As our recent update anticipated, scrutiny of the oil and gas sector is heating up quickly following the administration’s recent creation of an inter-agency Oil and Gas Fraud Working Group.  

On Tuesday, May 17, four U.S. senators (Harry Reid, D-Nev., Chuck Schumer, D-N.Y., Patty Murray, D-Wash., and Claire McCaskill, D-Mo.) wrote a letter to the Chairman of the Federal Trade Commission citing unspecified “concerns” and “allegations” that refiners might have agreed to cut back on gasoline supplies in order to keep gasoline prices high. They urged the Chairman to open an investigation into these allegations. They did not identify any source for these concerns or allegations, but simply noted their view that “[a]t a time when major refiners and oil companies are making record profits and American families continue to struggle with gasoline at record prices, the idea that refiners may be manipulating the market to keep prices artificially high is offensive.”1

The letter acknowledges, however, that a number of factors other than collusion have caused increased gas prices at the pump. The senators noted, for example, that “the rise in the price of oil is certainly a driving factor behind the recent rise in gasoline prices,” and that recent flooding along the Mississippi River may also be a factor.

The letter does not cite much in the way of factual support for its request for an investigation. The senators claim that “since the beginning of 2011 U.S. refiners have seen over a ninety percent increase in their refining margins,” that inventories remain below average, and that data from the U.S. Energy Information Administration (“EIA”) Weekly Petroleum report released May 6 suggests that refinery utilization hovers in the low 80% range (compared to last year’s upper 80% range).

The letter does not explain how these few data points support the unidentified “concerns” and “allegations” they reference and, indeed, the EIA’s own data and additional public information suggest that gasoline refineries operate in a healthy competitive environment. For example, the EIA itself reports data from more than 100 separate refiners. That kind of fragmentation among producers is generally thought to make cartelization difficult, if not impossible.

Moreover, public information from a sample of these refining companies shows that some companies’ production has increased, often dramatically, over the last year, while the production of others has declined. That sort of non-parallel behavior, likewise, generally suggests independent conduct and counters any inference of collusion.

The letter’s citation to the 7% year-over-year decline in industry-wide capacity utilization in the EIA’s May 6 report is, at best, anecdotal.2 Indeed, comparing capacity utilization for a single week in 2011 versus a single week in 2010 gives potentially misleading implications for the longer-term trend in capacity utilization. Indeed, capacity utilization earlier in 2011 was higher than in 2010. For example, the average utilization rate in January 2011 was five percentage points higher than in January 2010. Moreover, a comparison to 2010 may itself be flawed, as analysis of the weekly year-to-date refinery capacity utilization figures for 2010 versus 2009 suggests that 2010 was an unusual year, with lower capacity utilization early in the year and a fast ramp-up toward the summer season. The trend for 2011 is very similar to the trend for 2009.

Finally, the EIA reports that refinery margins have fallen dramatically and are below the average for 2000-07, and that the gasoline price increases are higher for a number of reasons, including higher crude oil prices, concerns over flooding along the Mississippi, and unplanned outages.3

Conclusion

This week’s development suggests that companies at all levels of the industry — whether production, refinery, distribution, or retail sales — can expect the heat to be ratcheted up in the near-term as political calls for heightened scrutiny ring out and as the administration’s new Working Group begins its efforts to scrutinize the markets. Private lawsuits may very well be next.

We do not believe these developments are cause for alarm. But they do present an opportunity for companies to perform a diagnostic check on their price and output decision-making and on the efficacy of their compliance programs.