wealth with poor American families?


Oil executives: We certainly believe LIHEAP is a great program; however, we feel it is best funded and administered by the government. As members of the private sector, we already pay taxes. Plus, unlike most other industries, there are additional sales taxes on our product in the marketplace. The homebuilders have had record profits of late, but you haven't asked them to fund low-income housing programs.


Democrat: That's a good idea. We hadn't thought of that.


Republican: Now, let's get back to the point. We have to put on a good show for the American people, so they think we are defending their interests. I see that your companies have used tens of billions of your enormous cash reserves to pay dividends and engage in share buybacks. Wouldn't that money be better spent increasing capacity?


Oil executives: In addition to our dividends and share repurchase programs, we also spend tens of billions every year to bring more product to the marketplace. Our ability to increase capacity is limited by the amount of oil in the ground, access to attractive drilling areas, weather, and technology. It takes four years to bring a new well into production; therefore, the current supply and demand situation cannot be corrected overnight. With many of our most productive properties in decline, the industry is finding it very difficult to meet continued demand growth.


Democrat: I'm sorry, but since I'm not a economist, could you explain to me these “laws of supply and demand” that you keep talking about?


End dream sequence ...

[ARKDAWG02]

Great post, you know people forget about the low oil prices that practically put Louisiana into a depression several years ago. Nobody was offering to help the oil companies then.

[champion110]

Is the Republican in your dream Cheney and the Democrat Dean?

[TYLERTECHSAS]

Great post BillPup. Don't you love how a huge portion of our gasoline price is for state and federal taxes which the DEMS, never met a tax they didn't like, lobbied for and received.

Gee, let's have a extra windfall profits tax for insurance (medical co.), drug companies, doctors, lawyers, auto and other industries that seem to be making large profits these days. BTW, did the US Gov. bail out America's O&G industry went south, in the 80's, like it has done other industries? NO! This business is not one for complaining. They are hard working, hands in the dirt, creative thinkers ready to take the gambles needed to survive in one of the most competative business's in the world. One other problem is that the O&G business in general does a very poor job of PR in all areas. There is so much more to say but I will stop at this time.

Again, good post BillPup.

[Bill Pup60]

You're sure right about the lack of PR know-how in the industry.

I've always been amazed at how productive the industry has been over the years. I know of no other enterprise which has to spend as much up front to find the raw material ( in some of the most God forsaken places on earth), spend as much to get it out and transport it and then "cook" into usable end products, transport it again and deliver it to the gas pump and sell it at a price that -- adjusted for inflation -- has stayed virtually constant over the last century. And this has been done in a virtually pure capitalistic manner with little "help" from government, labor unions, etc. and the usual leaches.

This abundance of cheap reliable energy has been the single biggest factor in allowing our economy and productivity to become the best on earth. Because none of the other things could have been achieved without it.

Yet the one thing we haven't done is an effective job of telling the public just what a good job we have done.

[Bill Pup60]

Is the Republican in your dream Cheney and the Democrat Dean?

Well actually Champ, the "dream" is that of the article's author not mine. But, I think the Dem in the dream very well could be Screamin' Dean. He's certainly clueless enough to fit the role.

As for the Repub, I was think more along the lines of that being Frist.

[arkansasbob]

an excellent little piece of satire. i simply do not understand all the complaining about the oil companies making record profits. they are at the mercy of the market. they could be going out of business next month and nobody would care. it's great that they are making profits. and they would be stupid not to expand production with the prices like they are. expanding production is the only thing that would ease gasoline price increases in the long run. and the only thing the government can do to really do any good would be to ease the regulatory cost of expanding production.

[Dawgbitten]

"Mercy of the markets" that they create?

Let me break this down how this works:

If you are in the business of making clothes, shoes, furniture, etc. Your job of CEO or Sales responsibility would be to make quality products that your market wants. The demand is pretty elastic depending on economic conditions and whether or not the consumer wants your products. Sales and marketing to those potential consumers is what gets your profits to grow.

If you are in the business of producing and selling resources, timber, oil, natural gas, etc. You aren't going to be able to manipulate a fairly inelastic demand. Your growth potential will pretty much be tied to growth in GDP (3%??). So what do you do? Cut the shit out of your supply and manipulate that in any way possible. If you are in Timber or paper, close production (ie. International Paper plant buyouts of a few years back and subsequent shutting down of plants or capacity).

If your in the oil business, quit building refineries to curtail the supply and then blame it on Environmental regulations why you can't build any more. Everyone knows damn well that environmental regulations have not stopped any corporation if there is money to be made. It is all about the manipulation of supply or grow at 3%. I seem to remember Enron and a few of those other energy trading companies manipulating and holding the whole state of California hostgage in a bogus energy shortage a few years back. Everyone blamed it on the "envirowhackos" in California then as well. Also, a Government that has allowed consolidation of the major oil companies has promoted this problem.

You are absolutely nuts if you think they are going to take these profits and reinvest in additional infastructure to increase supply. They have invested to much in creating their markets and the only way cheap gasoline and natural gas will return is if demand decreases significantly or some new money guys with very deep pockets get together to build some refineries. Gasoline will continue to hang out around the two dollar mark (which is very profitable to them) until the hurricanes or some other factor disrupts supply again.

[TYLERTECHSAS]

If your in the oil business, quit building refineries to curtail the supply and then blame it on Environmental regulations why you can't build any more. Everyone knows damn well that environmental regulations have not stopped any corporation if there is money to be made. It is all about the manipulation of supply or grow at 3%.

You are absolutely nuts if you think they are going to take these profits and reinvest in additional infastructure to increase supply. They have invested to much in creating their markets and the only way cheap gasoline and natural gas will return is if demand decreases significantly or some new money guys with very deep pockets get together to build some refineries.

IMHO, that article or your beliefs, where this couple of statements are concerned, could not be more wrong. And I have stated such in years past on BB&B.

[dhussdawg]

an excellent little piece of satire. i simply do not understand all the complaining about the oil companies making record profits. they are at the mercy of the market. they could be going out of business next month and nobody would care. it's great that they are making profits. and they would be stupid not to expand production with the prices like they are. expanding production is the only thing that would ease gasoline price increases in the long run. and the only thing the government can do to really do any good would be to ease the regulatory cost of expanding production.

I agree with much of what you are saying Bob, except for mercy of the market thing. As a whole, oil is viewed as a necessity. The demand for it is very inelastic. People and businesses might can cut back some fuel consumption, but for the most part, oil companies will get theirs as long as oil is around. Of course, I dont complain because we still have relatively low gas prices compared to others, and we demand much more than anybody else. I attribute this to good management by the oil companies because America isnt making it easy with the demands that we put on oil.

[Dawgbitten]

So I guess "Tiger in the tank" marketing really makes demand a relevant factor for any of these oil companies? BS and you know it.

What most people don't know is gasoline for Chevron, Exxon, BP, etc. is picked up at the same place. The tank driver may add a gallon of some type of additive to make it "Techron", Chevron's Brand.

I could give you a great example of how an oil company is trying to manipulate the sulfur market in the US right now, but I believe I should not put that in a public forum. They are, however, investing in the infastructure to manipulate that market.

[Dawgbitten]

Another thing to consider, wouldn't the oil companies want as many government regulations as possible on building more refineries to keep supply short? Things aren't always as they seem are they?

[Bill Pup60]

Regarding Dawgbitten's misguided ideas about new refinery construction in the US, here's an article that gives some good insight to the problem.........


New Refineries? Not a Chance

By Robert Aronen
September 14, 2005

In the aftermath of Hurricane Katrina, one of the more common investment theories I've heard is that Americans now know they need new refineries, and that engineering and construction (E&C) companies such as Jacobs Engineering Group (NYSE: JEC), Fluor (NYSE: FLR), and Foster Wheeler (Nasdaq: FWLT) are sure to benefit. While they may do very well in the next decade, I doubt that new U.S. refineries will play a significant role in their financial results.


Furthermore, the chances for new refinery construction in the U.S. are slim. To get an idea of what it takes to build a new refinery, one can look at Arizona Clean Fuels Yuma. This company has been trying to build a new refinery for six years, and not a single shovel of dirt has moved. The company is still fighting its way through city, county, state, and federal permit procedures. Between various levels of government, environmental organizations, and community groups, there are seemingly endless obstacles before construction can begin. Even if the stars align, Arizona Clean Fuels Yuma will not be running until the end of the decade.

Arizona, which has no refineries, is acutely aware of their dependence on fuel from California and Texas. In 2003, a major gasoline pipeline ruptured and was shut down for two weeks, causing price spikes and shortages throughout the state. Partly because of this event, Arizona Clean Fuels Yuma claims that there is 90% public support for a new refinery. Yet it is proving exceptionally difficult for the group to obtain approval for "the most advanced fuel refinery in North America ... producing the cleanest burning gasoline, diesel, and jet fuel that can be produced in the United States today." If the cleanest refinery in North America cannot be built in a remote location, with 90% public support within the state, then what are the prospects in the rest of the country?


Americans want lower gasoline prices, and they understand that refining capacity is needed to drive prices down. But few communities would accept a new refinery in their own back yard. I think Americans will support refineries in general but oppose all specific projects, resulting in a stalemate and little or no new construction.


The Arizona refinery struggle exemplifies one reason why I believe high fuel prices are here to stay for several years: It takes a long time to bring new refining capacity to market.

[Dawgbitten]

If an oil company wants to build a refinery it WILL get done. If an oil company does not want a refinery built it WILL NOT get done. Follow the money trail, Billpup. Politicians and environmental policies are easy to influence and/or circumvent. Does this company really want to build a refinery or does someone really NOT want a refinery built?

[Cool Hand Clyde]

I enjoy watching ExxonMobil stock go up.