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NPRA Testimony Cites Progress Made in Katrina's Aftermath, Calls for Policy Changes to Add Supplies of Oil/ Oil Products/Natural Gas

Posted on: Wednesday, 21 September 2005, 12:00 CDT

U.S. Energy Policy Should Rely on Market Forces and Encourage More Refining Capacity

Bob Slaughter, President of NPRA, the National Petrochemical and Refiners Association, today testified before the Senate Committee on Commerce, Science and Transportation on the many factors influencing energy pricing and related issues in the aftermath of Hurricane Katrina. In the testimony, he pointed out that it is important to remember that the hurricane's effect was an overlay on a pre-existing condition that was and is a situation characterized by high crude prices, strong demand for gasoline, diesel and other petroleum products, and a challenged energy infrastructure, especially refining.

"The damage left in Katrina's wake made the already troubling supply and price situation significantly worse. The market pricing system did work in the aftermath of the disaster. Crude oil and many product prices were in the process of retreating toward pre-Katrina levels by the end of last week, in spite of the fact that considerable offshore crude production remains out of service and about 5% of U.S. refinery capacity is still not operating due to storm damage," said Slaughter.

Slaughter pointed out that the overwhelming factor affecting gasoline and distillate prices is the supply and price of crude oil. Crude prices have been steadily increasing since 2004, largely due to strong growth in oil demand in China and India as well as in the U.S. The result: world demand for crude is bumping up against the worldwide ability to produce crude. "Strong demand for crude has dissipated the cushion of excess available worldwide oil supply, just as strong U.S. demand for refined products has eliminated excess refining capacity in the U.S.," explained Slaughter.

Gasoline costs closely track the cost of crude oil. Before Hurricane Katrina, gasoline price increases actually lagged crude oil price increases on a gallon-for-gallon basis. This means that refiners did not pass through all of the increased costs of their raw material - crude oil. Crude oil accounts for 55-60% of the prices of gasoline seen at the service station. The cost of federal and state taxes adds another 19% to the cost of a finished gallon of gasoline. "Therefore under normal conditions, 74-79% of the total cost of a gallon of gasoline is pre-determined before the crude is delivered to the refiner for the manufacture of gasoline," detailed Slaughter.

Slaughter stressed the importance of relying on market forces to balance supply and demand during this difficult period and reminded the committee about the nation's 10-year experiment with market intervention, mainly energy price controls, that went so far wrong in the 1970s. He cited an extensive U.S. Federal Trade Commission study published in June 2005 that stated: "Gasoline supply, demand and competition produced relatively low and stable annual average real U.S. gasoline prices from 1984 until 2004, despite substantial increases in U.S. gasoline consumption" and "...For most of the past 20 years real annual average retail gasoline prices in the U.S., including taxes, have been lower than at any time since 1919." Mr. Slaughter added, "Interference in market forces always creates inefficiencies in the marketplace and extra costs for consumers."

As for reports of price gouging during the current crisis, Slaughter pointed out that federal and state laws prohibit such actions. Slaughter urged that "Each alleged situation should be thoroughly investigated by the appropriate state and federal authorities and prosecuted when the law has been broken." Slaughter went on to say industry activities have been scrutinized in similar past situations but no anticompetitive behavior has been found. "More than two dozen federal and state investigations over the last several decades have found no evidence of wrongdoing or illegal activity on our industry's part."

Slaughter cautioned that recent refining industry profits should be kept in perspective. The refining sector of the oil and gas industry has historically received little return on investment. From 1993-2002, average return on investment in the refining industry was only about 5.5%. This is less than half of the S&P industrials average return of 12.7% for the same period. The FTC June 2005 study cited earlier had the following comments on industry profits: 'Recent oil company profits are high but have varied widely over time, over industry segments and among firms...Profits also compensate firms for taking risks, such as the risks in the oil industry that war or terrorism may destroy crude production assets or, that new environmental requirements may require substantial new refinery capital investments."

Slaughter concluded by recommending that increasing the nation's supply of oil, oil products and natural gas should be the number one public policy priority. Congress should give renewed attention to energy supply problems and encourage refinery capacity additions by eliminating disincentives to refining investment.

Congress should also review the permitting procedures for new refinery construction and capacity additions, and seek ways to encourage state authorities to recognize the national interest in adding domestic capacity. Finally, Congress should keep a close eye on several upcoming regulatory programs that could significantly impact gasoline and diesel supply, including implementation of the ethanol mandate (RFS) in the recently passed energy bill, implementation of the ultra-low sulfur diesel highway diesel regulation, Phase II of the Mobile Source Air Toxics rule for gasoline and, very importantly, changes in the implementation schedule for the new 8-hour ozone NAAQS standard.

Finally, Slaughter urged that restrictions on offshore production of U.S. oil and natural gas reserves be lifted. "Policymakers have restricted access to much-needed offshore oil and gas supplies in the eastern Gulf and off the shores of California and the East Coast. These areas must follow the example of Louisiana and many other states in sharing these energy resources with the rest of the nation because they are sorely needed."

NPRA is a national trade association with more than 450 company members, including virtually all U.S. refiners and petrochemical manufacturers.

Source: Business Wire

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