Senator: Oil Firms Worked Together

A Western senator accused major oil companies Thursday of working together in the mid-1990s to reduce refinery capacity in order to drive up gasoline prices in California and other states.

Sen. Ron Wyden, an Oregon Democrat who has scrutinized the industry for several years, released oil company memos and other documents suggesting that Arco, Chevron, Texaco and other firms sought to boost their profit margins by orchestrating the shutdown of refineries and thus curtailing gasoline supplies.

But Wyden stopped short of contending that the oil companies broke the law.

“I don’t think you can assert today that there is anything illegal,” he told reporters. But, he added, the companies’ business strategies, as illuminated by the documents, “sure look plenty anti-competitive.”

Texaco, Chevron and BP--the British oil giant that now owns Arco--all denied any wrongdoing, and all three pointed to California Supreme Court and Federal Trade Commission rulings as evidence that market forces are behind the trends in refining and gasoline prices.

On Thursday, the California Supreme Court dismissed a class-action lawsuit accusing major oil companies of colluding to overcharge consumers for cleaner-burning gasoline. Many of the documents Wyden released had been offered as evidence in that case.

And earlier this year, the Federal Trade Commission closed a three-year antitrust investigation by concluding that Western and Midwestern oil refiners had not engaged in illegal activity.

Chevron said it “flatly denies any improper conduct” as alleged by Wyden, and the San Francisco-based company noted that it hasn’t closed a refinery since the mid-1990s. It further said it “does not participate in meetings with other oil companies” that might lead to collusion.

Texaco, which is in the process of being acquired by Chevron, said discussions among oil companies “about [profit] margins and capacity are conducted in the normal course of business and in no way constitute improper or illegal behavior.”

Refining capacity and reliability, in any case, remain key factors in the outlook for near-term gasoline prices. An Energy Department report Thursday warned that California gasoline prices, already the highest in the country, could rise again this summer if the state’s refineries are subjected to rolling blackouts.

Chevron and some other oil companies already have told state officials that they don’t have enough backup generating power to keep their refineries operating at full capacity in the event of a blackout. And with gasoline production just now catching up with motorists’ demand, any refinery cutbacks could send prices soaring.

California’s refineries would be exempted from rolling blackouts under a draft decision issued Thursday by Commissioner Carl A. Wood of the California Public Utilities Commission. The PUC is scheduled to vote on the proposal June 28.

Wyden said his investigation undermines the Bush administration’s argument that refining capacity has been restricted by government-imposed environmental regulations and that regulatory reform is needed to ensure adequate gasoline supplies. The White House’s national energy strategy calls for a review of a Clean Air Act provision that the industry says hampers the construction of new plants.

Wyden called on his Senate colleagues to investigate the refinery capacity issue further as it debates energy policy and to determine whether legislation is needed to curtail anti-competitive activities.

Among the documents released by Wyden were internal communications from the mid-1990s suggesting that oil companies wanted to scale back refinery capacity to boost their profits.

“If the U.S. petroleum industry doesn’t reduce its refining capacity, it will never see any substantial increase in refinery margins,” stated a Chevron document dated Nov. 30, 1995.

A Texaco memo dated March 7, 1996, reached a similar conclusion: “[T]he most critical factor facing the refining industry on the West Coast is the surplus refining capacity. . . . [And] significant events need to occur to assist in reducing supplies and/or increasing the demand for gasoline.”

Strategic decisions made by the industry at that time would affect gasoline supplies today because of the long lead time needed to add refining capacity.

“The documents suggest that major oil companies pursued efforts to curtail refinery capacity as a strategy for improving profit margins, that competing oil companies worked together to subvert supply, that refinery closures inhibited supply and that oil companies are reaping record profits,” Wyden said.

Red Cavaney, chief executive of the American Petroleum Institute, the oil industry’s trade group in Washington, confirmed that an outside analyst warned of the negative effect of excess capacity on prices during the association’s annual meeting in 1995, when profits from refining operations were thin. He said that the meeting was open to the public and that there was nothing improper about the companies’ discussions or strategies.

“This is just the case of a normal response in a commodity market,” Cavaney said.

Indeed, industry executives and Wall Street analysts explain the current high prices of gasoline, especially in California, this way:

From 1995 to 1999, gasoline was so plentiful and its price was so relatively cheap that refining was barely a break-even business. That, combined with the added costs of making reformulated gasoline dictated by California’s strict environmental laws, led to existing refineries being closed and no new ones being built.

The effect was especially acute for smaller, independent refineries, because they didn’t have the financial muscle to offset those costs and refine oil into gasoline at a profit.

“The major oil companies are in a much better position than the smaller companies,” said Mary Welge, a senior editor at Oil Price Information Service, an industry newsletter in Lakewood, N.J. “You’re talking millions and millions of dollars to bring refineries up to specification, which isn’t easy unless you are very well funded.”

Those cuts in refining capacity made for tight supplies this year, when drivers’ demand for fuel outpaced the refineries’ ability to produce enough gasoline. Combined with a surge in crude oil prices, those factors have sent gasoline prices soaring to $2 a gallon or higher.

In recent weeks, though, gasoline prices have started to edge lower, mainly because gasoline supplies have been gradually building over the last two months.

Shogren reported from Washington and Peltz from Los Angeles. Times staff writer Nancy Rivera Brooks in Los Angeles contributed to this story.

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Oil Supply and Profits

A report by Sen. Ron Wyden of Oregon suggests that major oil companies sought to boost their profit margins by shutting down refineries and curtailing gasoline supplies. Here are some findings from the report: Lost Capacity at Refineries The number of barrels of refining capacity per calendar day lost due to refinery closures from 1995 to 2001:

Source: Sen. Ron Wyden