-
- "The direct flow out of consumers pockets in the
Midwest into the coffers of the oil companies was staggering. Just the
increase in estimated refinery profit margins during the 2nd quarter of
2000 compared to the same period in 1999 equates to a whopping $374.4
million out of motorists pockets in the state of Illinois by itself.
-
- "To clarify, this does not count the increase in
pump prices occurring world wide from increasing crude prices. Nor does
this amount reflect the increased prices paid by consumers in other Midwest
states also adversely effected by higher prices in the spring and summer
of 2000. The $374.4 million is only the estimated increased profits at
the refinery side of the ledger on sales for a 90 day period in the single
state of Illinois.
-
- "When considering the full impact of the price
spike on the economy of the region (versus the direct impact on motorists
shown previously), it is important to note the cash did not stay in the
region. The cash flowed directly south from the pump into oil company
accounts in Texas, Saudi Arabia, London, and Venezuela in a fashion that
mirrored the movement of fuel inventories shipped out of the region.
-
- "It is vital to observe the behavior of major oil
companies following the federal government releasing strategic crude reserves
and Congress establishing a heating oil reserve to hopefully avert a major
price in heating oil in the NE in the fall of 2000. Oil companies have
purportedly reduced the level of imported crude by an amount nearly equivalent
to the barrels released from the strategic reserve. There have been reports
that a fleet of ships carrying heating oil just sailed out of ports on
the Gulf and Atlantic coasts headed for foreign destinations and the draw
down of heating oil inventories in the NE is underway. Regulators and
legislators must focus their attention on the serial attempts by major
oil companies to use exports as a tool to drive fuel prices far higher
than the market should allow." _____
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- Causes And Effects Of The Recent Midwest Gas Price Spike
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- Report Authored by: Tim Hamilton Petroleum Industry Consultant
608 Columbia SW Olympia, WA 98501 (360) 943-6695
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- Report Commissioned for: The Foundation For Taxpayer
and Consumer Rights 1750 Ocean Park Boulevard, Suite 200 Santa Monica,
CA 90405 http://www.consumerwatchdog.org Jamie Court - Executive Director
(310) 392-0522, Ext. 327
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-
- Executive Summary
-
- In 1990, Congress passed the Clean Air Act. In accordance
with the Act and subsequent amendments, the Environmental Protection Agency
(EPA) mandated that cleaner burning fuels called reformulated gasoline
(RFG) be introduced in areas with severe air quality problems.The reformulated
gasoline program used a two-step process.
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- Beginning in 1995, "Phase IRFG " would be introduced
in the Dallas/Houston area of the Southeast, Chicago/Milwaukee area of
the Midwest, and approximately 85% of the entire New England/Mid Atlantic
coastal regions. Beginning in June of 2000, Phase II RFG would replace
the older formula. One of the major differences between the interim Phase
I formula and Phase II replacement was the blending of increased amounts
of oxygenates to further lower tail pipe emissions.
-
- The EPA approved the use of either ethanol or methyl
tertiary-butyl ether (MTBE), leaving the choice to the companies. The decision
on which alternative to use required careful consideration as the motor
fuel base stock would have to be refined differently depending on which
oxygenate was chosen. It also required coordination between the competitive
companies since they often store their fuels in the same tanks and the
two fuels could not be co-mingled without losing certification by the EPA.
-
- In the SE and NE regions of the country, the oil companies
decided to opt for the MTBE formulation. Due to tax advantages and the
availability of low-cost ethanol in the Midwest, the oil companies opted
to use an ethanol formulation in the Chicago/Milwaukee area. The oil companies
could have begun production and the introduction of Phase II gasoline at
any time of their own choosing. However, to ensure compliance, the EPA
set certain deadlines.
-
- Storage tanks were to be flushed of the previous formulations
no later than May 2000. By no later than June 1st, the system was to be
free of older formulation and the new Phase IIgasoline was to flow from
all nozzles at service stations by June 1, 2000.
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- Despite the five year lead time and mandated schedules,
all did not go according to plan. A leak in March 2000 in the Explorer
pipeline connecting the Midwest with refineries in Texas slowed shipments.
Concerned over the possibility of low inventories, gasoline marketers in
the Midwest petitioned the EPA to delay implementation of Phase II gasoline.
The oil companies opposed the delay request as BP/Amoco, Koch, and Exxon
Mobil repeatedly assured the EPA in writing and other conversations that
inventories were adequate (see Chicago Tribune, 10/08/2000). However, inventory
levels in storage tanks throughout the Midwest were at critically low levels
by April. A shortage, without actual lines at the pumps, hit and by the
end of May consumers were in sticker shock throughout the Midwest.
-
- The author of this study gathered information from a
wide variety of public and private sources. Public information sources
included the US Energy Information Administration (EIA), Environmental
Protection Agency (EPA), US Department of Transportation (Maritime Administration)
and the Office of Pipeline Safety, and the US Department of Labor Statistics
(Consumer Price Index). Examples of private sector public sources included
web sites ofcompanies and trade associations in the petroleum industry.
Pricing data and reports were acquired from commercial services such as
Oil Price Information Service (OPIS) and National Petroleum News (NPN).
An outside consulting firm was secured to search customs documentsfor imports
and exports of crude or refined petroleum products out of ports in the
United States.
-
-
- Following a review of all the available information
and data, the author came to the following conclusions:
-
- * The price spike in the Midwest was not the result
of increased refining costs required in the production of cleaner burning
"green fuel" (Phase II RFG)
-
- * OPEC production cuts and the increasing world price
of oil had little to do with the higher prices in the Midwest compared
to other regions of the United States
-
- * The main cause for the price spike was a draw down
in conventional and RFG gasoline inventory levels in the Midwest just
prior to the introduction of Phase II RFG
-
- * The draw down was a result of direct actions or,
in some cases, inactions of the oil companies doing business in the Midwest
and Gulf Coast regions just prior to the price spike including:
-
- a. Transferring 375 million gallons of gasoline out
of Midwest storage to other parts of the nation during the first quarter
of 2000 (data source=EIA)
-
- b. Sending 38% of the transfers south to Texas and
Louisiana, states with refinery surpluses that historically ship
the other way and supply 25 % of the gasoline consumed in the Midwest
(data source=EIA)
-
- c. Transferring approximately 54.6 million gallons
of RFG gasoline south during April through June 2000 at the same moment
the RFG price spike was underway in Chicago and Milwaukee (data
source=EIA)
-
- d. Increasing exports directly from Midwest storage
to destinations outside the country (mainly Canada) by an additional
32.6 million gallons compared to the same period in the previous
year (data source=EIA)
-
- e. and Led by the same companies spiking prices in
the Midwest (ExxonMobil, Shell, Texaco, and Coastal), over 280
million gallons of gasoline was loaded on ships in Gulf port cities
for export to Venezuela, Philippines, Chile, and Mexico at the
same moments inventories in the Midwest were drawing down to critical
levels (source: searches of import/export database, Journal of Commerce)
-
- * The price spike was extremely harmful to the consumers
and economy of the Midwest ($374.4 million in direct and $1.1 billion
overall economic impact in Illinois alone during a 90 day period).
-
- * The increased prices at the pump were nearly pure
increased profit margins for the oil companies.
-
- * Even as the draw down of inventories was underway,
the oil companies repeatedly issued oral and written assurances to the
Environmental Protection Agency (EPA) that inventories were at adequate
levels when in fact the inventories were down to critically low levels
-
- * While the industry was capable of producing gasoline
in volumes well beyond the needs of the region, the oil companies chose
not to cease the extra exporting and restore the inventory levels in the
Midwest until after the prices spiked
-
- * If actions are not taken by elected officials, consumers
in the Midwest can expect to pay $3.6 billion more annually for gasoline
in the future compared to their counterparts in the SE and Gulf region.
-
-
- Further, FTCR and the author decided to jointly recommend
that state and federal officials launch a bipartisan effort to:
-
- * Adopt a single nationwide standard for gasoline formulations
so oil companies can no longer manipulate inventories in a manner that
creates price spikes.
-
- * Close loopholes in antitrust laws and commodity trading
laws to provide for prosecution of individuals and corporations involved
in the creation of price spikes;
-
- * and Pass measures to control the flow of crude and
refined product exports to ensure that the multinational oil companies
do not abuse the interests of this nation and its citizens.
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-
-
- Source: http://www.consumerwatchdog.org/ftcr//pr/pr000771.php3
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