Gas costs: pain at pump, gain to industry
Updated 4/25/2006 12:35 PM ET
By James R. Healey and Matt Krantz, USA TODAY
Major oil companies begin reporting robust first-quarter profits today in a string of earnings announcements likely to cheer their shareholders and infuriate motorists pumping $3 gasoline into their tanks.
"I don't demonize the oil companies, but I know the crowd will have a lynch-mob mentality" when hit with multibillion-dollar oil earnings every day this week while coping with near-record gasoline prices, says analyst Tom Kloza of Oil Price Information Service.
The big profits come against a backdrop not only of high fuel prices, but also scattered gas shortages along the heavily populated East Coast. Congress is talking about imposing new taxes on oil companies and pushing harder for antitrust investigations of possible price manipulation. President Bush plans to announce in a speech today that he has asked the Energy and Justice departments to open inquiries into possible cheating in the gasoline markets, White House press secretary Scott McClellan said.
The spotlight on Big Oil is more intense than at any time since allegations of gouging and price manipulation erupted after Hurricane Katrina closed oil and natural gas operations in the Gulf of Mexico last August. Eight months later, 22.3% of Gulf oil production remains shuttered. What's different this time, what could make it more uncomfortable for oil companies, is that the fresh outrage comes atop leftover ill will from energy price increases after Katrina.
"I'm a capitalist, but I think we're being extorted," said Ron Safier, 72, an executive recruiting company owner in Los Angeles, as he put $46.94 worth of gas into his Toyota sedan. Oil companies "need to be brought to their knees" by government intervention, he says. Safier was filling up at an Arco gas station in west Los Angeles, where the cheapest self-serve regular was $3.099 a gallon.
The statewide average in California was a record $3.117 Monday, travel club AAA reported. The nationwide average, AAA said, was $2.908, closing in on the peak $3.057 reported Sept. 5 after Katrina.
Brandi White, 30, a stay-at-home mom in Kansas City, Mo., has a $50 weekly fuel budget, which no longer fills either of the family's vehicles. "If we weren't on the very lower end of middle class, it might not matter," says White. "But we still have to stick with (that) budget, or we don't get to buy food. It turns into a Catch-22. We have to have the gas to get to work, but we can't afford the gas to get to work to make the money to pay for the gas."
The latest government figures, from the Energy Information Administration, show a nationwide average for regular grade gasoline of $2.914 Monday, up 13.1 cents from last week, and a hefty 67.8 cents more than a year ago.
Diesel fuel averaged $2.876, EIA said, up 11.1 cents from last week and 58.7 cents more than a year ago.
Many Americans have no choice but to keep pumping gasoline, regardless of price. But their anger worries oil companies.
"Energy issues are important to people, and we're are struggling with how to deal with that publicly," says Dave Gardner, spokesman for ExxonMobil, which reports first-quarter earnings Thursday. Analysts polled by Reuters Estimates expect $9.1 billion, the most of any major oil company but less than ExxonMobil's record $10.7 billion in the fourth quarter last year.
Washington is watching
Records or not, they look too big to some lawmakers — big enough to ignite talk of windfall profit taxes.
Sen. Arlen Specter, R-Pa., chairman of the Senate Judiciary Committee, is backing legislation to toughen antitrust laws relating to oil company mergers, and says a tax on extraordinary — windfall — profits could help cut fuel prices.
"I believe that we have allowed too many companies to get together to reduce competition," Specter said on a CNN television program Sunday.
"In the short run, it's hard to deal with it for tomorrow. But I think windfall profits, eliminating the antitrust exemption, considering the excessive concentration of power, are all items we ought to be addressing."
Sen. Carl Levin, D-Mich., who appeared with Specter, said gasoline prices "would come down within a matter of days" if President Bush said he would support a windfall profit tax on oil companies.
Such a tax would backfire, warns Wachovia economist Jason Schenker: "If you tax the oil companies for producing, then they are less likely to produce," he says.
As big as they are, oil companies' first-quarter numbers are unlikely to be records, because refiners use more oil than their parent companies produce, forcing them to buy oil at today's high prices.
Benchmark West Texas Intermediate crude oil, also known as light, sweet crude, was $73.33 a barrel at the close of New York trading Monday. That was down $1.84 from Friday's close. The record, in inflation-adjusted dollars, is $86.99 January 1981, according to EIA data.
Gardner says ExxonMobil produces 2.5 million barrels of oil a day from its wells, but refines 6 million barrels a day. "The difference, we have to purchase. It's a big cost to us," he says.
Overall, major oil companies' U.S. marketing margins — the profit on selling gasoline and other products made from oil — fell 80% in the first quarter, vs. the fourth quarter of 2005, and are down 25% from the first quarter of 2005, Nicole Decker, analyst at Bear Stearns, said in a note to clients.
Big Oil can expect no sympathy from those in the best position to offer it.
House Speaker Dennis Hastert, R-Ill., and Senate Majority Leader Bill Frist, R-Tenn., Monday sent a letter to President Bush asking him to order a government investigation to determine if there has been any gasoline price gouging or energy market speculation that could be leading to the higher prices at the pump.
"Anyone who is trying to take advantage of this situation while American families are forced into making tough choices over whether to fill up their cars or severely cut back their budgets should be investigated and prosecuted," the two said in their letter to the president.
"Sweeps of retail distribution centers should be undertaken to ensure that retail price movements are in response to a change in market conditions and not price gouging," the lawmakers wrote.
The Federal Trade Commission has responded to orders from Congress the past few months to look into potential gouging. In a report to Congress in March, the FTC said it was continuing to gather information. "The Commission has faced relatively little resistance from industry members during this investigation," the FTC said. "Most companies appear to have responded in good faith."
Hooked on oil?
Where the oil companies are not showing good faith, critics say, is in developing alternative energy sources that could help insulate the USA from unstable and high world energy prices.
U.K.-based BP, which today kicks off the week of oil earnings by announcing an expected $5.1 billion, is among the most aggressive investors in alternatives to petroleum. It formed BP Alternative Energy last November and says it will, through it, invest $1.8 billion by the end of 2008 in wind, solar, hydrogen and other alternatives. But that'll be only 5% of BP's total capital expenditures.
Royal Dutch Shell — expected to announce May 4 that it earned $5.4 billion the first quarter — says it has put $1 billion into alternatives such as hydrogen, wind and solar power during the past five years. Shell is also considered among the companies most eagerly pursuing alternatives.
"Generally, it's a small piece of capital budgets," says Jacques Rousseau, analyst at Friedman Billings Ramsey. "European companies are investing more (than U.S. firms) in renewables like wind and solar," he says, while "U.S. companies are not doing much at all," he says.
"It's a fool's errand to expect the oil companies to invest in any significant way," says George Sterzinger, executive director of Renewable Energy Policy Project, a Washington D.C.-based research firm.
"What you really want," he says, "is a serious program to counterbalance our reliance on fossil fuel. You're not going to get there by waiting for the oil companies to invest their windfall."
Contributing: Barbara Hagenbaugh, Roger Yu, Chris Woodyard and Sharon Silke Carty
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