Consensus on cost of gas hard to reach |

Consensus on cost of gas hard to reach

Cliff Thompson

If you think the price of gas at times seems criminal, you’re not alone.This week in Vail the top prosecutors from Western states discussed just that at their annual meeting at the Vail Marriott. Speakers included oil company representatives, attorneys general and attorneys who have litigated oil issues.”It’s a dysfunctional system,” said Bill Lockyer, California attorney general. “It’s an oligarchy. Seven companies control 90 percent of the refining capacity for the West. Why is it that between December ’03 and February ’04 that (profit) margin jumped 64 percent?”Lockyer said there have been no verdicts proving collusion on the part of oil companies or refineries despite nearly 30 lawsuits filed in the last decade by states attempting to prove it occurred.”No evidence of collusion,” he said. “Doesn’t mean it didn’t occur. We couldn’t prove it. Supply and demand are in a tenuous balance.”But oil executive Colleen Cervantes of Chevron Texaco said the perceived high cost of gasoline is the result of market forces.”We’ve got unprecedented demand,” said Cervantes. “Even modest supply disruptions can have widespread price impacts.”Cervantes said refineries across the country are operating near capacity and that 60 percent of the fuel processed is imported. “Western demand is growing at 1.8 percent per year,” she said. “Our (domestic crude oil) capacity to grow is less than that. That means more imports.”Complicating the picture is the fact that individual states require specialty “boutique fuels” to prevent smog and to comply with federal clean air standards, Cervantes said. Those specialty fuels require refineries, already working at capacity, to stop, retool and then start again, slowing production.”It breaks up the supply chain,” she said.Free markets or regulated?Building new refineries is both difficult and expensive because it can take years just to receive a permit for a new refinery. Cervantes told the assembled attorneys general that a free market will work best.”Since the spike, demand decreased and prices have lowered,” said Cervantes, “The free market worked. Government needs to step away from the pump and let the free market operate.”But attorney Spencer Hosie, who has litigated against oil companies on behalf of states, said he thinks the free market is being manipulated.”West Coast gas wholesale margins are abnormally high,” he said. “They are two to three times greater than wholesale margins everywhere in the country.”What happens when markets don’t work?” he said.Hosie suggested the oil companies operate under a system of “disciplined competition,” whereby oil companies understand that “price competition serves all ills,” he said. Hosie said he believes there is some collusion, but that it is difficult to prove.He suggested states like California create strategic reserves of fuel that could be “trickled out” during price spikes to help moderate prices.”The state could own a terminal that could take the tip off of price spikes,” he said. “This is not about short supply. We’re awash in gas.”But Cervantes said creating such a reserve would require enormous storage capabilities.So what can be done to help relieve the situation?”It’s time to consider taking a serious look at (removing) the federal gas tax,” said Mark Brnovich, who heads the center for Constitutional Government at the Goldwater Institute, a conservative think tank. “It was designed to complete the federal highway system during the Eisenhower administration. Now it’s used for pork projects.”That federal tax alone adds 18.4 cents to the price of a gallon, Brnovich said.Still cheap, sort ofBut all speakers were careful to provide some perspective on gasoline prices.Cervantes said that when today’s average $1.89 a gallon prices are compared to prices two decades ago, they’re cheaper – by far. Adjusted for inflation, that gallon of gas purchased in 1981 would now cost $2.79 a gallon. But all agreed the supply-demand issue will get worse before it improves. Even the use of fuels such as ethanol, produced from agricultural products and designed to create cleaner-burning fuels, take so much fossil fuel to produce and transport that it offsets the clean air benefits, Brnovich said.And demand isn’t going to level off any time soon. In California alone, there will be 15 million new vehicles on the roads in the next decade, Lockyer said.”Low cost oil,” Cervantes said, “doesn’t exist any more.”Cliff Thompson can be contacted via e-mail at or by calling 949-0555 ext. 450.

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