Monday, July 7, 2008

Oil Companies Sought to Boost Prices by Cutting Refinery Output

Oil Companies Sought to Boost Prices by Cutting Refinery Output

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While the Bush administration cites the lack of refineries for energy shortages, internal oil industry documents show that five years ago companies were looking for ways to cut refinery output to boost profits.

It takes about four years to build a large refinery so any substantial additional new capacity from new plants would have had to begin by the mid-1990s, energy expert acknowledge.

But some internal industry documents obtained by Sen. Ron Wyden, D-Ore., suggest that in the mid-1990s oil companies had no interest in building new refineries because of low profit margins and, in fact, were discussing the need to curtail refinery output to boost profits.

"If the U.S. petroleum industry doesn't reduce its refining capacity, it will never see any substantial increase in refinery margins (profits)," said an internal Chevron document in November 1995.

The memo cited warnings given about refinery profits by a senior analyst from the American Petroleum Institute, the industry trade group, at an industry conference that year.

API spokesman Jim Craig, reached Wednesday evening, said he knew nothing about the memo or its reference to an API conference.

A year later, an official at Texaco, in a memo marked "highly confidential," called concerns about too much refinery capacity "the most critical factor" facing the refinery industry - resulting in "very poor refining financial results."

The Texaco memo, written in March, 1996, concluded that "significant events" were required to deal with the excess refinery capacity problem and suggested one solution might be to get the government to lift clean air requirements for an oxygenate in gasoline. Removal of the additive would require more gasoline to be used in each gallon of fuel, tightening supplies.

While refinery capacity now has become tight, the oil industry is still pressing for an end to the federal requirement for an oxygenate in gasoline, arguing new blends of gasoline can meet the same clean air requirements.

"The documents suggest that major oil companies pursued efforts to curtail refinery capacity as a strategy for improving profit margins," said Wyden, who was releasing the papers at a news conference today…

Wyden said the documents he obtained - including the internal Texaco and Chevron memos - suggest that oil companies in the '90s "sought to eliminate excess capacity to improve profits.

He said some of the refineries that were closed may have been shuttered "specifically to tighten supply and drive up costs" to consumers, although he provided no specific documentation of this.

But Wyden obtained a confidential 1996 e-mail from Mobil Corp., which has since merged with Exxon, that suggests major oil companies were not reluctant during the 1990s to try to force smaller independents out of business.

A California refinery owned by Powerine Oil Co., had ceased operation in 1995, but was trying to start up again a year later hoping to compete in production of a special, cleaner gasoline required by the state.

This gas was selling at a premium and Powerine's reentry into the market could cause the price to drop as much as 3 cents a gallon, a Mobil executive warned in the internal e-mail.

"Needless to say, we would all like to see Powerine stay down," the memo continued. "Full court press is warranted in this case." The refinery remained closed.

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