Today, U.S. Senator Maria Cantwell (D-WA) pressed oil industry leaders on recent West Coast gas price spikes and called for greater transparency in gasoline markets and refinery shudowns. During a Senate Energy and Natural Resources Committee Cantwell raised the need for better oversight of gasoline markets and refineries on the West Coast.
At the hearing Cantwell also highlighted a new report from McCullough Research that demonstrates since April 2012, West Coast gasoline prices have broken from historic trends and have ceased to have a significant connection with crude oil prices. In Washington state, prices have risen 9 cents in the past week alone and are 27 cents higher than the national average.
"Washington state prices are among some of the highest in the nation," said Cantwell during today's hearing. "We found last year that in a West Coast refinery fire, everybody said that this is the cause of the spike, when in reality data showed that refineries weren't offline. So we're not following supply and demand here. My constituents want to see more transparency there. Hamburger probably has more regulation on it than gasoline."
Cantwell also questioned Dan Gilligan, President of the Petroleum Marketers Association of America, on whether the West Coast gasoline price spikes showed the need for more transparency in notification of refinery shutdowns. The McCullough Report found that a 35-cent-per-gallon price spike on wholesale gas in California on October 1, 2012, occurred 80 minutes after ExxonMobil reported an interruption to production to the South Coast Air Quality Management District.
"But what we need to know now is what's caused these recent spikes," Cantwell continued at today's hearing. "On October 1st, a seemingly minor problem at ExxonMobil's Torrance refinery led to an almost instantaneous increase in wholesale prices in California. A power problem that only briefly interrupted operations is supposedly blamed for one of the highest price spikes in a decade. Mr. Gilligan you cited reasons but just as these shutdowns seem to be hitting the press. What do you think we need to do to get more transparency in the market?"
Cantwell has long fought to protect consumers from artificially high gasoline and diesel prices. In November 2012 Cantwell led a West Coast delegation letter demanding that the Department of Justice (DOJ) conduct a refinery-by-refinery investigation into the cause of spikes that drove gas prices to more than $4 a gallon in Western states during May and October.
Last year, Cantwell also urged the Federal Trade Commission (FTC) to use its regulatory authority to aggressively investigate why Washington state's gas prices increased to near record highs during the month of May, even as the world price of oil and national average gas prices dropped significantly.
Cantwell wrote the law making manipulation of wholesale oil markets illegal. Her legislation, which became law in 2007, empowers the FTC to levy civil penalties of up to $1 million per day. She has been an advocate for reining in excessive oil speculation, calling on federal regulators to implement overdue rules in the energy futures markets. She has long fought to prevent market manipulation and excessive speculation from artificially driving up the price of oil and prices faced by consumers at the pump.
During the 2010 financial market reform debate, Cantwell pushed for tough and effective rules and the elimination of loopholes to prevent speculators from manipulating the oil market. She fought to ensure that the bill required the Commodity Futures Trading Commission (CFTC) to enact position limits to diminish, eliminate or prevent excessive speculation that disrupts the market, and she continues to push the CFTC to enact these new rules. Mandatory speculative position limits and strong anti-manipulation tools were major factors leading to Cantwell's eventual support of the Wall Street reform law.
A full transcript of today's hearing follows.
Senator Cantwell: I want to thank the Chairman and Ranking Member for holding this hearing -- it's a very important issue -- and for all of you for being here today. Obviously high gas prices on the West Coast and supply and demand issues is something I've spent a lot of time on, my office has spent a lot of time on.
And here we are again, with prices approaching four dollars per gallon in Washington State. And when it gets to that point it starts to eat into our economic growth. So up nine cents in the past week, Washington state prices are among some of the highest in the nation, 27 cents above the national average. And a new report by McCullough research confirms something that we suspected all along -- that during the past year West Coast gas prices have ceased to follow the crude oil price.
I think my constituents would get it if there were a supply and demand formula they could follow here, but they can't follow one. So I'd like to enter into the record the report to illustrate some of the peculiar behaviors of the West Coast petroleum markets over the last year. The report also underscores the need for continued real oversight and investigation of refinery shutdown announcements.
We found last year that in a West Coast refinery fire, everybody said that this is the cause of the spike, when in reality data showed that refineries weren't offline. But actually were still emitting, which raised a lot of questions about who's actually following these markets and the transparency. I believe that the U.S. Energy Information Administration (EIA) should play an even bigger role.
But what we need to know now is what's caused these recent spikes? On October 1st, a seemingly minor problem at ExxonMobil's Torrance refinery led to an almost instantaneous increase in wholesale prices in California -- adding up to 50 cents in less than a week. A power problem that only briefly interrupted operations is supposedly blamed for one of the highest price spikes in a decade. Now I guarantee you when the implosion happened in the Gulf, if prices had spiked that much, the nation would have taken action. When these prices spike to this level, in both cases crude oil prices were either level or falling, and during the highest price spike inventories were either increasing or remaining at historic five-year averages.
So we're not following supply and demand here. My constituents very much want to see more transparency there. Mr. Plaushin, in your testimony you mentioned the high degree of volatility due to refineries. Mr. Gilligan you cited reasons, but just as these shutdowns seem to be hitting the press, what do you think we need to do to get more transparency in the market?
Mr. Dan Gilligan, President, Petroleum Marketers Association of America: We supported Senator Dorgan's amendment in 2007 to try to get EIA more involved in communicating about refinery schedule maintenance and outages. You know, really it's the unplanned outages that really tear up the market. I think in the upper Midwest there were two or three refineries that were down for maintenance, and generally that was understood. But then all of a sudden you had I think a serious problem at a BP refinery in Whiting, and then you had another refinery outage, all of a sudden you had a catastrophe on your hands.
We think we need to take baby steps to see what can be done to improve communication and planning so that people are more aware of what potential problems could be. We're ready to sit down and talk with you and committee staff about what kinds of things the EIA might be able to do to help everyone accommodate those changes -- the outages that are scheduled.
Senator Cantwell: I mean, do you think the country would have stood for, if we had the Gulf implosion and everybody being shut down, ten other refineries saying "oh I had planned maintenance so I'm gonna go down." Do you think we would have put up with that?
Mr. Gilligan: Well I think to some extent, and certainly Valero knows more about that than I do, but there's a life safety issue. They have to go down for maintenance or they could risk injury to their employees if they don't do the right you have to weigh that into it. It's not that simple. And it can be very complicated.
Senator Cantwell: Four or five refineries going down at the same time?
Mr. Gilligan: Well, I.
Mr. Bill Klesse, Chairman and Chief Executive Officer, Valero Energy Corporation: First off, Valero announces its planned turnarounds. We announce them actually for the financial community because they're very interested in them. There are also services that actually aggregate them and put them together. But I think your question was addressing more of, you have a spot situation and all of a sudden the markets move dramatically. And it's actually the expectation. Supply and demand is there, but it's the expectation.
So when Torrance in your example had an issue -- and I'm not sure what's actually happened in Washington -- when you have these issues because refineries are larger today, we have inventory in the system. But there's immediate expectation in the wholesale markets that then goes through to the retail markets of how long are they going to be down? Because this is a commodity, we're largely in balance in the system. So when some of the supply comes off, the expectation is going to be tighter, and all of a sudden you get prices moving. And then if you'll notice, over time, depending on getting it there, the prices come back down.
Senator Cantwell: Well I think it's one of America's most important commodities and probably least regulated -- hamburger probably has more regulation on it than gasoline -- and yet the fact that this price spike can happen without real supply and demand issues is a problem that we have to address. And I see the chairman has returned, but Mr. Khan I wanted to mention the fact that you bring up the Jones Act as something of a price increase. CitiGroup has been under investigation and paid penalties both for fraud in the mortgage market and is now under investigation by the Financial Services Authority (FSA) for manipulation in gas prices, and the fact that you come here and blame the Jones Act as some reason why we have high gas prices is just amazing to me. Thank you Mr. Chairman.