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Wednesday, November 09, 2005

Big Oil Really, Really, Doesn't Want To Talk About Those Big Profits

A while ago I mentioned ( here and here) that Big Oil didn't really want to explain the Big Profits, and that the amount of profit *increase* was phenomenal (in one case, the *increase* in profits over the prior year was 86%).

Many people were willing to cut ‘em a little slack, since Hurricane Katrina had waltzed through the Gulf, and put wells and refineries off line when the crews got evacuated. But then it was noted that the prices had started going up *before* the storm hit, and that the prices were being applied to gasoline stocks that were *already* in the pipelines, and on trucks, and in service station tanks.

The answer *then* was that the prices at the pump were “paying the higher price for the next delivery.”

Then the story was that the prices were so high because there was insufficient refining capacity, in general, and tried to say leave the impression that they didn’t build more refineries (or upgrade what they had) because of Big Bad Government Regulation and/or The Evil Environmentalists . This seemed a little, shall we say, disingenuous, as the industry itself had demonstrated that they had no desire to either add to, or upgrade, refining capacity, because the classic scarcity-of-product = high-profit (otherwise knows as “all the market will bear, and then some”). (It also had a somewhat familiar sound to those who remember that one of the reasons that energy companies in California, Washington State and Oregon gave for *their* record high prices was supposed government regulation and environmentalists blocking new power plant construction. And, of course, there was no proof to the rumors that plants were being shut down on purpose to short supplies or, or. Hmmm. Let me get back to you on that, I have a memo from Ken Lay explaining all that….)

Soon after, the prices at the pump hit highs (at least in the US) that I don’t recall seeing since the Great Oil Embargo (the highest I saw at one station here was $3.93/gal).

But this must be the Season of Harry Potter. Because soon after the voters started complaining loudly about the high costs, and even though two more big storms swept through the Gulf, the prices at the pump, following laws of economics that that must be something taught in advanced classes at Hogwarts, the prices started to drop at the pumps.

Even though those next deliveries were supposed to be so expensive.

The cynic here thinks it more mundane, along the lines of “look, I appreciate all the campaign contributions you give the party, but I’ve got all these pesky *voters* ringing my phone off the hook, and my e-mail box is choking, you really should know that some of these folks think you, (and I really don’t believe it for a minute) are taking advantage of people who don’t have a choice.

"Now, neither you nor I want to see that darn Windfall Profits tax back, now do we? So, why don’t you go and shake those spreadsheets, and see if you can find a “technical market correction” or something like that, OK?”

Well, even though the prices at the pump are starting to come down (see the AAA index here), it’s still a mystery if the prices will stay down.

However, “Big Oil” found itself in the public eye again this morning (Wednesday 11/09/05) as hearings are being held before Congress about the high profits the companies have been seeing.

And, to keep things in a little perspective, bear in mind the numbers quoted below from an LA Times story, are *quarterly* profits, not annual.

A move that, I think, is going to give as much fodder to Democratic advertising spots in the coming mid-term election cycle as one of Delay’s former aides calling the Christian base “whacko,” was the refusal of the Republicans to have the oil executives give testimony under oath.

From the LA Times article:

The chiefs of five major oil companies defended the industry's huge profits today at a Senate hearing where they were exhorted to explain prices and assure customers they're not being gouged.There is a "growing suspicion that oil companies are taking unfair advantage," Sen. Pete Domenici, R-N.M., said, opening the hearing in a packed committee room.

"The oil companies owe the American people an explanation," he declared.

Lee Raymond, chairman of Exxon Mobil Corp., said he recognizes that high gasoline prices "have put a strain on Americans' household budgets" but he defended his company's huge profits, saying petroleum earnings "go up and down" from year to year.

ExxonMobil, the worlds' largest privately owned oil company, earned nearly $10 billion in the third quarter. Raymond was joined at the witness table by the chief executives of Chevron, ConocoPhillips, BPAmerica and Shell Oil USA.

Together the companies earned more than $25 billion in profits in the July-September quarter as the price of crude oil hit $70 a barrel and gasoline surged to record levels after the disruptions of Hurricanes Katrina and Rita.

Raymond said the profits are in line with other industries when earnings are compared to the industry's enormous revenues.

But senators pressed Raymond to explain why in the aftermath of Hurricane Katrina some ExxonMobil gas station operators complained the company had raised the wholesale price of its gas by 24 cents a gallon in 24 hours. Is that not price gouging? They asked.

Raymond said he could not confirm the specific price increase, but that ExxonMobil had issued a directive in response to the storm disruptions "to minimize the increase in price while at the same time recognizing if we kept the price too low we would quickly run out (of fuel) at the service stations."

"It was a tough balancing act," said Raymond, who said it was not price gouging.

Democrats had wanted the executives to testify under oath, but Republicans rejected the idea.
"If I were a witness I would demand to be put under oath," said Sen. Daniel Inouye, D-Hawaii. The soaring prices have sent shivers through a Congress worried about political fallout


The head of the National Association of Manufacturers, former Michigan Gov. John Engler, criticized lawmakers for the way they handled the hearing."

Demagoguery and demonization will not reduce energy prices or solve supply problems in the long run," he said. "Our energy supply and infrastructure have suffered from 25 years of increasingly restrictive government policies that have made it almost impossible to access and refine the resources we have. The Senate should dispense with the theatrics and get serious about Americas energy supply."

// Sure, we just need to let the GOP give these guys some more tax breaks //

James Mulva, chairman of ConocoPhillips, said "we are ready open our records" to dispute allegations of price gouging. ConocoPhillips earned $3.8 billion in the third quarter, an 89 percent increase over a year earlier. But he said that represents only a 7.7 percent profit margin for every dollar of sales. "We do not consider that a windfall," said Mulva.

// Excuse me, but an 89% increase in profit sound like a “windfall” to me //

Raymond cautioned against Congress imposing "punitive measures, hastily crafted" -- an apparent reference to windfall profits taxes -- and suggested that they would inhibit investment in domestic energy projects. Both Republicans and Democrats have urged the companies to use more of their profits to build refineries and other energy projects.
David O'Reilly, chairman of Chevron, attributed the high energy prices to tight supplies even before the Gulf hurricanes hit and said his company is "investing aggressively in the development of new energy supplies."

The oil executives said their companies spend tens of billions of dollars in investments.
Shell earned $9 billion in the third quarter, said John Hofmeister, president of Shell Oil Co., but he said over the last five years the company's investment in U.S. operations was equal to its income from U.S. sales.

// And what is that number compared to world-wide sales? //

The oil industry's record third-quarter profits -- at a time when motorists were reeling from unprecedentedly high gasoline costs and warned of huge heating bills this winter -- have caught the attention of both Republicans and Democrats in Congress. Some analysts predict the 29 largest oil companies will earn $96 billion this year. "

Some video from the hearings can be found at Crooks and Liars.