Summary of Senate Hearings on Oil Prices

A week after the Hurricane Katrina hit the Gulf Coast, gasoline prices reached an all-time-high average of $3.06 a gallon in September 2005.

A few weeks later, America's five biggest petroleum corporations reported a collective $32.8 billion in profits for the third quarter of 2005. Moreover, in 2006, the same corporations announced that the year 2005 was their most profitable year in history.

This sequence raised a simple question in the minds of people: why record gasoline prices and record profits happened at the same time?

In order to find the answer the executives of big oil were called twise to testify

1. On November 9, 2005 before a joint hearing (on Energy pricing and Profits) of the US Senate Committees on Commerce, Science and Transportation, and on Energy and Natural resources). Transcript of the hearing is given in Washington Post website. Their written statements can be found on senate energy and natural resources committee web site.
On March 14, 2006, before the US Senate Judiciary Committee hearing on "Consolidation in the Oil and Gas Industry: Raising Prices?" see, written testimonies.

Senators wanted to know what companies were doing with their profits and what they were doing to lower gas prices. In fact the main question was whether oil majors’ huge profits were due to profiteering.

Here is the summary of the first hearing (details are in my previous post)

What they do with their profits? … they invest
Why gasoline is expensive? … because of market forces and costs…
Why crude prices go up? … it’s the market, Dude…
How the price of oil is set? … set in market…speculators…Saudis…well, because….
Would big bosses donate money from their earning? …Nada…
Why don’t they invest more in the US? … Because of obstacles
What are the obstacles to investment in upstream in the US? …lack of access..
What government can do? … remove or ease the barriers…
Would they support revenue sharing? ….Oh, yes!
Companies in favor of Efficiency, Conservation and Alternative Fuels? yes, in principle, but…
What’s wrong with refinery capacities? … blame on the US goverment…
Did companies sell oil abroad during the high price period? … don’t know…
Do Companies Need Incentives? …. No, leave us alone…
Windfall profit tax blackmail….wrong door…affects small companies, not the big ones

And here are the the most important points in the second hearing (see for details in my previous post)

Congress should enact the NOPEC bill because of OPEC’s anti-competitive behavior. The bill would make OPEC subject to anti-trust laws.

Oil majors actually do not compete but cooperate for increasing the gas prices by withholding supply.

The world has a single highly integrated market for crude oil. No US oil company has a large enough share of that market to exercise market power and raise prices. Only big producers are able to exercise market power, notably Saudi Arabia.

Distinguishing between market power and real scarcity in the refining business is extremely difficult.

The record profits oil companies have reported recently are primarily due to the extremely high price of oil. High oil prices are also the primary reason for high gasoline prices.

The financial markets are enormously complex, and there is an almost complete lack of transparency in the system. As a result markets are vulnerable to abuse and manipulation.

Long and boring Federal and State regulatory processes, procedures, and burocracy have discouraged the building of grass roots refineries and expansions of existing refineries.

Some of the greatest potential untapped resources in the world are off limits to companies here in the United States. Lack of access to those resources is one of the main reasons why gas prices are high.

There is an ever increasing competition with government owned companies.

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:

Industry Reactions to Hearings

Of course, industry associations and journals supported to big oil bosses.

“The hearing on oil prices and oil company profits represented a dark moment for the party of free markets,” says Novermber 21, 2005 editorial of Oil&Gas Journal. It adds that “Republicans are supposed to believe in markets…. The price and profit hearing, prompted as it was by phenomena altogether characteristic of severely strained markets, never should have been held. Lawmakers-especially Republican ones-should challenge antique suspicions directly, explain to those still needing the education how markets work, urge government restraint, and note the inevitability of price declines.”

American Petroleum Institute, as expected, sides with oil companies. The insitute says that “The price of oil is set on the global market by the forces of supply and demand. The price of crude is the consequence of thousands upon thousands of individual decisions made on the world market every day. No one company or group of companies has control over that price. Large international oil companies own less than 10% of the world's oil resources.”

Editorial of Oil&Gas Journal on March 27, 2006 also gives a hand. It says that “US oil consumers need an adult understanding of market processes and an appreciation for the scale of energy needs. …In view of future energy requirements, in fact, US fuel consumers should be cheering oil company profits….Oil prices are high-and oil industry profits, too, by association-because global demand is approaching the physical limits of supply. This is not a matter of conjecture or opinion. It is evident fact.“

What oil companies really want?

They want access to resources in the US! That’s it.

It turns out that bringing the big oil bosses to the Senate had a different purpose, a theater play: We (the Senators) will ask you why it happened and you will tell us what you want, so that the public understands how we should go on…

In December 2005 Senate Energy and Natural Resources Committee Chairman Pete V. Domenici announced that he would try to bring back legislation authorizing federal oil and gas leasing on the Arctic National Wildlife Refuge Coastal Plain in the new year. "ANWR remains one of our top priorities. Developing more of our own energy is the right thing to do for our economy, our consumers and our security. I'm not walking away from this challenge," he said. (Oil&Gas Journal, 2 Jan. 2006 page 30)

First of all I believe that both hearings were nothing else than an arranged theater play between companies and senators. Outcome proves that. The Washington Post writers define the issue very elegantly: “Fortunately, the hearings are more bark than bite. Congress knows it, and the oilmen know it too.”

Senators blackmailed the oil bosses with plans for a windfall profit tax and a profiteering ban but the companies warned them against it because a windfall tax could impact investment and push prices higher. Raymond indeed had made it very clear “History teaches us that punitive measures, hastily crafted in reaction to short-term market fluctuations, will likely have unintended negative consequences."

The Result?

At the end oil companies won. Companies are now allowed to explore in new acreages in Gulf of Mexico.

In March 17, 2006, the Central Gulf of Mexico Lease Sale 198, attrackted nearly $1 billion. 4040 blocks comprising approximately 21.3 million acres offshore Alabama, Louisiana, and Mississippi were offered. Moreover, on Apil 4, 2006, The US Minerals Management Service announced the availability of the Proposed Notice of Lease Sale 200, an offshore oil and gas lease sale in the western Gulf of Mexico, scheduled for August 16, 2006. And more is under way.

In fact, if the Senators wanted the real truth, they would have asked different questions, and would have demanded hard data such as their stock levels when the hurricanes hit, their export records, and the records concerning the use of stocks.

Moreover they would have asked why the companies keep buying their own stock.

Tthey could have asked whether the companies are in anyway have any activity (directly or indirectly) regarding the non-commercial oil futures activities?

Like many people, I do believe that today’s high oil prices cannot be explained by the oil market fundamentals. See here and here.

When oil prices were about $10 seven years ago the industry were quoting the IEA’s oil market report showing too much oil in the market, the so-called missing barrels phonemenon. Today there is even more missing barrels compared to those times and yet the people talk about not having enough supply. This is Ridiculous!

Why hasn’t there been any official request to CFTC through the US General Accounting Office in order to investigate whether there were any attempts by any type of traders to manipulate prices? Such a request had already taken place in 1991 to examine whether oil futures markets have been manipulated to raise prices more than was justified by supply and demand factors.

In fact, today the ivestigation would be even more appropriate. As 4 March 2006 issue of the Economist magazine mentioned there are more than 8000 hedge funds today, with more than $1 trillion of assests under management, and industry lacks a central database.

Why it is now not investigated who indeed the players are and how much of the activity is accounted for by these traders?

Today, we are seeing high prices of today with contango, which is unusual configuration. This means, we have a high spot price AND the futures for distant months are even higher. Traditionally, crude futures have traded in backwardation.

Besides opening up new acreages for exploration, which is practicaly in favor of companies, the US government would also try to solve boutique fuels issue and harmonise gasoline taxes, which would be something for consumers.

What is then the result of those two hearings? Oil companies-1 : Consumers-0