April 30, 2002

WASHINGTON — Senators looking into gasoline price spikes accused oil industry executives Tuesday of conspiring to keep gas prices high by lowering supply through coordinated reductions in output.


"There is strong evidence ... that you actively help to create and maintain a tight market," said Senate Government Affairs Permanent Investigations Subcommittee Chairman Carl Levin, D-Mich.

Levin asked industry executives flat out if they had ever reduced refinery production in order to keep supply low, which increases prices because consumer demand remains constant.

All five industry executives appearing before the committee denied any collaboration on restricting supply and blamed a variety of factors, including environmental rules that require oil companies to change gas blends depending on the season, regional demand and accessibility, and the price of crude oil on the world market.

"In the long run, gasoline prices are directly related to the price of crude oil — over 90 percent of the change in gasoline prices is directly related to the changes in the price of crude," said Ross Pillari, group vice president for U.S. Marketing for British Petroleum.

Levin said that he understands that inelastic demand and interruptions in output — for instance, the lack of pipelines to transport fuel — affect prices, but said he doesn't buy the excuse that world oil prices have that large an impact on gas prices.

"The price of crude oil was not a factor in the price spikes of 2000 and 2001," he said.

The hearing comes after completion of a report by the majority members of the committee on how gas prices are set. The report said the gas price increase of 35 cents between 1999 and 2000 — on average rising from $1.16 per gallon to $1.51 per gallon — has only been matched once in history, in 1980 during the Iranian revolution and subsequent war between Iran and Iraq.

The report suggests that "most companies and gasoline stations try to keep their prices at a constant price difference with respect to one or more competitors. As a result of these interdependent practices, gasoline prices of oil companies tend to go up and down together."

It also says mergers of gas companies and refineries have concentrated control of gas and oil in a few hands, reducing competition and driving up prices.

Numerous consumer groups complained last summer about large spikes in gas prices, a result of low inventories and withholding by the gas companies, and said price gouging hurt consumers. Several lawmakers at Tuesday's hearing agreed.

"Gas prices have an impact on the American family's bottom line," said Sen. Jean Carnahan, D-Mo. "When constituents ask why prices are increasing, they deserve an answer."

"Americans are puzzled and angered against the force that have raised their prices. They are not alone," said Sen. Joseph Lieberman, D-Conn.

Industry executives countered that Congress' own rules are responsible for an increase in output since federal, state and local rules demand that companies produce boutique fuels, special blends that are developed to address regional and environmental considerations.

With upward of 100 different products demanded by local markets, it becomes more expensive for oil companies to produce each product, the executives argued.

"One of the greatest challenges we face as an industry is supplying an ever increasing number of 'boutique' fuels to an ever-expanding number of niche markets," said Rob Routs, President and CEO of Shell Oil Products U.S. "The smaller the market, the more isolated they become, and the more difficult it is for us to move products to those areas on short notice."

Sen. Jim Bunning, R-Ky., was sympathetic to claims that government regulations can create problems for the companies, but he said that regional pricing unfairly creates price spikes from one neighborhood to another.

"There is probably no other commodity that Americans purchase regularly that fluctuates as much," he said. "We must make sure that the government's role as regulator does not contribute to the problem."

The executives assured Congress that they are working on increasing refinery output and transportation paths with the increase of pipeline construction.

Sen. Susan Collins, R-Maine, said the oil companies should be aware of upcoming restraints, including refinery construction — no new refinery has been built since 1976 — and upcoming seasonal changes.

Sen. George Voinovich, R-Ohio, added that the energy bill recently passed by the Senate should help companies trying to increase their supply because it aids in the construction of pipelines, but he said the United States must also reduce its dependence on foreign oil, which comes from unreliable business partners who can stir up shortages and hikes.

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