Judiciary Committee hearing on oil prices

On March 14, 2006, the US Senate Judiciary Committee held a hearing on "Consolidation in the Oil and Gas Industry: Raising Prices?"

The aim of the hearing was to understand the reasons for price increases at a time when oil corporations were posting record profits.

Note that this hearing, in fact, was not any different from the November 9, 2005 joint hearing (on Energy pricing and Profits) of the US Senate Committees on Commerce, Science and Transportation, and on Energy and Natural resources. See my post on that hearing. In a separate post I will compare both hearings and will discuss why those hearings were nonsense and what should have been done if Congress members were realy serious on the subject.

Below are the important parts from the Judiciary Committee hearing based on written testimonies. Tuesday, March 14, 2006. Also note that as of April 2, 2006, the written testimonies of ExxonMobil and Chevron were missing on the Senate Judiciary Committee’s hearing website.

Senator Patrick Leahy

His main concern was OPEC. He suggested Congress should enact the NOPEC bill into law, because “government-controlled entities routinely collude to set prices, and they have also wielded their power to purposely create major supply and security concerns in the United States. The time for our NOPEC reforms may have finally arrived.”

Remining the participants that the Senate has already passed this bill, which would make OPEC subject to our anti-trust laws, he added that “This measure would make OPEC accountable for its anti-competitive behavior and allow the Justice Department to crack down on illegal price manipulation by oil cartels. It will allow the federal government to take legal action against any foreign state, including members of OPEC, for price fixing and other anti-competitive activities.

Tom Greene, Senior Assistant Attorney General for the State of California

He didn’t say much interesting except mentioning that “the prices were spiking not because of the retailers that are covered by the law but by the refiners that supplied them.”

David Boies, Chairman, Boies, Schiller and Flexner, LLP

He basically attacked Exxon and Mobil, and claimed that “the natural forces of competition do not appear to be working on Alaska's North Slope”

“The reason why vast amounts of natural gas sit idle beneath Alaska’s North Slope and have not been brought to market is that ExxonMobil and BP, the companies that control the production of most of those resources, have decided between themselves that they would prefer to withhold this gas and maintain artificially high natural gas prices throughout the U.S., rather than market North Slope natural gas” he added.

“They have acted together with the purpose of eliminating competition that could threaten their control over the development, marketing and pricing of natural gas”

“For example, in the mid-1990s, BP sold oil from Alaska in Asia at prices lower than it could have gotten in the U.S. in order to tighten U.S. oil supplies and raise the price of oil shipped to refineries on the West Coast.”

Prof. Severin Borenstein, University of California, Berkeley

He, in fact, was the only person who specifically dealth with the title of hearing. He said that “the world has a single highly integrated market for crude oil. No U.S. oil company has a large enough share of that market to be able to profitably exercise market power and raise prices.”

But he added that “some producers are able to exercise market power, most notably Saudi Arabia, which is able to move oil prices significantly with its output decision.”

He then correctly pointed out the reason that the record profits oil companies have reported recently are primarily due to the extremely high price of oil. And that high oil prices are the primary reason for high gasoline prices.

Concerning refining issue he stated that “In a tight refinery market as we are beginning to face in the U.S., producers are likely to receive higher margins without exercising market power simply because strong demand relative to supply pushes up prices in any market.”

Also, he confessed that “Unfortunately, distinguishing between market power and real scarcity in the refining business is extremely difficult.”

Peg Lautenschlager, Attorney General, State of Wisconsin

He reported the suprising findings of their six-month investigation.

Two primary conclusions of that investigation were “1) the upward volatility of natural gas prices over the past several years cannot be simply explained by traditional supply and demand factors, contrary to what is commonly reported; and 2) the financial markets for natural gas are enormously complex, and there is an almost complete lack of transparency in the system.”

For some this must be stunning. He went on stating that “As evidenced by the wild, irrational swings in natural gas prices over the past several years, at a time when supply and demand were relatively stable, these new markets have not worked very well. Many of the industry representatives we spoke with believe these markets lack transparency and are vulnerable to abuse and manipulation.”

He also concluded that “increased oversight of the over-the-counter markets is needed, including requirements for registration of traders and reporting of trades.”

James Mulva, Chairman and CEO, Conoco Phillips

He was very clear. All his testimony can be summarised into a few points a) increasing competition with government owned companies, b) lack of access to resources even in the US, c) long and boring formalities and procedures in the US.

Here are some important points:

“For petroleum companies, the global business environment has become particularly challenging as government-owned enterprises from both oil-producing and consuming nations have emerged as new global petroleum players, adding to competition in the marketplace.”

“Constrained access increases the requirement for the U.S. energy industry to look for resources abroad, where resources often are controlled by national oil companies. Resource access has been steadily eroding since the 1960s. … today international oil companies can directly access only 7 percent of the world’s oil and gas reserves, with an additional 12 percent accessible through joint ventures with national oil companies.”

“Meanwhile, national oil companies from oil-producing and consuming nations, along with privately held Russian companies, are now competing globally and adding to the reserves access challenge.”

“Crude oil prices are determined in highly liquid and transparent U.S. and international markets by thousands of traders and other business entities based on the market conditions that exist on a given day.”

“The refining industry has been challenged by a number of Congressional and State mandates, over the years, focused on significant spending on clean fuels and emissions reductions. This has diverted capital from capacity expansion. Federal and State regulatory processes also have discouraged the building of grass roots refineries and expansions of existing refineries. The process for siting and securing the many permits necessary for a refinery are lengthy and difficult… The need to develop about 100 different “boutique” grades of gasoline in the United States in various localities also has increased the cost of manufacturing gasoline and reduced short-term product fungibility.”

“..increase in the cost of finding, developing and producing a barrel of oil. Steel prices doubled between the end of 2002 and end of 2004, and they are a large cost component for our industry. In the last three years, onshore drilling costs in the U.S. rose 52 percent and the cost of tubular goods rose by 125 percent. These components represent about half the cost of onshore wells. …Shipping rates for large crude carriers also tripled between 2002 and 2004, raising the cost of imported crude. However, there also is a longer term trend of costs increasing because our industry does not have access to the lowest cost reserves, including in the United States. Thus, our industry is going after more remote, deeper water, more complex and lower quality reserves that inherently cost more than what we were developing a decade ago.”

“Resource access is a particular problem for natural gas in the United States because the most highly prospective areas are off limits for drilling or the permitting requirements are so onerous that prospects become uneconomic. …The only short-term and long-term solution is to make more acreage available, especially in the Eastern Gulf of Mexico and the Rocky Mountain regions. We would encourage the reinstatement of lease sale 181 in the Eastern Gulf of Mexico. We also would encourage the Department of the Interior to ensure that the Bureau of Land Management has sufficient staffing to expedite permitting in the Rockies. Such measures can increase the supply to U.S. consumers in the near term. Outside the United States, we believe that the federal government should use diplomacy to encourage foreign producing nations to allow greater resource access at reasonable terms.”

But he messed up all those good points by adding the following: “Even our international refinery investments benefit U.S. consumers. For example, our planned investment in our newly acquired refinery in Germany is expected to allow us to significantly increase imports of gasoline to the United States.”

Mr. Bill Klesse, CEO, Valero Energy Corp

He basically defended the refiners. The most notable sentence was: “while much has been said about refining profits, it is important to note that the average gasoline margin for U.S. Gulf Coast refiners in 2005 – the best year ever – was $10.57 per barrel, or about 25 cents per gallon of gasoline. Even in a good profit year like 2005, our overall net profit margin was still less than 4.4 percent of sales.”

John Hofmeister, President, Shell Oil Company

He was, of course, in line with ConocoPhillips:

“Lack of access to energy resources and the hurricanes are the roots of the angst American consumers are experiencing. When supply is limited and demand is not reduced, the consequence is higher prices – in a free market that’s how it works.”

“Prices are set on a competitive global market. The biggest component of the retail price of gasoline – about 60 cents of every dollar -- is the price of crude oil. Crude oil prices are set on the deepest and most liquid commodity market in the world. Companies of all sizes populate these markets, and investor-owned companies such as Shell provide some competitive balance to large government-owned oil companies.”

“The key to providing reliable and affordable energy for America’s future is new supply. Some of the greatest potential untapped resources in the world are off limits here in the United States. It is ironic that some of the same voices that cry out for lower prices also advocate restricting access to domestic sources that, with today’s technologies, could be developed in an environmentally responsible manner.”

“Beneath federal lands and coastal waters, there are estimated to be 102 billion barrels of recoverable oil and 635 trillion cubic feet of natural gas whose development is limited by federal policies. If Congress wants to address supply and help consumers, provide a way to tap these resources.”

Ross Pillari, Pressident and CEO, BP America, Inc

His message is this: mergers and acquisitions are good for everyone. If we hadn’t gotten bigger, we could not be so successull in meeting the demand. Here are some important sentences:

“the increasing demand for refined products requires ongoing investment in more sophisticated refineries that can compete by processing a wider variety of crude oils and still meet today’s more stringent environmental requirements.”

“Our greater size, combined experience, and know-how have provided us with the ability to compete for both domestic and foreign sources of oil and gas that we might not otherwise have realized. This increased scale also has allowed us to accept risks and participate in projects that smaller companies are unlikely to have undertaken.”

“Participation in a project of this scale requires very large resources, and a smaller BP would have found it difficult to participate.“

“Investment to find new oil and gas reserves in the deep water Gulf of Mexico is another example of a set of projects that would have challenged and may well have overwhelmed a smaller company. These projects are extreme in every way - extremely large, extremely deep and extremely costly – and presented unprecedented technical challenges. The longer term risks are equally extreme, as demonstrated by the potential for hurricane damage and loss of production similar to what we experienced in 2005. However, our scale enables us to tap the breadth of resources necessary to remain committed to our investment strategy and to respond to such emergencies.“