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Friday, June 8, 2012 - Page updated at 09:00 p.m.
Cantwell, analyst target refinery production cuts
By Kevin G. Hall
WASHINGTON — West Coast oil refiners cut gasoline production this year after a fire at BP's Cherry Point plant in Whatcom County, creating a supply shortage that's left West Coast motorists paying inflated prices at a time when the rest of the nation is enjoying a windfall at the pump, according to Sen. Maria Cantwell and an energy analyst.
In a letter sent to regulators Thursday, the Washington Democrat calls on the Federal Trade Commission (FTC) to investigate refinery operators Alon, Chevron, ConocoPhillips, Shell, Tesoro and BP.
Citing a report by energy consultant McCullough Research — a group that helped topple energy-trading giant Enron — Cantwell questioned why May gasoline prices in Washington state soared to within cents of the local record of $4.35 a gallon set in July 2008. At the same time, gasoline prices nationwide in May fell 17 cents a gallon and oil tumbled more than $14 a barrel.
The McCullough Research report, published Tuesday by the group based in Portland, Ore., questioned whether the historically low gasoline inventories on the West Coast were really a result of the Feb. 17 fire that idled BP's Cherry Point refinery for about three months.
West Coast gasoline prices had tracked closely with the price of West Texas intermediate crude delivered at Cushing, Okla., but veered widely from historical norms in May, according to the report.
Had prices followed supply costs, said the report's author, Robert McCullough, retail gasoline prices on the West Coast would have dropped to about $3.51 a gallon. Instead, prices have been about 77 cents higher.
"The sudden price shift has provided a significant windfall for refineries and retailers on the West Coast," the report said, adding that at a differential of 77 cents a gallon, "this translates into a windfall profit of $48 million a day."
In an interview, McCullough was skeptical that the price increase is due to necessary plant maintenance and repairs at West Coast refineries — which are few in number and thus enjoy tremendous pricing power. He stopped short of alleging collusion, but he noted U.S. Energy Information Administration data that show a steep drop in West Coast gasoline inventories in late April and May.
"The West Coast is a gasoline island," McCullough said. "Since there is very little transportation of gasoline between the West Coast and the rest of the United States, it's not clear you even need to have collusion to influence prices here. When you do not have enough competition, economists describe that as pivotal suppliers. On the West Coast there are so few players, so it's not difficult for refiners to view themselves as pivotal suppliers."
McCullough's research implies supply was withheld to keep prices inflated.
"The question is not whether there was a fire at Cherry Point. It's whether everybody else in the refining market also shut down capacity to create a shortage," Cantwell said. "We want answers, and my constituents want answers. We think this is an anomaly without a good explanation."
Cantwell, McCullough and industry critic Consumer Watchdog, based in California, questioned the timing of the cut in production. Apart from the Cherry Point closure, the list of production reductions includes: Tesoro's refinery in Martinez, Calif., repairing a hydrocracker, a high-pressure processing unit, from May 2 to May 13; Shell's refinery in Martinez undergoing maintenance from April 27 to May 16; Chevron scheduling seasonal maintenance in Richmond, Calif., on May 28; Alon's hydrocracker restart in Bakersfield, Calif., on April 20; and BP's Carson, Calif., plant undergoing flaring operations from May 15 to May 21.
Also affecting supply was a fire at the ConocoPhillips refinery in Rodeo, Calif., on April 25, and an unspecified and undated production problem at Tesoro's Anacortes refinery.
"Consumer Watchdog has suspected, with good reason, that refiners, particularly in the West Coast, use their outages to keep prices high," said Judy Dugan, director of research for the group, which advocates more regulation of the energy sector. "We have called for at least state regulation that would oversee refinery outages. They can do anything they want for any reason."
Cantwell in recent years has fought for legislation that limited how much of the oil market can be controlled by financial speculators and has pressed the FTC to look more closely at refiners.
In her letter to the agency, Cantwell said the Cherry Point fire shouldn't have led to record-low inventory levels "unless other West Coast refiners failed to undertake actions that could have made up for the supply shortage resulting from the Cherry Point accident. The reasons why six other West Coast refiners simultaneously reduced operations are not well documented."
The only operational reduction that appears to have been announced in advance was BP's flaring operation at its Carson, Calif., refinery. BP spokesman Scott Dean said Wednesday that the work at the California refinery was scheduled before the Cherry Point fire and vowed his company would cooperate with any federal probe.
Tesoro spokeswoman Tina Barbee declined to address the allegation of market manipulation, but she said the refiner performs "routine planned maintenance on a regular basis, as needed, to ensure the safety and efficiency of our operations. It is long-standing Tesoro policy, for proprietary and competitive reasons, not to discuss specific maintenance scheduling or activities."
The Western States Petroleum Association — a Sacramento, Calif.-based trade association for energy companies on the West Coast — denied the allegation.
"Sen. Cantwell has, in the past, made similar requests for investigations, and there have been literally dozens of investigations into pricing of petroleum products on the West Coast and elsewhere in the last dozen years. And all of those have found that market factors are the dominant explanation for changes in product prices," spokesman Tupper Hull said. "And none of those have found that manipulation of the market has occurred."
One explanation for the findings of past probes, said Cantwell and McCullough, is that the FTC has not moved as aggressively to police refiners and the wholesale gasoline market in a way that the Federal Energy Regulatory Commission (FERC) has policed utilities and natural-gas trading. The FERC toughened its approach after the finding of manipulation in electricity markets by Enron and its competitors.
Cantwell's letter asked the FTC whether its Gasoline and Diesel Monitoring Project detected anomalies in West Coast pricing, and asked how the agency will obtain market data to make its determination.
The FTC also was asked to offer an opinion as to whether West Coast refiners enjoy a market concentration that allows them too much pricing power.
If the FTC does open a probe, the focus likely would be on why so many refiners slowed production at a time when a big supplier was sidelined.
"It would be useful to find out were these maintenance and repairs scheduled or unplanned," McCullough said.
Refiners disputed the notion that scheduled maintenance or repairs can be postponed easily.
"This isn't going in and polishing some door handles," Hull said.
Gasoline prices (Per gallon, unleaded regular) Thursday Week ago Month ago National average $3.56 $3.62 $3.76 Washington $4.23 $4.28 $4.08 Seattle-Bellevue-Everett $4.29 $4.34 $4.10
Source: AAA Daily Fuel Gauge Report
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