Pumping Us Dry

Katrina tragedy is an absolutely perfect storm for oil companies

The very first thing George W. Bush did in response to Hurricane Katrina was to offer a helping hand—not to the people stranded on rooftops in New Orleans, but to his friends in the oil industry. These were the same people who gave him $52 million in his last campaign. The president released millions of barrels of oil from the Strategic Petroleum Reserve so the oil companies would have enough fuel to make gas and keep the country going. But the companies don't need this oil. They're already swimming in it.

Pouring more oil into the marketplace didn't reduce gasoline prices, which kept on going up, hitting $4 a gallon in some places.

While crude oil production doubtless was curtailed by the storm, the companies face a surplus, not a shortage, of crude oil. So why dump more on the market?

“Despite growing inventories, U.S. commercial crude oil inventories (excluding the Strategic Petroleum Reserve) increased by nearly 5 million barrels over the past 3 weeks,” wrote the federal Energy Information Administration. Continuing in the clipped industry jargon, the agency added, “While this may not appear to be a substantial build, it comes at a time when crude oil inventories typically decline, as refiners use more crude to make gasoline needed for current demand and heating oil as they stock up for the winter.”

Thus, any crude oil inventory increase during the month of August, much less one of five million barrels over a three-week period, might lead one to expect prices to drop. Yet the price for West Texas Intermediate (WTI) crude oil has risen by $5 per barrel! If prices don't fall under these conditions, what will make them fall?

All over the world this summer, oilmen raced to dump surplus into the U.S. market, where the rigged prices made them a killing. Oil traders in China, the second biggest world market next to the U.S., were shoving oil into the high-priced U.S. market to make more money. (The U.S. consumes 25 percent of the world market; China 7 percent.)

Fort Worth Star-Telegram columnist Ed Wallace wrote last week that “there's actually weakening demand in Asia over the past two months, so oil is being diverted to the U.S., where it'll bring higher profits.” He quoted Reuters as noting that “Chinese oil trader Unipec resold at least 3 million barrels of August-arriving crude due to reduced refinery demand and was offering more, traders said last week.” Mary Rose Brown, a spokeswoman for Valero in San Antonio, was quoted by The Wall Street Journal as saying, “There is no reason for crude oil to be at $65 a barrel other than hype in the market.”

To be sure, some oil companies face shortages because of the storm, but the release of oil from the strategic reserve may not help them much. “The Capline, a major crude oil pipeline that feeds many Midwest refineries with crude oil from the Gulf of Mexico, is currently shut down due to lack of electricity at many of its pumping stations,” the EIA reported Wednesday. “As a result, one refinery in the Midwest has already reported that it has reduced its production due to a loss in crude oil supply. With the recent Government decision that crude oil from the Strategic Petroleum Reserve (SPR) will be made available to those affected by the hurricane, there may be some relief for refiners that have reduced their production due to loss of crude supply,” the government service dryly continues. “However, they will need to find a way to get the crude oil from the SPR to their refineries.”

What is going on here? The story goes like this: Refineries are increasing their stocks of crude, yet not increasing production of gasoline. This may help explain the high prices. It is an odd situation, since usually, in the summer, refineries are operating full tilt to lay in supplies of gasoline and home heating oil.

The slowing of gasoline production might be due to some unrecognized problems within the refineries. But the industry says it's because of market conditions, with officials noting that while today's crude prices are over $70, in 1999 crude oil was selling at around $12 a barrel. “Refineries lost a lot of money. In fact they lost money for most of the 1990s,” Jeff Morris, president of Alon USA, owner of the Big Spring Refinery, told The Wall Street Journal last week. “People chose not to spend on refineries. So what's affecting us now is that we're behind the investment curve and it will take us five to 10 years to catch up.”

If the companies can't increase their refined products, they could end up turning not to the petroleum reserve but to the European Union. While the U.S. keeps a supply of crude oil in its strategic reserve, the Europeans maintain a stock of gasoline as well as crude. There has been speculation that in a really tight situation, the EU might be called on to export some of that supply to the U.S.


Meanwhile, the high gas prices are adding to the profits of the big companies. Says the watchdog group Public Citizen: “Since George Bush became president in 2001, the top five oil companies [selling gas] in the United States have recorded profits of $254 billion: ExxonMobil: $89 billion, Shell: $60.7 billion, BP: $53 billion, ChevronTexaco: $31 billion, ConocoPhillips: $20 billion.” The group adds: “As Americans shell out more dollars at the pump, the profit margin by U.S. oil refiners has shot up 79% from 1999 (the year Exxon and Mobil merged) to 2004.”

Bush refuses to increase the energy efficiency standards for motor vehicles, which use 70 percent of total oil production, and he recently signed the energy bill that hands out billions in new subsidies to the industry. Even he seems to recognize what a shuck this is: In April, with prices moving ever higher and the Congress debating the energy bill, Bush said, “With $55 oil, we don't need incentives to oil and gas companies.”

But this summer, Congress, with the president's enthusiastic support, adopted a series of new subsidies for the oil and gas industry. “Officially, the energy bill's giveaways are supposed to cost $14.6 billion over the next 10 years, offset in part by $3.1 billion in higher gasoline taxes on consumers,” says Robert S. McIntyre of Citizens for Tax Justice. “But that doesn't include the bill's $70 billion in authorized but unfunded subsidies, for which cash will have to be appropriated later.”

Now they get another handout in the form of the strategic oil reserve. This is a complicated setup whereby rather than paying the federal government (i.e., the general public) for the right to drill oil on public lands, the industry puts some of this oil into the reserve. When times get bad, it then extracts some of the 750 million barrels stored in salt domes under the Texas and Louisiana coasts-with the promise to return it later on. It can therefore get cost-free oil, turn it into gasoline and sell it at high prices, hoping to buy back crude oil later on at lower prices and return it to the reserve.

In addition, the petroleum reserve will buy oil to fill its reservoirs on the market to jack up crude prices. So the industry makes a killing both ways. The public is left shelling out $4 a gallon at the pump.


Additional reporting: Isabel Huercuga

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