Oil Watchdog

Santa Monica, CA -- Oil refineries' deliberate failure to boost gasoline inventories, in combination with unusual maintenance and accident shutdowns, drove this spring's record pump price spike, concludes a study conducted for OilWatchdog.org and The Foundation for Taxpayer and Consumer Rights. The nonprofit, nonpartisan FTCR called for investigation and oversight of refinery operations, costs and profits to prevent continuation of a two-year pattern of price spikes. (See the full study here.)

"This study tells us that the entire refining industry learned a vile lesson from Hurricane Katrina: Refiners can neglect infrastructure, make too little gasoline, suppress inventories and still haul in record profits," said Judy Dugan, research director of OilWatchdog. "It's the opposite of what U.S. drivers and the economy need, but it serves oil companies' bottom line."

The study, "The Katrina Syndrome: Low Supplies = High Prices," was conducted by independent oil industry analyst Tim Hamilton for the nonprofit, nonpartisan FTCR and its OilWatchdog.org project, which reports on and critiques oil industry political influence and misdeeds. FTCR had asked Hamilton to explain how gasoline prices spiked so high this year when crude oil prices were lower than last year even as pump prices broke records in May and June.

"This study shows that the principles of free enterprise no longer apply to motor fuel refiners," said Hamilton. "Instead of being financially penalized for failing to meet the needs of their customers, the oil companies are rewarded by price spikes at the pump. This creates a financial incentive to short the supply of gasoline and diesel each spring."

The study was released as a week of oil company profit reports began. It found:

- Gasoline prices spiked upward in the spring, disconnected from crude oil

"If gas prices had followed the crude oil trend into the spring, drivers across the country might have seen pump prices increase from $2.28/gallon in February to $2.44/gallon in May [2007]. Instead, national pump prices skyrocketed to $3.15 in May, a staggering 87 cents per gallon, or 38% increase, during a period when crude prices rose only 7%." (See Chart 1.)

- Low inventories pushed prices

"Since regulatory decontrol of the refining industry in the 1980's, the industry has basically set fuel production rates and inventory levels at its discretion. ... Historically, the industry refined more gasoline and diesel during the winter than was sold at the pump... in the spring and summer, the predictable increase in demand was served without a price spike. ... Inventory was also adequate to largely compensate for unexpected disruptions, mechanical or weather-related, at refineries.

"In April of 2007, inventories of gasoline controlled by the industry were dramatically lower than in either of the two previous years. The drop from 2005 to 2007 was 9.6% [nationally]. With the supply of gasoline provided by the industry dropping below the level needed to fulfill demand, prices spiked to another record high." (See Chart 2.)

In California, gasoline inventory dropped 13.5% from April 2005 to April 2007, pushing an even more severe price spike. (See Chart 3.)

- The industry utilizes refinery production to control inventory levels

"In recent years, unplanned refinery outages that would have gone unnoticed in earlier years are blamed as the causes of gasoline price spikes. However, the underlying cause is the companies' decision not to maintain supplies sufficient to compensate for refinery downtime. ...

"The companies owning refineries have significant discretionary control over how much gasoline is refined each year. In the long term, companies decide whether to build or upgrade production capacity. In the short term, they decide how and when to conduct planned maintenance or "turnarounds" that limit production. Finally, during periods of normal operation, companies use their discretion to limit or increase the flow of crude into the refinery and the volume of gasoline and other refined products coming out to storage terminals. Pipeline breaks, fires and nature-related problems also occur, and their effect is related to the age and maintenance of refineries, both of which are under the companies' control." (See Chart 4.)

The study also found that diesel fuel prices, unlike gasoline, did not spike this spring in large part because inventories entering the period of the price spike were larger than in previous years, not smaller. They are proof of the dramatic effects of inventory on price. (See Chart 5, Chart 6 and Chart 7.)

"This spring's gasoline price spike was a foregone conclusion when refiners restricted gasoline inventories instead of boosting them over the winter and early spring, then planned long maintenance shutdowns," said Dugan. "Even this spring's unplanned refinery outages were not just acts of fate, since they are directly related to lack of modernization and quality of maintenance on aging equipment."

FTCR concludes that only state or federal regulation is likely to change the price-spike pattern.

"Without new state or federal investigation and oversight of oil industry refining practices and the regulation of gasoline supplies, consumers can expect dramatic price spikes to be an annual event, with higher prices lingering through summer," said Dugan.

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The Foundation for Taxpayer and Consumer Rights (FTCR) is California's leading nonpartisan consumer advocacy organization. For more information, visit us on the web at: www.ConsumerWatchdog.org and www.OilWatchdog.org.