Consumers and politicians have criticized U.S. oil companies for raising gasoline prices 5 to 12 cents a gallon within hours of the Iraqi invasion of Kuwait. Are such hikes really justified?
The Times asked Chevron Corp. chief economist W. D. (Bill) Herman and Rep. Mel Levine (D-Santa Monica) to discuss the issue in separate interviews. San Francisco-based Chevron is the largest oil company west of the Mississippi. Levine has called for oil companies to roll back gasoline prices and advocates that Congress take action when it reconvenes after Labor Day.
Q : Were the recent gasoline price hikes tied directly to last week's Iraqi invasion of Kuwait?
Herman: The increase came at a bad time. Crude oil prices had been going up for several weeks, but the increases had not yet been passed along to consumers. At their meeting in late July, (the Organization of Petroleum Exporting Countries) had agreed to raise prices from $18 to $21 a barrel, and that was already driving prices up.
(Last Thursday, Chevron told its dealers to raise gasoline prices 5 cents a gallon, according to a company spokeswoman. The company based the increase on several factors, including the price of crude oil, low gasoline inventory at its refineries and conditions in the Middle East, the spokeswoman said.)
Levine: The fact is, it takes 45 to 60 days for oil from the Persian Gulf to reach American ports. Assuming it was imported oil, the price at the time it was purchased was $18 a barrel. The prices we have seen, particularly those within hours after the crisis occurred, were artificially inflated based on fear.
Last Saturday, I read that the oil companies were urging the Bush Administration not to embargo oil that had already left the Persian Gulf because they had already paid for this oil.
Herman: Oil is priced on the day of delivery because it takes so long to transport. The world market price is the one that you have to adhere to. We had a tanker from Iraq and had to get clearance from the White House to accept shipment at our refinery in Pascagoula, Miss.
Levine: After the Exxon Valdez spill (in March, 1989), the oil companies used that as an excuse to artificially inflate gasoline prices. During the cold winter of 1990, there was another oil price spike based upon speculation.
A staff briefing by the Department of Energy emphasized that there is a 391-million-barrel reserve, 56 million barrels more than minimum operating requirements to fill current orders. The oil industry is awash in its own oil. The recent price increases came exclusively out of price gouging.
Q: If the crisis in Kuwait is resolved soon, can we expect to see an immediate drop in gasoline prices?
Herman: If nothing else happens in the Middle East, crude oil may gradually go down to the $21-per-barrel price. If the $28 crude oil price is maintained, the price of gasoline may go up 25 cents more a gallon.
Q: Why can't the oil companies cut their profit margins and absorb these increases to help out consumers?
Herman: Our profit is less than 5 cents a gallon. With such a big volume of sales, a penny can really make a difference.
We had a terrible year last year. (Chevron's 1989 net income fell to $251 million from $1.7 billion in 1988, mostly due to special charges. Revenue in 1989 totaled $32.8 billion, compared to $28.9 billion in 1988.)
If you look at the consumer price index since 1950, overall prices have gone up fivefold, but the price of gasoline, which is part of the index, has gone up between three- and fourfold. It's still one of the best buys in the consumer basket.
Q: What can Congress do to combat higher gasoline prices?
Levine: I would prefer that oil companies voluntarily restrain these excesses. If there is not voluntary restraint or executive action (by President Bush), there will be a legislative response. I think the individual consumer should raise his or her voice, demanding some restraint, and let their representatives know that these short-term increases have no justification.
When Congress reconvenes, there will be several areas to look at, including windfall profits and price controls, which are very difficult to administer. This type of price jolt can throw us into a serious depression. The price of oil could be the fuse that ignites a very serious problem in the economy.