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US: Domestic Oil Companies, Not OPEC, Mostly to Blame for High Gas Prices

Consumers Union
April 7th, 2004

In testimony today before the Senate Judiciary Committee's antitrust subcommittee, two leading consumer groups placed much of the blame for higher gasoline prices on domestic oil companies. The groups noted that consolidation in the refining industry has enabled large oil companies to restrict the supplies that make it to the pump, sending gas prices higher and leading to windfall profits.

"Blaming high gas prices on high crude oil prices ignores that fact that over the past few years, the domestic refining and marketing sector have imposed larger increases on consumers at the pump than crude price increases would warrant, said Mark Cooper, director of research at the Consumer Federation of America. "While OPEC's tightening of supplies hasn?t helped the situation, a lot of the blame rests with American oil companies squeezing more and more profit out of American consumers."

According to Consumers Union and the Consumer Federation of America, the gasoline refining and marketing segments of the domestic industry have increased pump prices by $50 billion to $60 billion in the past four years. This is apart from any price increases brought on by the Organization of the Petroleum Exporting Countries (OPEC) tightening supplies. This means that up to $60 billion of after-tax windfall profits have gone to the domestic petroleum industry over that period.

Much of this windfall can be attributed to a wave of mergers in the 1990s that dramatically increased concentration of the industry into the hands of a small number of giant companies, whose decisions restricted capacity, undermined independent suppliers and rendered markets uncompetitive and vulnerable to manipulation.

"With the oil companies exerting so much power over the market, it's difficult to bring prices down in the short-term," said Adam Goldberg, policy analyst with Consumers Union, who is urging the federal government to shine a spotlight on industry practices. "One way to discourage market manipulation is to institute a windfall profits tax. As long as huge windfall profits can be made, private sector market participants will have a strong incentive to keep markets tight."

"In the long-term, policymakers should concentrate on breaking OPEC's pricing power," Cooper continued. "That would relieve a lot of the pressure from consumers energy bills. But that alone isn't enough to get the oil industry to start pricing gasoline at the pump fairly."

Other long-term solutions proposed by the consumer groups, include:

-Restoring reserve margins by increasing both fuel efficiency (demand-side) and refining production capacity (supply-side)

-Increasing market flexibility trough stock and storage policy

-Discouraging private actions that make markets tight and/or exploit market disruptions by countering the tendency to profiteer by withholding of supply

-Promoting a more competitive industry.

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