Senators step up oil blame game with refiner probe

WASHINGTON Tue May 17, 2011 5:15pm EDT

A gasoline silo at a refinery in New Jersey, in a file photo. REUTERS/Shannon Stapleton

A gasoline silo at a refinery in New Jersey, in a file photo.

Credit: Reuters/Shannon Stapleton

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WASHINGTON (Reuters) - Democratic senators called for a federal probe to determine if U.S. refiners are cutting gasoline production to keep pump prices high, the latest in a series of political measures seeking to combat $4-a-gallon gasoline that critics say is largely political theater.

The request for the Federal Trade Commission to look into possible price-fixing, which the agency is not required to conduct, is the latest effort to shift the blame for near record pump prices to big energy companies and speculators.

The senators said the evidence of possible malfeasance are the unusually strong refinery profit margins and the fact that plants are running at only 82 percent of their capacity -- their lowest for the pre-summer driving season since 1985.

"Why are they producing less gasoline for the American consumer?" asked Senator Claire McCaskill of Missouri, who supports ending oil industry tax breaks. "Maybe it's because they decided to reduce supply in order to increase price."

But oil traders and analysts said the low runs are largely the result of diminished demand for gasoline caused by the recession, high unemployment and greater ethanol use. The high margins are available only to a select few refiners that can take advantage of a glut of cheap mid-continent crude.

If domestic refiners were colluding, they argue, then foreign traders would be quick to ship more gasoline to the U.S. market. At the moment, however, U.S. refiners are exporting it in near record volumes.

FTC Chairman Jon Leibowitz said his agency takes the senators' concerns about the competitiveness of petroleum markets very seriously.

"The FTC is always on the lookout for potential price-fixing in this sector, and we will take action whenever we find wrongdoing," he said.

The demand for a probe comes a week after a separate group of senators called on the U.S. futures market regulator to speed up new rules to limit speculation in commodity markets.

It also comes as debate heat up over expanding offshore drilling, the repeal of Big Oil tax subsidies and a new government task force that includes the FTC to tackle oil market manipulation.

Analysts and traders say none of those measures would be likely to materially change the course of oil prices, which rose earlier this month to the highest level since 2008 on fears over war in Libya and unrest in the Middle East. They have since fallen by about 16 percent as traders took profits.

Wholesale gasoline prices on the New York Mercantile Exchange (NYMEX) have been particularly volatile as traders bet last week that flooding on the Mississippi could disrupt supply from 10 Gulf refiners. After officials opened a spillway, however, that threat dissipated and prices fell back below $3 a gallon for the first time since March.

"Dozens of investigations of gasoline price fixing over the years have generated plenty of headlines and political hyperbole, but have failed again and again to find any evidence of wrongdoing," said Charles Drevna, president of the National Petrochemical and Refiners Association.

"This is political theater," he said.

One of the FTC's more recent investigations in May 2006 concluded that companies did not cause the run-up in gasoline prices starting in 2002 by restricting refining capacity or cutting petroleum inventories.

HIGH MARGINS

The senators seeking the FTC investigation, including Senate Majority Leader Harry Reid, cited recent Energy Department data showing U.S. refiners are operating only at about 82 percent capacity. That makes the refinery utilization rate so far for this May the lowest since 1985.

Senator Charles Schumer said the profit margins of some refiners have not been this high since Hurricane Katrina in 2005, when supply disruptions caused fuel prices to spike.

Schumer said it does not make sense for refiners to have low production levels and also export record amounts of petroleum when U.S. prices are high.

"Sounds like a recipe to keep prices high. We don't know if this is a smoking gun but it sure requires a close look," he said.

Senate Republican Leader Mitch McConnell, while not responding directly to allegations of price-fixing by refiners, criticized Democrats for not taking action to boost domestic oil production to lower gasoline prices.

While refiners are operating at lower capacity, U.S. gasoline inventories remain high, rising almost 1.3 million barrels to about 206 million barrels, based on the department's most recent weekly data. Total U.S. gasoline inventories are just 1 percent below the prior five-year average.

"We're seeing a pretty well supplied market, so it doesn't make sense to run at full capacity and keep on stockpiling if you don't have an end user to supply to," said Rob Kurzatkowski, futures analyst with OptionsXpress in Chicago.

Bill Day, a spokesman at Valero Energy Corp, the largest U.S. independent refiner, said oil plant capacity is low now because refiners do annual maintenance in the spring to gear up for higher demand during the summer driving season.

Refiners would be missing out on big profits right now if they were holding back their gasoline production, because profit margins for making oil products are high.

"It would be self defeating to limit production at a time of high margins," he said.

U.S. refinery margins in the Gulf Coast for example were $32.91 per barrel last week, much higher than they were last year according to Credit Suisse.

The request for an FTC investigation comes as U.S. gasoline prices fell for the first time in eight weeks, according to government data released on Monday.

Energy analysts said they expected retail gasoline prices to drop significantly over the next few weeks, possibly as much as 50 cents a gallon, as oil prices fall sharply.

(Additional reporting by Timothy Gardner in Washington; and Matthew Robinson and Selam Gebrekidan in New York; graphic by David Sheppard; Editing by Lisa Shumaker and Sofina Mirza-Reid)

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Comments (8)
4ngry4merican wrote:
So we have more than enough supply, but refiners are still running below capacity. Explain to me again why we need more drilling?

May 17, 2011 11:16am EDT  --  Report as abuse
I would love to see actual heads roll for this and not just political theater please.

May 17, 2011 12:12pm EDT  --  Report as abuse
fromthecenter wrote:
Well people, what the hell do you think, they want low prices?

May 17, 2011 6:09pm EDT  --  Report as abuse
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