The CU/CFA report not only backs up findings of a Government Accountability Office report, issued in May, that mergers are responsible for higher oil and gas prices, but says the report doesn't go far enough in targeting the increasingly consolidated oil industry's strategy to keep prices high. The GAO said in its report "that oil industry mergers and increased market concentration generally led to higher wholesale gasoline prices."
One of the most dramatic findings of the report was that U.S. consumers have been hit by an average $1,000 increase in total annual fuel or energy costs during the past four years, for a total of $500 billion in extra expenditures nationwide. At the same time, the oil and gas industry's after-tax profits were $100 billion higher during 2000-2004 than they were from 1995-1999. Only one-quarter of profits were invested back into exploration and development, the report said, and also the rate of production from existing reserves has declined.
A spokeswoman for industry group the American Petroleum Institute called the report "way off base," while the FTC, which had issued an earlier rebuttal to the GAO report, declined to comment on the CU/CFA study.
"After nearly two decades of the Federal Trade Commission pursuing a policy of allowing massive consolidation in the oil and gas industry, the last five years has seen the prices that consumers pay for gasoline, natural gas, heating oil, and propane soar," the CU/CFA report said.
As evidence, the report notes that the domestic "spread," or pump price of gasoline minus crude oil costs and taxes, was just under 40 cents per gallon during the latter half of the 1990s, but started rising and has averaged 50 cents per gallon from January 2000-June 2004. Similarly, the domestic spread of crude oil rose from $17.40 per barrel in 1995-1999 to $26.75 per barrel between 2000-2004, the report said.
Even Federal Reserve Chairman Alan Greenspan was recently quoted in the Wall Street Journal saying that "unusually wide gasoline retailer's margins" have played a role in the price hikes.
The CU/CFA report also said the FTC, in allowing the mergers, has set the stage for market abuse, since market forces -- meaning the ability of consumers to cut back as well as the ability of producers to increase output -- is so weak that market power can be exercised at much lower levels of concentration.
"Energy is a necessity of daily life. Consumers cannot radically alter their energy needs in the short term ... energy markets are vulnerable to abuse, leaving consumers at the mercy of price increases," the report said.
"Operating stocks to meet demand and cushion price swings have declined to very low levels ... generally in the range of a couple of days, compared to four or five days in the early 1990s and over a week in the 1980s."
Adam Goldberg, policy analyst with Consumers Union, publisher of Consumer Reports, said it's not just the FTC that needs to change its approach to the energy-price issue.
"The Federal Energy Regulatory Commission needs to quit dragging its feet in its investigation of price manipulation, and it needs to make sure the gas markets are functioning properly," Goldberg said. "And Congress has to drop its misguided energy proposals that reward oil companies with subsidies for exploration that they should be conducting with the massive profits they're now making."
The CU/CFA report recommends several public policy changes, including a change in FTC's merger review process to stop further consolidation that would result in decreased competition and higher prices for consumers. The groups also recommend stock and storage policy be changed so that minor disruptions and reduced storage do not lead to price spikes; an increase in the nation's refinery capacity to better meet demand; and most important, an increase in automobile fuel efficiency standards.
But Rayola Dougher, API senior policy analyst, said the report was baseless.
"The report has been discredited quite a bit (by the FTC)," Dougher said. She cited statements by former FTC head Timothy Muris calling the report "fundamentally flawed," as well as a counter-report by the FTC that stated refining capacity and competition has not been reduced due to mergers. She also pointed out that the profit average of the industry is right around the U.S. industry average, "around a nickel for every dollar earned." She also pointed out that the FTC regulates oil industry mergers more rigorously than any other industry.
API financial statement data for companies in the oil/gas industry shows that second-quarter 2004 profit margins averaged 7.2 percent, compared to an average of 7.6 percent for all U.S. industry. Over the last five years, the industry's profits averaged 5.3 percent compared to a U.S. average of 5.4 percent, API said. It also said that several other industries see larger profit margins than the oil and gas industry. For example, banks realized profit margins of 22.4 percent in the quarter. Software & services reached 14.4 percent, insurance companies averaged 11.6 percent, real estate earned 9.7 percent and the media earned 8.8 percent.
"The Consumer Union's assertions don't have any basis in fact ... any points they try to make, there's evidence that contradicts that repeatedly," Dougher said.
While the FTC declined to comment on this latest report, its counter-report issued in August asserted that mergers of private oil companies had not had any effect on worldwide oil market concentration; concentration has remained low to moderate despite mergers; the FTC had helped prevent more mergers and anti-competitive conditions; and industry changes have reduced incentives to be involved in all aspects of the oil market from discovery to distribution.
Its general counsel also said at a recent Congressional hearing to address soaring gasoline and natural gas prices that 85 percent of the increase in gasoline prices was due to increases in crude oil prices.
"Blaming high gasoline prices on high crude oil prices ignores the fact that over the past few years the domestic refining and marketing sectors have imposed substantial price increases on consumers at the pump," the CU/CFA report said.
"Four years ago, we said excessive consolidation in the industry was hurting consumers, and today the evidence clearly supports that," report author Mark Cooper, CFA's director of research, said. "Unfortunately, the FTC continues to hide its head in the sand over the effect its inaction on mergers is having on consumers' pocketbooks."