Through The Looking Gas

From the LAT's story on Exxon's $9B quarterly profit:

"The financial results drew outrage from politicians and consumer advocates who see historically high U.S. gasoline prices as evidence of profiteering.

"This is a staggering profit and proof that we are being gouged by the oil industry," said Jamie Court of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

Court said oil companies had refrained from building domestic refineries so that tight supplies would push up prices.

'Now Exxon needs to invest that money in making more gasoline,' he said. 'Neither Exxon nor the industry has opened a new refinery since 1976 because the companies know keeping refined supply low is a recipe for huge profits.'

Certainly, political pressure is building on the industry to increase its refining capacity, even from a GOP that this year championed an energy bill that included new subsidies for the oil and gas industry.

'These companies are turning in record profits 'they have a responsibility to expand,' Energy Secretary Samuel Bodman said Thursday before the Senate Energy Committee. Senate Majority Leader Bill Frist (R-Tenn.) called for an investigation of possible profiteering."

I have some real problems with all of this.

For one thing, the idea that it is the oil companies' fault that there have been no new refineries built in 30 years is laughable. The reason is the maze of regulation that any new refinery faces counpled with pervasive "nimby-ism". Everyone wants more gasoline, but they don't want to have anything to do with the processes required to make it, and they especially do not want these processes anywhere within sight. There is now one new refinery on the drawing board in Arizona. It has taken nearly 15 years and over $33 million to find an "acceptable" site and to obtain the necessary permits. It will take another 5 years and $3 billion to build it -- assuming it isn't killed by public opposition of ever changing governmental requirements in the mean time.

Problems like this have forced the industry to increase production at existing sites. Yet this process generated what has become known as the "USEPA Refinery Enforcement Initiative." The latest "victory" in this in initiative was aExxon to spend $590 million in unproductive capital and pay $18.4 million in penalties and penalty projects. EPA boasts that it has now subjected 77% of the industry to such "settlements."

I am not saying that there was no legal basis for such settlements. I am saying, though, as a lawyer who was deeply involved in some of these settlements, that the legal basis was far shakier than EPA will ever admit. Indeed, the thing that drove most of these companies to settle was that they had to get "peace" with EPA in order to pursue their plans for expanding production. The idea that the government is "shocked, just shocked" that we have a shortage of domestic refining capacity is utterly preposterous.

Another thing that bothers me is the idea that the refining industry controls the price of gasoline. That too is laughable. Three years ago, when gasoline was selling for $0.89/gallon and the refining industry was losing money hand over fist, no one complained. Now, when gasoline is pushing $3.00/gallon, everyone sees a conspiracy. Gasoline is a commodity just like sugar, flour, milk and coffee. Absent price-fixing or government price supports, the price of gas or any other commodity is dictated by supply and demand. There has been no allegation of price fixing in the industry (and given the intense level of competition and the number of competitors in the market, price fixing seems far-fetched) and there is certainly no price support by the government (except for the fact that a large chunk of the price of gas is taxes). Gas is high right now for one and only one reason: there is a lot more demand than there is supply.

The final point that bothers me is the notion that oil companies "have a responsibility to expand." If they have such a responsibility, it is not to the public but to their stockholders and it arises not because of past profits but because company managements believe that expansion will result in greater future profits. The oil companies are not public interest organizations. That is not to say that they should not act responsibly toward the public. But it is to say that they are not in the public service business and that they have no responsibility to expand except as dictated by their fiduciary duty to maximize shareholder value.

Gas prices are high because the demand for it has outstripped the supply. Supply is low because it has been constrained by governmental policy and public opposition to such an extent that the shut down of 10% of the domestic refining capacity due to hurricanes causes major dislocations in the market. Demand is high because we use so much. Everyone is in favor of conservation so long as it is someone else doing the conserving.

As Pogo said, "We have seen the enemy, and it us," not the oil companies.