Oil Companies Catch Heat For High Prices

Posted: January 14, 1990

Home-heating oil prices are falling fast as the political heat rises on oil companies accused of gouging consumers during last month's cold snap.

As of Friday, retail dealers in the Philadelphia area reported that prices had dropped to as low as $1.15 a gallon from the high of about $1.40 a gallon reached around New Year's Day. Prices in the area were around 85 cents a gallon in October.

"I think it just goes to show you how artificial the whole thing was. It was fueled by profit-taking and speculation," said Patrick L. Allinger, Philadelphia director of Buyers Up, a consumers' oil-buying cooperative.

Oil companies see things differently. The run-up in prices was the result of normal market forces, supply and demand, said John R. Galloway, a spokesman for Chevron Corp.

"We are not gouging people and we are not beating our wives anymore either," Galloway said.

In response to complaints from several governors and members of Congress, the U.S. Justice Department has begun what spokeswoman Amy Casner described Friday as "an inquiry" into the prices.

"Following the inquiry, we will determine whether or not to investigate any wrongdoing," Casner said. "We are operating under no set timetable, and this is in the very, very preliminary stages."

The distinction is being made between an inquiry and an investigation, Casner said, because the department has no information indicating there was something "wrong" - in a legal sense - with the sharp price increase.

A House subcommittee had a hearing on the increase last week, as did a legislative committee in Harrisburg. The Senate Governmental Affairs Committee is having a hearing on Tuesday in Washington.

"Given how dramatic the price increase in home-heating oil was, people deserve an explanation," said Aaron Bayer, counsel to Sen. Joseph I. Lieberman (D., Conn.), chairman of Tuesday's hearing.

"It has had a huge effect on people, particularly low-income people who have used up much of their federal funds for heating support," he said.

Remedies the committee might consider, Bayer said, include requiring the oil companies to produce and keep on hand greater supplies of home-heating oil, or having the government establish regional reserves of home-heating oil, especially in New England, where there are no oil refineries.

The federal Energy Information Administration reported that average prices were as high as $1.54 a gallon in some parts of New England in early January.

The oil companies have been accused of starting the heating season with abnormally low supplies of heating oil. When the cold snap struck in December, demand pushed prices up quickly because of the perception that there was not enough oil on hand, according to most analysts.

Oil refineries rationed their supplies, in some cases selling only to retailers with whom they had long-term supply contracts.

Fred J. Sacco, executive vice president of the Fuel Merchants Association of New Jersey, a group of 400 retail dealers, said the major oil companies now are "definitely" easing restrictions on how much heating oil dealers may buy.

Prices also have begun to fall quickly, Sacco said. At this point, he said, the big concern among retailers is whether prices will stay high long enough for the dealers to recover what they say they lost while prices were shooting up.

According to Sacco, the retail dealers were not able to pass all of their extra costs on to consumers as wholesale prices climbed.

"They are caught in the middle again," he said. "Many are worried about how they are going to get through because they have all extended their lines of credit at the bank. If they come down in price too fast, they may not be able to pay their loans back."

Prices are definitely declining, according to Roy R. Patterson, president of the Better Home Heat Council of Delaware, which represents 400 heating-oil retailers in the Philadelphia area.

He noted that wholesale prices on Friday were as low as 81 cents a gallon, down from a high of about $1.11 around New Year's. Retail prices were down as low as $1.15 on Friday, he said.

A Buyers Up survey found that prices in the Philadelphia area were about $1.26 a gallon last Thursday, Allinger said.

To the oil companies, there is nothing surprising about either the sharp increase or the sharp decline.

"Prices are going down because the warm weather has come back," said Paul Durkin, a spokesman for Sun Refining & Marketing Co. in Philadelphia. "The cold snap broke right around New Year's. It is starting to have its effect on the marketplace."

Durkin conceded that Sun profited from the quick run-up in prices.

"Sure, we made money," he said. "You are in business to make a profit. Absolutely."

But he said the short-term gain now threatens the industry with long-term adverse effects, particularly the negative public reaction.

"The consumer feels ripped off," Durkin said.

Sun's wholesale prices simply followed the New York Mercantile Exchange, where prices for future oil deliveries were bid up in speculation over the impact of the cold weather on supplies, said Durkin. There were few cases of dealers actually running out of oil, although some said they were not able to get all of the oil they needed when they wanted.

According to Durkin, Sun had no choice but to follow the prevailing market price.

"Suppose we said we were going to stay 25 cents under the market," he said. "We would have been run dry. One way you control demand is through price."

Anne Straitiff, a BP Oil Inc. spokeswoman, said her company also probably made some handsome profits in December, but that it was just a result of the market and BP's normal pricing techniques.

BP sets its prices based on bids in the spot market - oil available for immediate delivery, she said.

"We don't change our method of pricing when the price goes up or when the price goes down," she said.

Mobil Oil spokesman John Lord said that retail dealers who thought prices would keep rising contributed to the run-up in prices.

"Distributors would buy from our terminals as rapidly as possible in anticipation that cold weather would get even worse and that the price would continue to accelerate upwards," he said.

"They were buying it out of our terminals faster than it was being burned by consumers in their furnaces," Lord said.

The demand from distributors was up 200 percent from the previous December, he said. In the week before Christmas, 13 of Mobil's 25 terminals in the Northeast went dry for periods ranging from a few hours to two days because of the unusual demand, Lord said.

"I know people like to think of it as a conspiracy, but it is a free market," he said. "There are many things exerting pressure on the market. Psychology is a big one."

While the government inquires into the causes for December's price increase, what many consumers really want to know is whether it will happen again.

"Anything is possible, but I think it is extremely unlikely," said Patterson of the Better Home Heat Council.

"Certainly, we are not likely to get the weather conditions we have had," he said. "Refinery supplies, as well as imported products, are up. And hopefully, with as many people looking at what happened, it will put some restraints on the producers."

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