The Byrne Report
Once upon a time in a tony San Francisco eatery, Joe Alioto, the antitrust lawyer, drew me a diagram on a napkin. His scrawl traced the fate of John D. Rockefeller’s Standard Oil of New Jersey, the holding company which controlled the world’s oil market until it was broken into separate entities under the Sherman Anti-Trust Act shortly before WW I. The Supreme Court ruled that Rockefeller’s monopoly dominated oil producing, refining and distribution by “conspiring to restrain trade.” Alioto explained how the remnants of the oil trust (Exxon, Mobile, Chevron, Amoco, etc.) have effectively recombined through mergers and market sharing. Although the oil colossus redux is not yet doing business under one logo and one set of books, modern refining technology has made the anticollusion statutes of the Sherman Act as obsolete as oil lamps, Alioto said.
To talk about how the oilgarchy extracts excess profit from selling gasoline in California, we go to energy consultant Tim Hamilton of McCleary, Wash. A former gasoline dealer, Hamilton works for a consortium of western state gasoline retailers. He is widely recognized as an expert critic of oil-corporation refining practices. He recently engineered a series of studies for the Foundation for Taxpayer and Consumer Rights of Santa Monica that detail the methods by which the reborn colossus manipulates gasoline supplies and, therefore, pump prices in California.
Hamilton says, “Hurricane Katrina is not responsible for $3 a gallon in the western United States,” Hamilton says. “The latest round of price increases started a week before Katrina.” The East Coast and the southern states are experiencing price increases driven by the loss of refining capacity on the Gulf Coast. But 66 percent of the crude oil refined into gas in California, Hamilton notes, is mined on the West Coast. The California market is relatively independent from fluctuations in the availability of foreign, or gulf coast, oil.
Gasoline brands ship crude oil into their western refineries in accord with a “just in time” marketing scheme; i.e., the corporations avoid creating large inventories, making it impossible to meet suddenly increased demand. And when they deliberately withhold crude from their own refineries–by shutting down refineries or shipping crude to Chile–they create a supply shortage. This leads to a jump in pump prices, and increases refining profit margins (by an estimated $15.5 billion since 2000).
It is all about “mogus,” the term for the generic gasoline that the refineries ship, via co-owned pipelines, into jointly controlled holding tanks. When a tanker truck pulls up to the mogus tank, it is filled with generic gasoline that is treated with each brand’s additives as it flows into the truck. Consequently, oil executives know exactly how much mogus is flowing in and out of the tanks and to whom in real time. Their ability to access each other’s supply information without “conspiring” enables them to passively collude without picking up the telephone.
Here is how it is done, according to Hamilton: A Chevron Texaco executive looks at the amount of his gas flowing into the central tank via shared pipelines, say 100,000 gallons a day. He decides to sell 20,000 gallons of refined crude to Chile instead of sending it to the central tank, thereby creating a shortage of his brand’s contribution to the shared mogus stockpile. Oops! he exclaims, we have a shortage and we have to raise the price because there is more demand for our brand than we can supply. In a truly competitive market, his customers would drive to a Mobil station for a lower price. But in this scenario, Mobil raises its prices because of the increased demand for its product since Chevron Texaco’s prices have risen.
Of course, the Mobil executives are watching the inflow-outflow at the mogus tank just as carefully as the Chevron suits are. When Chevron cuts back on its contribution to the mogus, Mobil can cut back on its own contribution in tandem. Then the refining divisions of both companies justify the jacking up of gas prices because of the low supply situation they have artificially created–and neither loses customers to the other.
This is not price fixing by a cartel of the Rockefeller variety, says Hamilton. It is simply what he calls a “rational” reaction by individual companies desiring to maximize their refining margins when supply diminishes for whatever reason. Pooling this type of data is not illegal under the antiquated Sherman Act. From January to June of this year, California oil refiners inflated profits in this manner by 61 cents per gallon.
Meanwhile, family-owned gas stations go bankrupt. Unbeknownst to the customer, the wholesale price increases days before it is reflected at the pump. The retailer is constantly behind the mark-up, having to pay for gas at a higher price before it can be sold at a lower price. He can only hope to earn back the difference when and if prices fall. Meanwhile his 3 percent credit card fees skyrocket in tandem with prices. The 10 cents a gallon he needs to pay his rent and employees and register a profit are eaten up by these extra costs.
Of course, the international energy corporations would like to play the same game with refining profit margins everywhere, but on the East Coast, for example, it is harder to choke off supply since there are more potential sources of crude oil flowing into terminals in the eastern United States. Ironically, California has the capability of becoming self-reliant because of its easy access to locally produced crude, but this is turned upside down when the monopolists artificially deflate the supply until consumers react by reducing demand so that prices fall. Another way prices fall is that East Coast refining operations, seeing the high profits to be taken in the west, start sending their gasoline westward, which lowers pump prices. Hamilton points out that this option is not currently available to us, because the Katrina effect has drastically reduced supply in the east.
Hamilton says that the price caps on gasoline instituted by the state of Hawaii have failed, because they were tied to East Coast price indexes. He hopes that, as the mainland market cools, the caps will make more sense, although they have to remain close to mainland prices, in order not to repel the mogus from making the trip to Hawaii.
Using Hamilton’s data and analysis, the Foundation for Taxpayer and Consumer Rights suggests that the state build a gasoline reserve system. Millions of gallons of potential gasoline storage space is currently available under gas stations, which tend not to use the full capacity of their premium tanks. Premium gas is no longer necessary for performance except for special types of automobiles, so the state could mandate that most stations sell only regular gasoline. The increased supply can be stored in the unused premium tanks, and become available during times of increased demand, or genuine supply shortage.
Predictably, the oil brand trade group, Western States Petroleum Association, based in Sacramento, blames high state gasoline taxes, and environmental regulations for skyrocketing pump prices. But do not look to the Schwarzenegger government or the equally inept legislature for relief. California is one of the few states that collects a percentage sales tax on purchases at the pump. When prices rise, so do state tax revenues, by $1 billion this year alone.
From the September 28-October 4, 2005 issue of the North Bay Bohemian.
© 2005 Metro Publishing Inc.