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Government, Politics & Issues

Senators grill Big Oil execs, but gas prices likely to remain high at the pump

This article first appeared in the St. Louis Beacon, May 12, 2011 - WASHINGTON - As gasoline prices kept rising Thursday in St. Louis and many other areas, the volume of hot air continued to expand in Congress -- with Democrats taking Big Oil to task for big profits and Republicans embracing a "drill, baby, drill" strategy.

On the Senate side, the heads of the five largest oil and gas companies ran into a hostile gauntlet of Finance Committee Democrats who asked why they needed $2 billion a year in federal tax breaks when their profits hit $35 billion in the year's first quarter.

Many Democrats, including Sen. Claire McCaskill, D-Mo., want to stop those breaks -- and a Senate vote is expected as early as next week. But Republicans, including Sen. Roy Blunt, R-Mo, contend that the oil firms can use their profits to expand U.S. oil exploration and production and warn that hiking their taxes could raise gas prices.

In the Republican-led House, lawmakers approved the last of three bills that -- a year after the nation's worst-ever oil spill in the Gulf of Mexico -- would expedite Gulf oil-drilling permits and open more waters to drilling on the East, West and Alaskan coasts. But many Democrats, fearing the environmental impact of less-restricted drilling, want a less rushed timetable for opening coastal areas to more oil and gas exploration.

While each initiative has pros and cons for the long term, experts and studies indicated that neither the Democratic proposal to cut Big Oil tax credits nor the Republican push to encourage more oil drilling were likely to have a significant short-term impact on gas prices at the pump.

That's not what people hit by high gasoline prices want to hear. On the Missouri side of the St. Louis region, the average price at the pump topped $3.99 a gallon on Thursday -- exceeding the previous record level of a penny less, set in July 2008 -- and prices were about 20 cents a gallon higher than that in the Metro East area.

Even though crude-oil futures are now trending downward, gasoline prices have remained high in St. Louis in part because of supply questions relating to the fear that prolonged flooding in Louisiana would impact some oil production and refining, as well as oil transport on the swollen Mississippi River. Also, oil executives said Thursday, there is usually a lag between the time that international crude oil prices decrease and that drop is reflected at the pump.

Would Cutting Big Oil Tax Breaks Raise Prices at the Pump?

Some Republicans argue that cutting the tax breaks for large oil companies is likely to have an impact on gasoline prices, whether soon or later.

"The idea that these things don't have an impact at the pump is, I think, not well thought out," Blunt told reporters in a conference call Wednesday. He accused the Obama administration of following a policy to try to "raise energy prices" to increase the demand for fuel-saving alternatives --- and he said, "They're doing a great job of that."

Some oil company executives who testified Thursday agreed with that assessment and said increased taxes eventually would affect pricing -- although most conceded that there would be little or no short-term impact, mainly because oil prices are determined by many international factors unrelated to taxes.

Other experts begged to differ. A report by the nonpartisan Congressional Research Service, released this week by Senate Majority Leader Harry Reid, D-Nev., predicted that the proposed tax changes would have negligible impact on gas prices.

The report said that, with the cost of oil over $100 a barrel, "prices are well in excess of costs, and a small increase in taxes would be less likely to reduce oil output, and hence increase petroleum product (gasoline) prices."

In a review of the five tax changes proposed by McCaskill and other Senate Democrats, the research service said that tightening the tax code would make only a small difference in the oil industry's revenue and found that the daily price of oil had much more to do with international factors.

Those factors include the value of the dollar, political unrest in oil-rich regions, macroeconomic growth trends and oil market gyrations. The report said that "any effect due to changes in the tax treatment of the oil industry would be hard to separate from the changes due to other factors."

For her part, McCaskill -- who readily concedes that ending the tax breaks would not help reduce prices at the pump -- scoffs at the notion that it would increase fuel costs. "We have more domestic oil being produced now [in the U.S.] than in the latter part of the Bush administration," she told reporters Wednesday.

McCaskill said oil firms "are wildly profitable, and yet our prices continue to climb... The price of oil has more to do with supply, demand and speculation than it has to do with whether or not the federal government is writing them a check every year for a couple of billion dollars."

While many Republicans contend that oil companies need tax incentives to expand their exploration and drilling efforts, McCaskill said tax breaks "are not what incentivizes them to look for more oil and gas. They are clearing going to still be looking to expand their production if it means that they will be more profitable by selling that gas."

Are Big Oil Firms Being Unfairly Singled Out?

At Thursday's Senate hearing, Rex W. Tillerson, the chief executive officer of the largest U.S. oil and gas company, Exxon Mobil Corp., called the proposal to cut the tax breaks "counterproductive" and unfair.

"Increasing these companies' taxes would only discriminate against certain U.S. workers, make our companies less competitive against others who are in the same business and discourage future energy investment," said Tillerson.

Expressing similar sentiments were the heads of Royal Dutch Shell, Chevron Corp., ConocoPhillips and BP. They contended that, over the long run, production costs would likely increase -- and so would gas prices, depending on market trends.

But Senate Democrats said the $21 billion in tax breaks that they would like to rescind from the five big oil firms over a decade could be used to help reduce the nation's budget deficit. "We can put this money to better use and we should," said Senate Finance Committee Chairman Max Baucus, D-Mont.

The panel's top Republican, Sen. Orrin Hatch, R-Utah, said that represents a tax hike on companies that would do nothing to help increase domestic energy product and reduce the nation's dependence on foreign oil imports. He also warned that "the reasoning put forth for repealing these tax provisions -- rising gas prices and reporting higher first quarter profit -- would set a bad precedent for future tax increases."

Why Not Cap 'Boutique Fuel' Blends?

Instead of aiming at Big Oil, Blunt has proposed capping "boutique" fuel blends as one way of possibly holding down gas prices increases, especially during times of shortages.

Blunt and 38 other Senate Republicans, including Sen. Mark Kirk, R-Ill., plan to offer an amendment to cap the number of boutique blends, which are unique fuel blends demanded by a state or local air pollution agency and approved by the EPA as part of a plan to help meet national air quality standards.

"If fuel is $4 a gallon, something has to give [because] it impacts the entire economy," Blunt said recently. "This [amendment] would help solve that problem."

On Thursday, Blunt joined 31 other congressional Republicans -- including Rep. John Shimkus, R-Collinsville -- in sending a letter asking why the Energy Department and the Environmental Protection Agency had not conducted a study, which Congress asked for by June 2008, to determine the impact of boutique fuel requirements on the price of gasoline.

"Since the demand for oil continues to increase, and the price of gasoline continues to rise, as the country recovers from the economic recession, does EPA not see the utility in conducting a study to aid in the simplification of our fuel delivery system?" Blunt and other lawmakers wrote in the letter.

But Charles T. Drevna, president of the National Petrochemical and Refiners Association, told the Beacon that such changes in the boutique-fuel regime aren't likely to have much of an impact in the present situation.

Like many other energy experts, he contends that political instability in the Middle East and the decline in the U.S. dollar have been the biggest factors in the speculation that has led to higher oil prices per barrel.

"We're looking at the lowest value of the dollar in three years," he said. "There's little wonder that investors are out there buying gold and silver and ... speculating on crude oil futures. And that's driving up the price of crude" — even though the oil supply has been adequate.

While some critics have blamed refiners and distributors for taking advantage of oil costs to burn consumers, Drevna said U.S. refiners "are doing everything we can to trim costs and prevent a total pass-through [of crude oil price hikes] on to the consumer." In this year's first quarter, he said, the "average retail price of gas has risen 58 cents a gallon while, on a comparative basis, the average cost of crude [oil] has risen 65 cents a gallon."

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