Accusations Fly Over Fuel Costs

Tuesday, June 20th 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — With gasoline prices soaring, there's been no shortage of blame — rising oil prices, pipeline problems, short supplies, cleaner gasoline requirements and even an esoteric patent dispute, to name a few.

But an examination of these explanations provides no clear picture of why gasoline in a matter of a few weeks jumped as much as 50 cents a gallon in some areas of the Midwest — nearly five times as much as increases nationwide.

The summer price surge has politicians worried in this election year. The Clinton administration has asked the Federal Trade Commission to investigate possible illegal price gouging in the Midwest, and Vice President Al Gore said Monday that a broader probe was needed since oil companies have been making huge profits this year.

White House press secretary Joe Lockhart said Tuesday despite ongoing investigations ``we can't find a legitimate reason'' for the $2-plus price for gasoline in the Chicago-Milwaukee area and a scattering of other places in the Midwest. He said industry's claim that cleaner-burning gasoline is to blame ``doesn't stand the test of logic.''

Energy Secretary Bill Richardson said the price differential between conventional gasoline and the cleaner fuel required beginning this month in areas with the worst summer smog ``has not been explained'' sufficiently by the industry.

``The oil companies, the refining companies need to explain ... why prices are so high,'' Richardson said after addressing a meeting of oil executives, where he expressed renewed concern about tight gasoline supplies.

George W. Bush's GOP presidential campaign, meanwhile, blamed Gore and President Clinton.

``It sounds like Al Gore is now trying to divert attention away from the Clinton-Gore administration's failed leadership when it comes to addressing high gas prices and developing a national energy policy,'' Bush campaign spokesman Scott McClellan said.

Elsewhere, a number of economic and regulatory explanations are being offered for the run-up in gasoline prices. Here are a few.


After hitting a peak of $34 a barrel, oil prices declined in April after the Organization of the Petroleum Exporting Countries agreed on production increases. But, in a surprise to some analysts, oil prices rebounded and were back up to about $30 a barrel by mid-May and June. That prompted gasoline prices to edge up nationally, but only by about 4 cents a gallon in the last two weeks of May. The crude oil price increases, however, do not explain the much steeper increases in parts of the Midwest, especially in the weeks after Memorial Day.


During most of May and into June, stocks of gasoline have been nearly 10 percent lower than during the same period a year ago and on the low edge of a range considered adequate. It is a precarious situation with the start of the heavy summer driving season. But low stocks have meant profits for refineries. Refinery margins in May were on average 20 cents a gallon, three times what they were a year ago when stocks were high, according to government figures.

Officials have said some refiners were slow in revving up production this spring, waiting for lower oil prices — which never came — to build up inventories, meaning more of a profit margin. In early May, federal officials raised concern that refineries were not producing fast enough.


In March, the 1,400-mile Explorer pipeline, which carries gasoline into St. Louis and the Chicago area, sprang a leak and was shut down for five days. Oil companies have cited the break repeatedly as a reason for supply problems and price increases in the upper Midwest. It's a claim disputed by the pipeline company.

``The market should have adjusted to that months ago,'' insists Rod Sands, vice president of operations at Explorer Pipeline Co. He said while five days of shipments were lost, the line has been sending at full capacity since March. The pipeline is only one of a number serving the upper Midwest.

Two weeks ago a pipeline in Michigan had a break and was out of commission for nine days. Gasoline prices in the Detroit area soared to $2 a gallon afterward. Industry critics say the ``just-on-time inventory'' practices, a policy adopted by the oil industry years ago to save storage costs, has eliminated traditional supply cushions that in the past eased the price impacts from temporary transportation problems.


The oil industry blames much of the price spikes this summer on a requirement for a cleaner-burning blend of reformulated gasoline in areas with severe summer smog. They say the costs of making the gasoline — about a third of all gasoline sold — is higher than anticipated because of blending problems, especially where corn-based ethanol is used as an additive. While it allows fuel to burn cleaner, ethanol releases more evaporative emissions, requiring other components of the gasoline to compensate to meet the new requirements. This makes gas blending more difficult and expensive, although how much is a matter of great dispute.

And some refineries have not retooled to make the new blend, adding to the supply problems, industry officials say. This has left Environmental Protection Agency officials and some state regulators frustrated because, they maintain, oil companies have been planning for the new gasoline for more than a year but made no mention of problems that would cause prices to skyrocket or lead to a supply crunch.

``There is no reason that this should be a surprise,'' said William Becker, executive director of a group representing state air pollution control officials.

The cleaner-burning gasoline is costing consumers 5 cents a gallon more on average than conventional gasoline, although the gap is four times that much in the Midwest, mostly Chicago, Milwaukee and St. Louis, where prices have jumped 30 cents to 50 cents a gallon.

But according to the AAA, many other cities that require the cleaner blend gasoline (though not ethanol) showed only modest price increases over the past month. For example: Houston, the average price of a gallon of regular unleaded was $1.54, compared with $1.48 a month ago; Boston, $1.64 versus $1.53 a month ago; New York City $1.72 and $1.54; and Philadelphia, $1.58 versus $1.47 a month ago.


Although not generally known, motorists also are paying a premium because of a little-known patent dispute involving the blending of the cleaner gasoline. In March, a federal judge upheld the validity of a patent for a particular blending process held by Unocal Corp. Six California refineries are under orders to pay Unocal a nickel for every gallon of gasoline made by Unocal's process. Refiners across the country are worried the same could apply to them, so they are either using more expensive alternatives, or — some industry critics surmise — may be passing some cost on to customers in anticipation of having to settle with Unocal in the future.