Gas prices spur calls for action

Taxes on oil profits weighed; consumers urged to conserve

By JEFF MONTGOMERY, The News Journal - Deleware
Sunday, May 13, 2007

Homemaker Ruth Bennett used a simple, wholesome standard to sum up the burden of $3-per-gallon gasoline.

"When you compare the price of a gallon of gas to a gallon of milk, gasoline is right up there," said Bennett, who lives in the Glasgow area. "I think the price is going to keep going up and yes, it does hurt."

Across the country, record-high fuel prices have dipped deeper into the pocketbooks of unhappy consumers, prompting some lawmakers to threaten new taxes on oil-industry profits and bringing new scrutiny on an industry practice of charging different prices to gas stations depending on their location.

Although prices are expected to continue to hover just below $3 per gallon through at least the summer, a disruption in supplies or refinery production could bring a whole new shock.

"There's an almost endless list of things that could go wrong, that could get us to $6 or $7 gasoline," said Andrew Weissman of FTI Consulting in Washington.

"Even if we keep getting lucky, short-term, what I can tell you as someone who has spent his whole career focusing on these issues is, it's definitely going to get worse unless we take action now to create a better situation five or six years down the road," Weissman said.

Industry leaders blame high prices on a string of factors: record demand, rising global competition for crude oil, low gasoline inventories and limits to production capacity.

For consumers, however, there's one scenario that paints a clear picture: Record gas prices have meant record profits for the nation's refiners, including Delaware City refinery owner Valero.

"It's a reflection of supply and demand for gasoline," said Bill Day, a spokesman for Valero, the nation's largest refiner. Demand "has been very high." He deferred other questions to the American Petroleum Institute, a trade group.

Valero, the Houston-based refining giant, attributes recent record earnings in part to its use of cheaper-than-average crude oil and refining leftovers, which allows it to increase profit margins compared to competitors.

The leftovers, which come from less-sophisticated refineries in other parts of the world, have cost Valero $9 to $25 less than other types of crude in the past. Crude costs make up about half of the price at the pump.

Not all of those savings necessarily get back to consumers. Valero, which produces 70 percent of gasoline sold on the Delmarva Peninsula by one state estimate, has recorded a string of record profits, including a $1.1 billion quarter this year.

Last week, the price of a gallon of regular gasoline in Delaware was higher than New Jersey, where taxes are lower, and slightly lower than Maryland and Pennsylvania.

'Ambiguous' but legal

Even within Delaware, the price of gas can vary widely. A survey of prices found a range of more than $3 a gallon for regular unleaded at a Hockessin station to $2.80 a gallon at a station in Harrington.

While the prices are set by individual stations, they are also dictated by what refiners charge them. And to determine what they charge, some refiners employ a practice known as zone, or geographical, pricing.

Under the practice, refiners sell gasoline at prices that differ from one geographic area to the next. To determine how much to charge, refiners factor in demand, competition and traffic counts, population density and household income, among other considerations.

Valero's pricing practices have gotten attention recently in in San Diego, Calif., where a citizen group tracks gas cost variations closely.

"Few consumers know it, but virtually all gasoline prices are redlined by the pricing managers at the companies they buy their oil from. The industry calls this practice 'zone pricing,' but everyone else calls it 'redlining,' " said Charles Langley, a gasoline analyst for San Diego-based Utility Consumers Action Network.

"All of the major brands use zone pricing to prevent price wars between dealers. The practice also ensures when money is being made on gas that it stays in the pockets of the refineries," Langley wrote. "In other words, that extra 50 cents you are paying -- and more -- is going straight into the pockets of Big Oil."

The Federal Trade Commission has found the practice legal but "ambiguous."

In Connecticut, where lawmakers have repeatedly attempted to ban the practice, a bill is under consideration that would prohibit zone pricing. That legislation is joined by myriad bills and ideas from Washington to Dover that would impose taxes on oil companies or refineries.

Taxing tankers?

Congress has considered windfall profit taxes, which would levy a charge on excess profits from the oil industry. Similar legislation was enacted in 1980 after the increase in oil prices brought on by the Arab embargo. The taxes were repealed in 1988, with one congressional research agency reporting that the taxes backfired, discouraging production and increasing the nation's reliance on foreign oil.

Last week, a U.S. Senate panel approved comprehensive fuel economy legislation, supported by Sen. Tom Carper, D-Del., that would impose new controls on blatant manipulation of prices during weather emergencies or other major supply disruptions.

House Democrats last week promised even more-sweeping price-control measures.

In Delaware, some lawmakers are talking openly of taxing the fleet of tankers and barges that move up and down the Delaware River each year.

Tanker operators transfer more than 100 million barrels of oil to smaller vessels each year partway up the bay to make passage up the region's narrow shipping channel safer. Legislative staffers recently began researching prospects for a tax on that process, as well as the possibility of a gross-receipts charge on the business.

For critics of the massive profits oil companies are taking in, there's good reason for legislation.

"I don't think there's any social good to be gained by having oil companies make huge profits," said Anna Aurilio, a spokeswoman for U.S. Public Interest Research Group. "From a consumer fairness point of view, regulators should be looking at and Congress should be looking at whether there are any shenanigans when it comes to prices."

According to the Energy Department's Energy Information Administration, 24 percent of the price of gasoline is determined by the cost of refining and the associated profits. Another 17 percent is determined by taxes, 9 percent by distribution and marketing, and the rest by the cost of crude. Delaware's tax of less than 1 cent per dollar raises $20 million annually. High prices this year could raise an additional $5 million.

"Rising gasoline prices are a burden on U.S. consumers, but they cannot be viewed in isolation from the U.S. energy situation," John Felmy, chief economist for the American Petroleum Institute, said last week in a statement to the House Select Committee on Energy Independence and Global Warming.

Several mainline environmental groups, including the Natural Resources Defense Council, have avoided debates over fuel prices, preferring instead to educate a newly sensitized public on the need for fuel conservation and alternate energy sources.

"We haven't been following the price issue. Our focus has been on just increasing fuel efficiency, developing clean, low-carbon fuels and trying to ensure that any time we're dealing with energy issues, we're also dealing with global warming," said Jim Presswood, a spokesman for the NRDC.

Prices should stabilize, unless ...

In Southern New Castle County's Airmont neighborhood, north of Middletown, Charles Ott's concern over price increases has been growing for years.

"Gasoline wasn't a bargain at $1.99 a gallon, either," said Ott, who commutes 21 miles one way each day to a job in the chemical industry. "It just takes more out of my wallet and I cut back the number of trips."

Ott said he needs a larger vehicle for his family, limiting his ability to pursue a fuel-efficient ride. Gas-stingy and alternate-fuel vehicles aren't yet available to meet his needs and budget.

Although the summer driving season will keep prices near $3 a gallon, consumers shouldn't expect things to get much worse, at least in the short term.

"If the system works as it's supposed to work, we'll be OK," said Roger Read, an energy industry analyst with Natexis Bleichroeder.

"This will probably be the highest gas prices we'll see," he said. "They won't go a lot lower until the end of summer."

But "if the system is stressed, for whatever reason," Read cautioned, prices could swing upward again.

Events in Delaware and elsewhere last week underscored that warning. Steam tube leaks in one of the Delaware City refinery's larger units forced a 20,000-barrel-per-day cutback in production, an event that was quickly cited in industry news reports as a contributor to a slight uptick in gasoline futures prices.

Prices are further threatened by any spike in crude oil prices, which have stayed below record levels despite rising demand.

"Don't expect crude oil prices to stay where they are now for very long. They may well go up almost $10 a barrel pretty quickly," Weissman said "I think gasoline prices may go quite a bit higher, even from where they are now."

For consumers like Bennett, of Glasgow's Barrington neighborhood, high prices are cause for some adjustment, like a more fuel-efficient car to replace a 1995 model, and an airline flight instead of a long-distance road trip.

"There was a lot of public squawking last year, when prices were up," Bennett said. "You don't hear it too much this time. I think people are adapting. Combining trips and scraping up money and taking it from other places."