Book Contents Introduction ------------------------------- 1 Chapter 1 Record Profits ------------------------------ 3 Are Americans paying for the Oil Industry’s record profits? Chapter 2 Oil Companies ---------------------------- 17 Who are these money-guzzling corporations? Chapter 3 Competition or Collusion --------------- 31 Is there a competitive market with a level playing field? Chapter 4 Oil Company Control --------------------- 53 Who is really making the money? Chapter 5 Federal Trade Commission ------------- 67 Regulators or Cohorts? Chapter 6 Pricing Across America ------------------ 85 Why do prices vary across the country? Chapter 7 Refineries ------------------------------- 107 Who owns them? Chapter 8 Excuses, Excuses, Excuses ------------ 121 The classic account of escalating fuel prices Chapter 9 Oil Suppliers ---------------------------- 133 Why so much talk about OPEC? Chapter 10 Stopping the Madness ----------------- 145 Can Oil Companies be Trusted? Appendix I: Royal Dutch-Shell Company Listings ------167 Appendix II: Gasoline Taxes by State, 2002 ---------------169 Appendix III: U.S. Refineries Capacity ---------------------171 Introduction Wouldn’t it be great to be in business and have a product everyone needed? And what if within this enterprise your competitors were few and far between? Or better yet what if you could arrange it so that in your utopia competitors were not even truly competing against you, but had some type of alliance that would benefit all of your pocketbooks? Interested? Well then, welcome to the United States of America’s oil and gas business! This industry can be somewhat complicated, but it is not difficult to understand. Does it make sense for our country and economy, which is fueled by oil and gas, to allow five oil companies to control 62% of the industry? These major oil companies are the explorers, producers, refiners, wholesalers, transporters and marketers/retailers of the oil and gas products. These few companies control the oil industry from the time it comes out of the ground until it reaches your home, car or business. Gasoline service station owners and operators have filed countless lawsuits against oil companies in the past ten years. The result has been that Mom and Pop operations are virtually becoming extinct because in litigation big oil’s pocketbooks just hold out longer than the station owners’. The owners have tried to look for help from governmental organizations designed to protect businesses and consumers. But the data points to our governments laissez faire attitude, and particularly to the Federal Trade Commissions and the Department of Justice’s approach to “protecting” consumers or business interests as they pertain to the oil industry. Big oil companies have great public relations machines that release information about why fuel and home heating prices are rising or why they are so high. You may think you are helpless to fight higher gas prices, but this is not true. Oil and gas prices affect everyone’s personal pocket book and virtually every business in America. In the bigger picture, oil and gas prices have a huge impact on the well being of this country and of the world. The oil industry needs to be accountable not only to its stockholders, but to the public at large. It needs to be a good steward of our communities’ resources. Integrity is a word that corporate America should abide by and subscribe to. We have witnessed too many companies that have not been truthful or fair with their consumers and stockholders. Is being truthful and fair too much to ask? As a former gas station owner and Texaco dealer, I can speak with first-hand knowledge of oil company pricing practices, their control of the marketplace, and even the oil industry’s ego and attitudes. This book will specifically look at what can be done to bring down the price of gas. We will consider some very important questions and explore their answers; including questions such as: Will a gasoline boycott be productive? Will a boycott of one company bring down the price of the entire industry? What is divorcement and will it work? Why don’t we have alternative fuel sources for our automobiles? Do we need to increase regulations or have mandates on refineries? Our energy policy has not changed in the last thirty years; isn’t it time for a change? My hope is that you’ll consider the overwhelming evidence that supports the numerous claims of oil company collusion and parallel pricing. By better informing yourself through reading this book and witnessing the active efforts by oil companies to limit competition through price discrimination, anti trust-practices, raising rents, eliminating rebate programs, zone pricing, price-fixing, manipulation, limiting production, and controlling supply, I trust that you (and all of America) will realize the detriment of allowing these few firms to control such a vital marketplace and become enraged enough to take action! Richard Clough Excerpts from Chapter 1 It is no accident that every time there is a climb in gas prices, these companies have a climb in profits. According to an industry rule of thumb, for every $0.10 increase in the price of gas at the pump, $10 billion in revenue is added to the oil industry! The years 2004, 2005 and 2006 have been record years for each of these Big 5 oil companies! Oil companies attributed their tremendous profit improvements to increased oil and gas costs. But of course, it’s clear from their profit earnings it has not cost them anything. The Big 5 companies are predominately involved in five business activities: Exploration / Production of oil and natural gas Manufacturing / Refining of petroleum products Wholesaling of petroleum products Marketing / Retailing of petroleum products Transportation The process of being the producer, refiner, wholesaler, retailer, and transporter is known as vertical integration and allows oil companies to make money during each step of the process. For example, Royal Dutch-Shell plc is in the business of exploring and producing, refining, transportation (including pipelines), wholesaling, and retailing. There are many businesses under the Shell umbrella, and they are essentially classed into five business entities. The key to being fully integrated is that profit is made by each business entity. Oil companies refer to their operations as upstream and downstream. Upstream operations are the exploration and production components of the oil and gas business. Downstream operations refer to refining and marketing of gasoline products. For the Big 5 oil group, the upstream operations contribute 51% to 75% of their total earnings. Most companies are in business to improve earnings and/or profit, but they do this by increasing revenue or by cutting costs and expenditures. Not so with the Big 5; their preferred method of enlarging revenue is to increase their margins of oil and gasoline. A margin is simply the difference between the price at which they buy or produce oil and gas, and the selling price. The Big 5 bolster their margins by raising the price for a barrel of crude, increasing the price of refined oil, and inflating the price of gas. Controlling Supply Oil and petroleum products have what is known as inelastic demand. This means that the demand for petroleum products and specifically gasoline is not responsive to a change in price. Even a small reduction in gas supply will lead to price increases and these price increases will be substantial. When there is a constant or slight increase in demand but constrained supply, gas prices are driven higher. Even the Federal Trade Commission reports, “Given the low price elasticity for gasoline, relatively small short-term supply reductions (or demand increases) can translate into large price increases.” The Federal Trade Commission’s own analysis concludes that a decrease in supply or an increase in demand of five percent could equate to a 30-40 % increase in gas prices. This may sound too simple, but this is a fundamental secret of the Big 5. By controlling the oil and gas supply, the Big 5 control the price of petroleum products including gas and oil for heating homes. Every time the price of a barrel of oil goes higher, so do all products that come from oil, and as you have noticed so do oil companies’ earnings. This is no accident. Oil companies regularly mention supply or inventory of gas as a reason for higher gas prices. But here is an interesting statistic regarding the Big 5 oil companies’ 2004 results for fourth quarter oil production. Oil companies report this as net oil—equivalent production. Four of the Big 5 oil companies have decreased their oil production: The only company to increase production was BP-Arco. How has this reduction in production affected the price of a barrel of crude oil and the price of gas? The domestic first purchase price for a barrel of crude oil in December of 2003 was $28.53. By October 2004 the price had skyrocketed to $46.28, an increase of $17.75 and the largest increase in our nation’s history! This escalation in price is a direct result of a decrease in oil supply or less production of oil. These Big 5 groups simply have the market power to influence, manipulate and control the price of oil by their supply decisions. Again, the easiest way to get more for a barrel of crude oil is to slow production or not produce enough to keep up with demand. Downstream operations (refining and marketing of gas) for the Big 5 in the fourth quarter of 2004 ranged from 25% to 45% of their total earnings. Chemicals, gas and power make up a small percentage of the balance. The following 2004 fourth quarter results for total earnings for the Big 5 oil companies ranges form Exxon Mobil's +27% to Royal Dutch Shell's +204%. These 2004 results are truly astonishing! This type of vertical integration (producer, refiner, and retailer) leads to higher prices for a barrel of oil and higher wholesale and retail prices of gas. In markets where there are a small number of independent or non-integrated refiners there will also be a limited amount of wholesale gas available resulting in increased gas prices for that area. Also, the wholesale gas price offered will not be lower than the wholesale price of an integrated company. Having fewer independent refiners also means fewer independent retailers who are not able to purchase wholesale gas lower than the wholesale price set by integrated refiners. These integrated refiners/oil companies have very little incentive to sell to other retailers who are competitors. Certain markets with a high concentration of vertically integrated companies greatly add to the demise of the market for unbranded gas and independent gas retailers. This is because independent gas retailers cannot find fuel to buy cheap enough to compete. The marketplace and control at the retail gas station is discussed more thoroughly in Chapter 4. A theoretic example of vertical integration could be one taken from the homebuilding industry: Most homebuilders get their supplies from a supply store (i.e. lumber from a lumber store). The lumber store gets its lumber from a mill; the mill gets its wood from a timber company, and the timber company goes into the forest and harvests the trees. Each step along the way independent companies are making money, and several companies are competing for the business. But, what would happen to the price if the homebuilder owned the lumber company, the mill, the timber company and owned the rights to the land? How much more would the building cost? Considering that the builder’s monopoly now means less competition, the cost to the buyer would be considerably higher. This scenario is akin to what happens in the oil industry and specifically with the fully integrated Big 5 oil companies. Great advantages and profits come from vertical integration. If at one step something goes bad, the oil companies just make it up at another step. If the price of crude oil fell for example, (and this is highly unlikely) the oil companies could increase their margins at other steps to maintain their profits. The vertically integrated oil companies’ productions divisions have manipulated and influenced oil supplies to continuously raise the price of crude oil. When you have four of five companies with this much power who decide not to increase production, oil prices simply have to rise and the consumer literally has to pay the price. If oil companies can blame others (OPEC, for example) for higher gas prices, they will continue to hide behind these scapegoats and profit from their deception. The fact is the Big 5 oil companies are largely responsible for driving up oil and gas prices. There are several factors that influence the price of gas, but the biggest factor is the price of oil. According to company financial records, crude oil is the step at which fully integrated oil companies make the most money; in fact, as high as 75% of earnings are produced by crude. Other factors that influence the price of gas are: refinery margins, operating costs, transportation costs, dealer or retail margins and taxes. Again, the biggest expense for gas, and the most profit for the oil company, is in the production of oil. The Energy Information Administration reports that oil and natural gas finding and production costs were $12.35 per barrel in 2003; this equates to about $0.29 per gallon. Location costs represent the costs to explore, discover, and acquire property in preparation to produce oil. Production costs include the costs to operate and maintain producing wells. This $0.29 is quite far from the 2003 average price per barrel of $27.56 that domestic refiners were paying for oil and even farther from the 2004 price of $36.77. The finding and production costs in developing countries are estimated to be ......... As of July 30, 2007 regular unleaded gas was retailing on a national average of $2.88 and world oil prices were $73 a barrel. Tired of paying high gas prices? Want to do something about high gas prices? You can help change our energy policy and change the price you pay at the pump? Buy my book, The Truth Behind High Fuel Prices and learn what you can do to change things. Excerpts from Chapter 4 Oil Company Control at the Retail Level Who is really making the money? Another way for oil companies to control, manipulate and affect gas prices are through their retail channels. Service stations or gas stations still remain the dominant way for oil companies to market gas. The oil company/refiner have five types of arrangements with the gas stations. 1) Lessee dealers 2) Open dealers 3) Jobber dealers 4) Independent dealers and, 5) Company owned and operated stations. Let’s review these arrangements or relationships and show how the oil company/refiner controls the price of gas at the retail level. Let’s begin with the lessee dealer. A lessee dealer leases the station, land and equipment from the oil company. The oil company supplies the lessee dealer, and the lessee dealer is required by contract to purchase their gas from the oil company / refiner at the gas price set by the refiner. This pricing arrangement is known as the “Dealer Tank Wagon” or the DTW price. The DTW price is what the oil company/refiner charges the lessee, and open dealers. The DTW price is generally arrived at by numerous factors including location, size and income level of market, traffic volume, population, competitors, same brand/other brand concentration and how much margin the gas dealer should operate on. The oil company/refiner sets the lease amount and terms of the lease. The open dealer owns the station and/or the property and equipment. The open dealer usually has a supply agreement with a oil company /refiner and sells gas under the refiner brand. This dealer is also charged the dealer tank wagon (DTW) gas price as part of his supply agreement. The jobber purchases branded or unbranded gas at a terminal owned by an oil company or companies and usually pays what is termed the “rack” price. The jobber distributes the gas to its own gas stations or to other gas stations. Many jobbers have contracts with refiners to purchase a set amount of their branded gas. Jobbers initially filled a niche for oil companies by delivering gas to rural areas, but over time also began delivering gas in some urban areas. The independent dealer purchases unbranded fuel wherever he can find it at the lowest price. This is usually on the spot market or at the rack price at the terminal. Independent dealers usually do not have long-term contracts nor do they associate with a particular brand. They will shop around for the best gas price. The company owned and operated station is obviously owned by the oil company / refinery. Station workers are employees of the oil company and are paid a salary or commission. Now what is the difference between the rack price and dealer tank wagon price (DTW)? Whatever the oil company wants it to be. It’s true. The rack price is generally intended for wholesaling fuel and was available to jobbers or independents. As a former open dealer myself I was forced (by contract) to buy DTW even when rack gas prices were lower. Generally speaking rack pricing should be about two cents lower. These two cents is the value of what it would cost for a jobber to pay his freight costs. There can be bigger swings between DTW and rack gas price depending on the supply of fuel and the location of stations. The following graph illustrates the marketing and retail structure for gas. (Graph is in Book) Are the Neighborhood Gas Station Owners a Thing of the Past? The Congressional Permanent Subcommittee on Investigations uncovered evidence that in many instances major oil companies price their own company operated stores and jobber supplied stations lower than lessee dealers, driving many gas dealers out of business. How was the Big 5 able to do this and gain control of 62% of the retail market? Part of the oil companies’ strategy to eliminate competition involves the way integrated oil companies distribute fuel using three different pricing tiers. (See graph on the previous page.) In the first tier, the oil company raises the wholesale price of gas (DTW) to the retailers so they cannot compete with company-owned stations. (This explains why the station with the same brand name two blocks away pays less than a lessee or open dealer station) The difference in gas price can be as much as $0.18 per gallon. This price variation is not supported by transportation or any other costs including overhead. The second tier strategy is designed so that the integrated oil company /refiner sells to consumers through their owned and operated stations. And at what price do you suppose they are buying their gas? The third tier of distribution is through jobbers. Jobbers can be considered middlemen and in some markets they fill a need for the oil company. Jobbers buy at the rack gas price. They can also operate their own stations and in this scenario cannot be considered middlemen. Jobbers are also reportedly complaining about gas pricing issues and not being able to compete with company owned stations. Their belief is that oil companies will do to jobbers what they have done to lessee and open dealers – eradicate this class of trade in certain markets. And they’re right! In some locations, this process of elimination has already begun. The bottom line is that oil companies /refiners became greedy and wanted more control of the price, the marketplace, and the profits that were going to the dealers. Part of a typical franchise-supply agreement states that the dealer will only buy his gas from the oil company/refiner. It basically became impossible for them to compete. Eliminating lessee owners by raising their leases is another way the small business owners/dealers are becoming extinct. When the lease used to be $3500 a month and then it becomes $6000 a month, there goes the gas dealer’s personal paycheck, his income and his way of life. One action Shell Oil took to put their dealers out of the gas business was to separate the gas part of the business from the other revenue generating parts of the station. As reported by Convenience Store News, Shell Oil Products U.S. and Motiva Enterprises looked to shift direct responsibility of non-fuel assets to their dealers and take full control of fuel operations. In this arrangement, Shell will manage and control the gasoline sales and the Shell operator will manage and make a living off the C-store, car wash, etc. Shell has decided to have multi-site operators that manage between 10-20 stations. One reason, and perhaps the main reason, Shell wants this type of operation is to control the retail gas price, even at the expense of manipulating Shell and Motiva dealers right out of business. This action of course eliminates retail competition. The result of taking the dealer out of the picture is the oil company can gain control of the market and raise the gas price as they see fit, thus charging you the consumer higher prices. In this great country, when you see lower prices at the gas pumps, it is the result of one thing - COMPETITION! Let me give an example of competition at the retail level. I was in Texas in October of 2004 and noticed a Murphy USA gas station that had recently opened in the parking lot of a Wal-Mart. Located across the street was an Albertson’s grocery store that also has a gas station. I watched them for a few days and noticed there was a “gas price war” going on between them and this caused the street price to drop over ten cents a gallon in a few days. Other gas stations in the area had also dropped their price trying to maintain volume and market share. This is good example of what competition will do. But you will not see this retail competition in markets where there are no independent refiners. Independent refiners usually sell to independent retailers who want to traffic their locations, increase sales, and will compete to win customers. A good example of wanting to traffic their stores and win customers is with hypermarkets. Hypermarkets are referred to as supermarkets or some other retail outlet that sells gasoline. For example Albertsons, Safeway, and Wal-Mart all have added gas to their merchandise mix. Most hypermarkets are simply adding gas islands to their parking lots. Where you find independent refiners or smaller integrated oil companies with a good availability of wholesale fuel, you will find hypermarkets offering gas for sale. Hypermarkets are less dependent on gas for their overall profitability and will use gas to help traffic their location. Hypermarkets have been known to price at their cost. They are good for competition, but only affect competition at the retail level. Fully integrated oil companies are still making the big money on their production and refining entities. But don’t confuse hypermarkets with major retail stores leasing space to oil companies. There are also some stations, for example Sunoco, Tesoro and Murphy USA, who sell gas from Wal-Mart parking lots under their own brand. They do this through lease agreements with Wal-Mart. So exactly how are retail gas prices set? |
| The Truth Behind Gas Prices |
| Copyright © 2007, Richard Clough |
| It’s one of the only industries in the world that controls the marketplace by fear and panic. It loves wars (especially in the Middle East), instability and shortages. For years, big oil has controlled Americans’ lives and pocketbooks like no other industry in the history of the country. And Richard Clough, the man who actually sued “Big Oil,” says it has gone on long enough. |
| “Oil Companies continue to have record profits year after year -- and people want to know how they continue to do it... Your book will tell them the real answers... I hope that legislators and consumers read your book and take action!” DENNIS DECOTA Executive Director for the California Service Station and Automotive Repair Association |
Do not be fooled, deceived or be complacent with temporary gas price reductions at the pumps. Richard predicts that by 2010, America will see prices of $6.00 a gallon! This explosive text is written by Texas resident and former gas station dealer Richard Clough, who takes you through the hidden practices of oil companies. Within this provocative work, Richard debunks many of the Big Oil excuses for higher prices and will arm you with answers and solutions to America’s oil and gas problems; which if acted on will give American’s lower prices, energy independence, stop the war on terror and stop polluting our planet. Richard reveals:
My Vision for America To give America and its citizen energy, economic, environmental and national security. That America would not be held hostage by the policies of the oil industry and the politics of this country. That alternative energy would be brought to market to free America from its dependence on foreign oil. That citizens hold our elected leaders responsible for setting policy that sets us free from oil and the terrorism that comes with it. Quotes from Richard “If the United States Department of Energy statement is true that oil and natural gas are the lifeblood of the U.S. economy, then American consumers are in the process of having their throats cut and will slowly bleed to death.” “Big 5 oil companies operate very similarly to the way OPEC operates, by controlling supply. Less supply means higher prices for the consumer and higher profit for oil companies. Even the Federal Trade Commission’s own analysis has shown that a decrease in supply or increase in demand of five percent will result in a 30% to 40% increase in wholesale prices.” “Who is monitoring refinery utilization? Oil companies are, that's who? That is like foxes watching over their own hen house. |
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| Richard Clough |
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Richard Responds to Senator Cornyn Texas Oil Refinery Expansion Will Fund Terror Senator Cornyn’s recent press release touts that the increased oil refining capacity at the Motiva refinery in Port Arthur, TX will and I quote “ increase national and economic security.” Senator Cornyn further states, “The proposed Motiva refinery expansion is a tangible step forward on the path to US energy independence. This expansion project would be a historic accomplishment for America energy security and serve as yet another feather in the cap of Texas production.” Richard Clough, the author of The Truth Behind High Fuel Prices, disputes Senator Cornyn’s claims. Richard contends that the expansion of this oil refinery will continue to fund terror around the World and will hurt the United States economic security, national security and energy independence. Senator Cornyn’s statements are misleading to Texans and American consumers, and let me tell you why? Motiva is a company that is 50% owned by Saudi Refining and 50% owned by Shell Oil; and neither one of these companies care about U.S. national security, economic security or our energy independence. Royal Dutch Shell has major investments (in the billions) with two countries, Iran and Syria that do not like us. Iran and Syria are recognized by the US as countries that sponsor terror. Yet, Royal Dutch Shell continues to contribute to the welfare of these countries by being major contributors to their oil and gas industry. If Royal Dutch Shell cared about U.S. economic and national security, they would not continue to bury their heads in the sand and contribute billions of dollars to Iran and Syria. Now what about Saudi Arabia? Are they a friend of the U.S. or do they just want our oil and gas money? Total imports into the U.S. from Saudi Arabia in 2006 totaled about $32 billion, with Shell being their best customer. What does Saudi Arabia do with the money that U.S. consumers give Shell and Motiva? Mia Bloom in an article for the Los Angeles Times reports Al Qaeda views Saudi Arabia as its primary source of money for global Jihad. Jihad is a holy war against Infidels, and an Infidel is anyone who is not a Muslim. The LA Times also reports that about 50% of the suicide bombers in Iraq are from Saudi Arabia. Remember September 11? Fifteen of the 19 terrorists or (cowards) who attacked this country were from Saudi Arabia. Saudi Arabia is considered by many as the engine of Jihad. Why is this? You can look straight to Islam and the interpretation of the KORAN where Muslim’s are ordained to fight, kill the unbeliever, fight until the persecution stops and religion is only for Allah. This is what Saudi’s teach in their educational system and this is why you see so many Saudi’s attacking us here in the US and in Iraq. Importing oil from Saudi Arabia to be used in a Saudi and Shell owned oil refinery in the U.S. will not do anything for United States energy independence or help Texas energy production! The expansion of the Motiva Refinery will not do anything to lower gas prices, help us gain economic security, national security or energy independence. It will only give more money to two companies who contribute to the welfare of terrorists. I completely and wholeheartedly disagree with Senator Cornyn and ask him to explain or clarify his statements and position. Richard Clough With gas and diesel prices at an all time high Senator Cornyn's office issued a release calling for a bipartisan energy plan that would provide “meaningful relief” to American consumers. This is an amazing statement seeing how the Republicans controlled Congress for six years and did nothing to help reduce our dependence on foreign oil or curtail the rising price of gas and diesel. With all due respect to Senator Cornyn, he and the Republican leadership did nothing to help American consumers with gas prices or this country with its dependence on foreign oil. Senator Cornyn must lack knowledge of how this industry works or he is playing politics with the American people. I would like to address two of Senator Cornyn's solutions to our rising gas prices. 1. Increase domestic refining capacity. This would work if we could force oil companies to do this. We can not even get oil companies to use the refining capacity they already have. For example the Energy Information Department is reporting refinery utilization at 85% in February, 86% in March and 88% in April. Why aren't utilizations rate like they were in 1997 or 1998 when they were reported at 95% or in 2003 when they were reported at 92.5%? I am sure the oil industry has their excuses and I challenge these excuses in chapter 8 of my book “The Truth Behind High Fuel Prices.” I even question these reported utilization percentages. Why? Because these numbers are reported by oil companies to the Department of Energy. There is no physical check of the refinery by a government employee or a third party to ensure the accuracy of their reports. After all, several of the major oil companies have had accounting problems in the past. Can they be trusted? I do not know where Senator Cornyn is getting his information that this country has 132 refineries. A quick check on the Energy Information website www.eia.doe.gov shows there are 142 operating refineries and 7 idle refineries. In 2001 strong evidence was presented to Congress that major oil companies were manipulating refinery fuel supply to increase price. Nothing was done then and this issue of manipulating gas and diesel supply is still with us today six years later. 2. The only way we will see gas prices come down is to form new supply. I agree with Senator Cornyn that we need to form new supply from several sources beside petroleum based products. My choices are ethanol, hydrogen, solar, electric, and biodiesel. But I believe we will only see gas prices come down when we have a competitive market place with companies aggressively pursuing customers. Since 1991 the US oil industry has had 2600 acquisitions, buy-outs, joint ventures, alliances and mergers. These government allowed mergers in the oil industry have created five of the largest companies in the world. These mergers were supposed to give customers better gas prices and service. Have they? These mergers have created great market power for five companies that control 62% of the US market. Again my book, “The Truth Behind High Fuel Prices” has repeated examples of documentation citing collusion and market manipulation If we truly want dependence from foreign oil and lower prices for consumers then we need to follow the seven steps found in my book. Richard Clough |
Richard responds to President Bush The people of Saudi Arabia have a great distrust and distaste for Americans, but while President Bush was recently in Saudi Arabia, he urged King Abdullah to pressure OPEC to increase oil production. What a humbling act for the President of the United States to plead for more oil from the King of Saudi Arabia. Let’s put blame where blame is do – with BIG OIL. . Exxon Mobil, the largest US oil company revenues are about the same as the 10 top OPEC countries total revenues! I ask you, who has the power? Why doesn’t President Bush go to the Big 5 oil companies and ask them to increase production. The Big 5 oil companies have been reducing production for the last 3 years. Big Oil does this simply to raise the gas price, so they can continue their record breaking earnings! While Big Oil is reducing production, Saudi Arabia and OPEC are being asked to increase production. This scenario has been going on for 3 years. OPEC increases production, BIG oil reduces production. OPEC increasing production will not lower your price? Why? Because BIG OIL will not ensure that the increased supply gets to you. The results speak for themselves. Economist and the FTC will tell you oil has low price elasticity. This means that oil is NOT responsive to a change in price. Oil companies know this and they know that by reducing the supply by 2%, will give them price increases of 20-25%. This is exactly what you are seeing in the marketplace. Fully integrated oil companies make 60% of their earnings in the production of oil or should I say lack of production of oil. So raising prices for a barrel of oil is the easiest and quickest way for BIG OIL to make more money! Let me give you just 2 examples of oil companies not wanting to produce more oil. 1. Of the 33,000 leases that oil co. have on BLM lands, 97% of those leases have NEVER had a drilling permit filed. 2. The state of Alaska is revoking leases from Exxon Mobil, BP, Chevron and Conoco Phillips on the Point Thompson, Alaska field. Why? Failure by these companies to produce anything from this field for 30 years. It is estimates the Point Thompson field has 300 million barrels of oil and 8 trillion cubic feet of natural gas. If oil companies are allowed to continue to collude and withhold product, the American people will not see prices come down, see energy independence, or see cleaner air and water. Cowboys have an old saying, “You can lead a horse to water, but you can not make him drink? Same truth applies here with oil companies. They know where the oil is, they have leases on the rights to drill. BUT you can not make them drill. Let’s get Free from Big Oil manipulating the market and OPEC oil and become energy independent! I have the solutions in my book! Richard Clough More Excerpts from Chapter 6 Pricing across America There are vast differences in gas prices across America and pricing even varies by region, state or city. The following chart shows the West Coast as having the highest gas prices in the nation and the Gulf Coast states enjoying the lowest prices. The West Coast region consists of five states: Washington, Oregon, California, Nevada and Arizona. The average retail gas price for regular unleaded gasoline on the West Coast November 15th, 2004 was $2.22 per gallon, up 50 cents from a year earlier, and 25 cents higher than the US average. What makes the West Coast region the most expensive in the United States? . Let’s first look at the Northwest. There are three oil companies in the Northwest that control the flow of oil from Alaska to the northwest states. These three companies are BP Arco, Conoco Phillips and Exxon Mobil and they supply over 95% of this regions oil. There are also only five refineries in the Northwest all located in Washington State. Vertically integrated oil companies own four of these refineries. BP Arco is located in Cherry Point, WA. and has a capacity of 225,000 barrels per day, the largest in the state. BP sells gas in the northwest under its own BP, Arco or AM PM brands. Shell Oil is located in Anacortes, Washington. This refinery was part of the Shell-Texaco marketing joint venture called Equilon. When Chevron and Texaco merged, the Federal Trade Commission required Texaco to sell its remaining refining and distribution interests and Shell happily purchased those assets. This refinery has a capacity of 145,000 barrels per day. Shell markets under its own brand. The third major oil company in the northwest is Conoco Philips located in Ferndale, WA. This refinery has a capacity of 92,000 barrels per day. Conoco Philips markets under the Phillips 66, Conoco and 76 brands. Tesoro is the fourth oil company with refining capacity and is located in Anacortes, WA. Tesoro purchased Shell’s former Anacortes refinery in 1998. Shell was forced to sell as a condition of the Shell-Texaco joint venture, thus Tesoro purchased this refinery. This refinery has a refining capacity of 115,000 barrels per day. It is known as a market follower. This means its gas pricing follows whatever the other three major oil companies decide to do. Tesoro is small compared to the Big 5 oil companies. Tesoro has two aspects to its business, refining and marketing. In total Tesoro operates six refineries with a total of 560,000 barrel per day capacity. Most likely, Tesoro and Shell are buying their crude oil from the three main producers in Alaska. The fifth and smallest of the refineries in the northwest is US Oil and Refining located in Tacoma, WA. Owned by an independent, it supplies gasoline to independent stations. US Oil and Refining has a refining capacity of 44,350 barrels per day and represents 7% of the total refining capacity in the entire northwest. You will not see very many independent retail gas stations in the northwest. Why? Because there is essentially one choice available for purchasing gas and they cannot buy it cheap enough to compete with the major oil companies. These major oil companies control the production, refining and pricing at the retail level. Too few major oil companies control the northwest oil and gas market. How does a company like Chevron, which is estimated to have 20% of the retail gas market in the northwest, compete without any major production in Alaska or a refinery in the northwest? Possibility they are trucking or shipping in fuel from outside the area. The likely explanation is Chevron has an exchange/ supply agreement with one or more of the other oil companies operating in the region. Chevron likely reciprocates this agreement with one of the other oil companies who need supply in another part of the country. In review, the reason for higher gas prices in the northwest can be summed up in two words: insufficient competition. There is not enough competition at the production level, or the refining level, and there’s definitely meager competition at the retail level. Specifically, competition is stifled due to the fact that: 1. There are three major oil companies that are the chief producers for this area; 2. There are three refineries owned by major oil companies who are fully integrated; and only two other refineries, one owned by a small oil company Tesoro and the other also owned by a small independent; 3. There are very few independent retailers; Two companies really hold the market power in the northwest, BP Arco and Conoco Phillips. These two companies control the major production in Alaska, they have good refining capacity, and they can supply multiple retail outlets. With fully integrated oil companies and without market competition, gas prices are not competitive. The consumers in the northwest can be somewhat happy; they are not paying the highest gas prices in the nation. The Western Region, which includes the northwest has very little pipeline that can carry product to it and has a high level of concentration that limits competitors from entering the market. Parts of California and Arizona do have some pipeline access to fuel refined in Los Angeles and Texas. Even with this pipeline, in January of 1998, the Attorney General of Arizona issued a report on competition regarding gasoline prices in his state. The attorney general was faced with the need to explain the fact that gas prices rise at all levels at once, that prices stay high even when crude prices fall and that fewer and fewer firms control bigger and bigger pieces of the retail pie. The study was intended to answer the following two questions. Are natural market forces of supply and demand at work? Is there collusion, monopolies or other market-distorting or consumer harming processes driving gas prices? One of the significant findings of this report was that in key markets in Arizona, specifically in Cochise and Pima Counties, merger, oligopoly market-harming supply and distribution structures have lessened competition and injured consumers. Even in 1998 the attorney general discovered their fuel price problems were due to mergers. What would this attorney general say now that many more mega mergers have transpired since 1998? Oil companies report that production prices are governed by conditions in the worldwide crude oil markets. It does not matter where the oil comes from or where it is produced the oil companies will figure into the price of gas the “world” crude oil price. This price is what the market will bear. It is not a coincident that oil companies have two primary pricing indexes and use them to price oil. Is this not price fixing? The price has nothing to do with actual costs; it all has to do with how high they can get the “world” prices then use them in their pricing indexes. Furthermore, setting a price to be charged within a certain market in order to squelch competition or create a monopoly is illegal. Hawaii for example is the state with the highest gas prices in the nation. There are two refineries and only five firms which account for ALL the wholesale fuel sold in Hawaii. Therefore all the retail gas stations are either owned or franchised through these five firms! The state of Hawaii is looking into this market monopoly and talking about setting price controls on fuel. Take a look at another state in which gas prices are very high – California. California is the most populated state in the union with 35,484,453 people and has the fourth largest oil reserve in the nation, estimated at 4.25 billion barrels. But, it is also the state with the highest gas prices in the lower 48 states. Californians use more than 16.6 billion gallons of gas per year and are the third largest consumer of gasoline in the world. As of November 15, 2004, the California statewide average price for regular unleaded fuel was $2.31; this was $.34 higher than the average retail price in America. In fact, these higher prices result in significant additional expenses for California drivers. For every one-cent increase in the price of fuel, it costs California consumers a total of $420,000 per day. (34) This equates to about $153 million per year and goes right into the oil company’s pockets. In 2002 total receipts to refineries in California was approximately 661 million barrels; 48% came from in-state oil production, 22% from Alaska, and 30% from foreign sources. The sources for foreign oil are displayed in the chart below: See book. California is a major refinery for west coast petroleum markets. California has 14 companies with 21 refineries that have a refining capacity of over two million barrels per calendar day. It has more refining capacity than any other state except Texas. Following is a list of California refinery owners and their refining capacity: 1. BP West Coast Products LCC. – Los Angeles, Cal. – 260,000 2. Chevron USA INC- El Segundo- 260,000 Chevron USA INC- Richmond-225,000 3. Tesoro-Martinez- 166,000 4. Shell Oil products- Martinez- 159,250 Shell Oil products- Wilmington- 98,500 Shell Oil Products- Bakersfield- 66,000 5. Exxon Mobil Refining and Supply Co. – Torrance- 149,000 6. Valero Refining Co. – Benicia- 144,000 Valero Ultramar INC-Wilmington- 80,000 Valero Refining Co.- Wilmington- 5770 7. Phillips 66 Co. – Wilmington- 136,600 Phillips 66 Co.- Rodeo- 73,200 Phillips 66 Co.- Arroyo Grade- 41,800 8. Paramount Petroleum Corp- Paramount- 50,000 9. Eddington Oil Co.- Long Beach- 26,000 10. Kern Oil and Refining Co.- Bakersfield- 24, 700 11. San Joaquin Refining Co. – Bakersfield- 24,300 12. Greka Energy – Santa Maria- 9,500 13. Lunday Thagard – Southgate- 8,500 14. Fenby INC- Oxnard- 2,800 Total: 2,010,920,000 Source: EIA, June 1, 2004 With all these refineries, there should be plenty of competition. But in 2001, six major oil companies controlled 93% or 1,865,120 barrels of the refining capacity. Hence 93% of all retail gas stations are owned, operated, or controlled by these six oil companies. In the last ten years, ten California refineries have closed. This has resulted in a 20% reduction in refining capacity. The consolidation of oil companies combined with their strategies to reduce refining capacity has resulted in the decline of gas stations from 22,091 in 1972 to 9,670 in 1997. The fewer independent refineries there are, the less wholesale gas that is available. The less wholesale gasoline that is available translates to fewer independent gas stations and less competition resulting in higher fuel prices. The retail market in California has shifted dramatically in the last 36 years, from twenty-one major companies in 1965 to only six in 2001. Here is the breakdown of market share by these six companies. 2001 Gasoline Market Share BP Arco – 22.6% Chevron Texaco – 19.91% Conoco Phillips – 17.66% Shell – 15.8% Exxon Mobil – 9.96% Valero – 6.99% Unbranded & others including Tesoro – 7.08% Source: California Energy Commission In 1980, the gasoline market share shows independents having a 22.3% market share. In 1990, a 20.1% market share, in 1995 a 19.7% market share and in 2001 a 7% market share. What happened from 1995 to now? Major oil companies want to control the retail gasoline price and market. The way they accomplished this was to eliminate small independent refineries therefore shutting down open and unbranded dealers. In the early 1990s the California market had an excess of supply and refiners sought to limit supplies to increase refining margins. One major oil company’s briefing document analyzes the crude supply, manufacturing and product supply for the state of California. See book: California’s could be paying $5.00 a gallon. The only reason you are not is because of a few good consumer watchdog organizations and the potential political fallout or backlash that would result. Yet, the market conditions are in place to raise prices and whenever the heat is off you will see prices go up again. California and the West’s gasoline markets are less competitive than most if not all markets in the nation. The Consumer Federation of America states, “ A wave of mergers in the industry has resulted in a level of concentration that creates the basis for business behaviors and strategies that can exploit market power. Several major mergers between vertically integrated companies in the top four of the oil industry (Exxon Mobil, BP- Arco, Chevron – Texaco, Conoco-Phillips) have pushed petroleum product markets to levels of concentration that are a serious concern.” A high degree of vertical integration makes it difficult for oil companies/refiners in other markers to export fuel into integrated markets. Fully integrated oil companies do not want to have other refineries selling fuel into their market and driving down prices through more supply. In highly integrated (concentrated) markets, the number of non- integrated retailers remaining in the market (as in the case of California) will not be large enough to economically bring in imports from other regions of the country. So, in markets where fully integrated oil companies have a big presence, they will be the ones who determine whether to import fuel into the markets to increase supply and stabilize prices. These barriers to import will lead and have led to higher prices. The large oil companies in California have effectively eliminated independent gas marketers from the retail markets. Unbranded independent marketers supply about 7% to Californian motorists compared to 30% to Texas motorists. Could this lack of independent refineries and marketers be the main reason why Californians pay 30 cents more per gallon than those in Texas? Let’s find out why? Exhibit 6A shows the largest oil producer in California and Texas and the percentage of each states oil production they each maintain: See book. The top 2 producers in the state of California are Aera Energy LLC and Chevron Texaco. They control over 66% of all the production in the entire state. The other companies follow what these two companies do when it comes to pricing oil production, or pricing crude oil. Who is Aera? They are a company that controls about 35% of the states’ entire oil production. This LLC is jointly owned by affiliates of Shell Oil and Exxon Mobil. Surprise, Surprise! This company was formed in 1997 and consists of both on-shore and offshore exploration and production. Just another shining example of how members of the Big Five work together. Now compare the oil production in California to Texas. In remarkable contrast, two companies are producing over 66% of the oil in California and thirty-two companies are producing 60% of the oil in the state of Texas. But, the Big 5 set the bar in both states. Other refineries and producers may not want to be too tough of a competitor. As one oil company official was quoted as saying, “we do not want to poke them in the eye”. Thank you for your support in changing our energy policy! |
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