Canton Repository

April 14, 2004

Taking aim at record gas prices

By PAUL M. KRAWZAK
Copley Washington correspondent

WASHINGTON — With gasoline prices at record highs, lawmakers say they are looking for ways to ease the pain.

Earlier this month, Sens. Mike DeWine, R-Cedarville, and Herb Kohl, D-Wis., introduced legislation targeting the Organization of Petroleum Exporting Countries. Their plan, if passed by Congress, would allow the United States to prosecute the cartel for artificially increasing prices by limiting oil production.

Another bill, introduced by Sen. Ron Wyden, D-Ore., is aimed at domestic oil companies.

His legislation would instruct the Federal Trade Commission to monitor gasoline supplies in areas of less competition. In those markets, the FTC or U.S. Justice Department would be able to order oil companies to cease any practice that would limit competition, such as charging higher prices to independent dealers.

The average national price of a gallon of regular gas rose to $1.78 earlier this month, a record when unadjusted for inflation. High prices are expected to continue into the summer, averaging a record $1.76 a gallon, the Energy Information Administration projects.

Whenever gas prices rise, so do voter anxieties.

Gasoline price increases overshadowed other issues in a poll conducted by the Pew Research Center from April 1 through 4. Fifty-eight percent of adults said they were tracking rising gas prices very closely, compared to 36 percent who were following the recent attacks in Iraq.

Observers of Congress are skeptical that any major gasoline price legislation will become law.

DeWine introduced a similar proposal in 2000 and 2001, but it failed to win consideration on the Senate floor.

Economists identify rising crude oil costs as the primary culprit in higher gas prices.

Changes in crude oil prices account for 85 percent of the fluctuation in gas prices, FTC attorney William Kovacic said.

Other factors driving up the cost of gas include strong demand for gasoline in the United States and abroad, low gasoline inventories and more stringent gasoline specifications, according to the Energy Information Administration.

DeWine, chairman of a Senate antitrust subcommittee, entertained alternative explanations for high gas prices during a hearing last week.

Some believe that consolidation in the oil industry and a declining number of refineries have reduced competition, resulting in higher prices.

Mark Cooper, director of research at the Consumer Federation of America, charged that oil companies have deliberately restricted supply to raise prices.

DeWine’s bill would clear the way for prosecuting OPEC, an organization of 11 nations that meets periodically in Vienna to agree on production quotas in an effort to set price.

“OPEC is probably the most notorious example of an illegal cartel in the world today, even at a time when it is widely understood that such conduct is counterproductive and ill-suited for a global economy,” DeWine said.

The legislation has drawn support from a score of senators, including Dick Durbin, D-Ill., Barbara Boxer, D-Calif., Dianne Feinstein, D-Calif., and Arlen Specter, R-Pa.

Although it is legal to prosecute foreign companies for collusion, U.S. courts have held that foreign nations acting in their own interests are exempt from antitrust laws.

During a hearing last week, George A. Bermann, a Columbia Law School professor, expressed his view there are no impediments in the Constitution or international law to DeWine’s bill.

“Congress is free to carve out claims relating to oil, gas and petroleum products for separate treatment and to subject foreign states to liability only as to them,” he said.

Skeptics argue it would be difficult, if not impossible, to prosecute OPEC even with a law. They question how courts would compel testimony from or enforce judgments on sovereign nations. DeWine said the United States could exert pressure by seizing a foreign nation’s assets in this country.

In addition, critics said prosecuting a nation such as Saudi Arabia would interfere with foreign policy objectives, such as preserving alliances in the Middle East. Nations that were prosecuted might respond by charging that U.S. policies limiting exports of sensitive technology or restricting imports are anti-competitive.

For example, a nation might retaliate by suing the United States for limiting sugar imports, said Robert W. Crandall, an antitrust expert at the Brookings Institution.

Philip Verlager, an economist who specializes in energy markets, backs the DeWine approach.

“Quite probably, we ought to go after the various members of OPEC,” he said. “It’s rather inexcusable that these people can sustain oil prices 75 to 100 percent above market clearing prices and then come in and enjoy our places like Aspen and so on with impunity.”

Wyden supports the DeWine bill, but he also blames oil companies for high prices.

In areas where the four largest refiners control 70 percent or more of the gasoline market, the Wyden legislation would prohibit refiners from favoring oil company-owned retailers and discriminating against independent stations unless they could prove it didn’t hurt competition.

Cooper, who backs the Wyden plan, contends that oil companies have discovered a way to increase prices without engaging in illegal collusion. By closing refineries and reducing inventories, they have reduced supply and made gas more expensive, he said.

For evidence, he points to a report by RAND, a think tank, which documented the oil industry’s elimination of excess capacity.

“For operating companies, the elimination of excess capacity represents a significant business accomplishment,” said the report, which noted that the industry blamed overcapacity for low profits in the 1980s and 1990s.

Although oil companies have benefited from restructuring, the report said for consumers, “the elimination of spare downstream capacity generates upward pressure on prices at the pump and produces short-term market vulnerabilities.”

RAND economist Mark Bernstein stopped short of accusing the oil industry of manipulating supply to drive up prices.

“Many industries have gone to just-in-time inventory ... for a variety of productivity reasons,” he said. “The oil industry seems to be going in that direction.”

DeWine said the jury’s still out on whether increasingly concentrated gasoline supplies have contributed to higher prices.

“I haven’t heard any compelling testimony on the issue,” he said.