Déjà Vu All Over Again

Maybe a certain group of oil company CEOs should consider acquiring a little time-share near Capitol Hill. These executives have made so many appearances in Washington lately that they could qualify as residents.

The most recent appearances came this past May 21 and 22, when five members of Big Oil’s senior management – Shell U.S. President John Hofmeister, ExxonMobil Vice President Steve Simon, Chevron Board Member Peter Robertson, ConocoPhillips Executive Vice President John Lowe and BP America Chairman and President Robert Malone – were subjected to two days of grilling by members of Congress.

That barbecue came on the heels of an April Fool’s Day exhibition by a House committee led by Rep. Edward Markey (D-Mass.), who told reporters: “The American people deserve answers from Big Oil. The top five oil companies made record profits last year, and yet are continuing to hold onto tax breaks that could be used to advance the clean fuels of the future. Americans are not going to find the answers at the bottom of a gas tank, so we will seek to bring the CEOs of these companies to Congress and to the American people.”

Indeed, starting with hearings in 2005 over gasoline price hikes following Hurricane Katrina, Big Oil representatives have made several appearances before dramatically outraged politicians demanding The Whole Truth about earnings, windfall profits and CEO salaries.

It is interesting that over the course of several of these events, the basic pattern of the hearings has not changed. First, the CEOs read statements that point out that without an increased supply of oil, they cannot change the price. They point out that they are making a very small profit and return for the shareholder. They once again testify that they do not control the price of the gasoline at the pump, and that the person who does is the station owner. A quick look at how the pump price breaks out supports that statement.

Understanding that more than 50 percent of the fuel price at the pump is the cost of the feedstock used to make the gasoline should point to an answer for the problem. The companies that provide the oil to the refiners are in business to make a profit or to collect revenues for their country of origin. They are not in business to provide a low-cost fuel to the American consumer, no matter how much the consumer or his or her elected representative may believe otherwise.

History Repeats (and Repeats) Itself

Perhaps our legislators could save time at the next go-around and review the transcripts from previous visits to Congress and achieve the same result without the expense of a hearing. Try to shake that feeling of déjà vu as you take a look at the questions, comments and criticisms of years past:

November 9, 2005: This was a joint hearing of the Senate Commerce, Science and Transportation Committee and the Senate Energy and Natural Resources Committee, called “Energy Pricing and Profits.” Appearing before the committee were Lee Raymond, ExxonMobil chairman and CEO; David O’Reilly, Chevron chairman and CEO; James Mulva, ConocoPhillips chairman and CEO; Ross Pillari, BP America president and CEO; and John Hofmeister, president of Shell U.S.

• “I expect the oil companies’ witnesses to provide some assurances about how you plan to use your recent profits to provide a stable source of energy to the United States and to pursue, to the maximum extent possible, lower oil prices and lower gas prices.”

– Sen. Pete Dominici (R-N.M.)

• “Let me just ask you a question here. Will you consider making a major personal contribution and major corporate contributions from record profits to a charitable fund set up, hopefully, with your efforts and community efforts, to help America’s working families get relief from higher home-heating oil prices or higher gas prices?”

– Sen. Barbara Boxer (D-Calif.)

• “If you’re saying that … the reason refineries or other investments in manufacturing are not made in the United States, but are instead made overseas, is because the regulatory environment is more stable and more predictable in other places, are you saying that that is the issue that we need to address more than any other for incentives for building refineries?”

– Sen. Kay Bailey Hutchison (R-Tex.)

• “In my part of the country, people going into the winter understand heating your home is not a luxury, it is a necessity, and they are going to pay a substantial amount more to heat their homes this winter, while they open the paper and they say: Boy, it is nirvana for you all, personally and for the companies. How do you respond to those consumers in a way that says to them, well, this is the right thing and this is a fair thing? Anyone?”

– Sen. Byron Dorgan (D-N.D.)

March 14, 2006: The Senate Judiciary Committee heard testimony from Rex Tillerson, chairman and CEO of ExxonMobil; John Hofmeister; James Mulva; David O’Reilly; Bill Klesse, chief executive of Valero Energy Corp.; and Ross Pillari.

• “There are fewer, more massive players in the markets. Prices have spiked and what has gone up has not come down. Coincidence? I don’t think so.”

– Sen. Charles Schumer (D-N.Y.)

• “I am a big promoter of ethanol. I have heard stories after stories about independent owners of franchised or branded stations who are prohibited from selling alternative or renewable fuels, so I would like to hear from some of you – will you commit to allowing independent owners of branded stations who choose to sell E-85 or B-20 to do so? Would you allow independent owners to produce alternative fuels from any outlet so that they can purchase a fuel at the lowest cost?”

– Sen. Chuck Grassley (R-Iowa)

May 21-22, 2008: Now back to more recent events. On Wednesday, May 21, the five executives read prepared statements to Senate lawmakers, including Patrick Leahy (D-Vt.), chairman of the Senate Judiciary Committee, who began his remarks with a stab at George W. Bush: “The President once boasted that with his pals in the oil industry, he would be able to keep prices low and consumers would benefit. Instead, it is his pals in the oil industry who have benefited. American consumers, and the American economy, have suffered immensely.”

In the New York Times, David M. Herszenhorn observed: “The executives politely but just as firmly insisted that Congress should focus its efforts on allowing more drilling and exploration for domestic oil – in the Arctic National Wildlife Refuge, offshore in the Atlantic and Pacific, and in the eastern Gulf of Mexico. They insisted that they were investing heavily in search of new oil supplies.”

With most of the producers of oil showing declining reserves and many producing countries showing declining output, the legislators should not be surprised that the price is going up.

Leahy also addressed the problems faced by Americans who depend on gasoline to run their businesses. “I want these witnesses to hear about Warren Hill, whose family settled in Greensboro, Vermont, more than 200 years ago,” Leahy said. “Warren runs a logging and trucking company that he dreams of passing on to his son. But the increase in fuel prices has led him to question whether his business, which has been successful for over 30 years, can survive.”

Leahy issued his challenge: “I say to our panel today: Mr. Hill wants to know how you can justify exorbitant profits on the backs of middle-class, hard-working families. He deserves answers. Every member of this Committee, and of this Congress, has constituents with similar stories and similar questions.”

A more relevant question may be how the credit card companies can charge 17 percent interest just because Warren Hill might have missed a few payments. Or why the grocery store can charge him so much for bread and milk. Perhaps we could also explain why Warren Hill’s house payments may have gone through the roof in the subprime mortgage debacle. Or maybe why the cost of sending his children to college is going through the roof.

In other words, instead of focusing on one of the smaller business expenses for the majority of the business world, why not focus on some of the bills that really add up?

The May 22 hearing was the second appearance in two months for Hofmeister, Simon, Robertson, Lowe and Malone. The same five executives were called to the carpet on April 1 to testify before the Select Committee for Energy Independence and Global Warming. This hearing was meant to obtain justification for why oil companies got $18 billion in tax breaks last year when their profits had hit $123 billion and oil prices had reached runaway highs.

“In what has become a regular show in the hearing rooms on Capitol Hill,” wrote Herszenhorn, “the oil company executives took a second day of lashings on Thursday. On Wednesday, they went through a similar exercise with the Senate Judiciary Committee. The lawmakers played their parts, too – showing mostly outrage and fury. ‘You all are gouging the American public and it needs to stop,’ declared Representative Steve Cohen, Democrat of Tennessee. Other Democratic lawmakers openly questioned whether the companies were illegally fixing prices to hoard profits and voiced suspicions that they were in cahoots with Vice President Dick Cheney to enrich the energy industry.”

And once again, the executives told their side of a familiar story. “As repetitive and uninteresting as it may sound, the fundamental laws of supply and demand are at work,” said Shell’s Hofmeister on May 22. “Oil exporting nations, as has been said, are managing their natural resource development and production to supply their local and global markets in their own self-interest.”

The House Committee on the Judiciary Antitrust Task Force and Competition Policy had its turn on May 22. Chairman John Conyers (D-Mich.) hosted a group that included Committee Chair Rick Boucher (D-Va.) and representatives Zoe Lofgren (D-Calif.), Sheila Jackson Lee (D-Tex.), Betty Sutton (D-Ohio), Debbie Wasserman Schultz (D-Fla.), Maxine Waters (D-Calif.), Steve Cohen (D-Tenn.), Steve Chabot (R-Ohio), Robert Goodlatte (R-Va.), Tom Feeney (R-Fla.) and Lamar Smith (R-Tex.).

So what was on the discussion agenda?

Ethanol. Big Oil versus Big Corn? Rep. Chabot had a question for Hofmeister. “This Congress has put a lot of confidence in ethanol to get us out of this mess that we’re in,” said Chabot. “But is it a fact that the energy that’s expended to produce a gallon of ethanol is virtually the same as the ethanol that you ultimately get out at the end of the process?”

“I think it depends on the type of ethanol you’re using,” replied Hofmeister. “Corn ethanol is one of the least efficient forms of ethanol. … What many people don’t recognize is that the ultimate BTU content of a gallon of ethanol is considerably less than a gallon of gasoline.”

Profits. Where does the money go? Rep. Waters posed this question to ExxonMobil’s Simon. Waters referred to records showing that ExxonMobil earned $40.6 billion in profits in 2007, the largest corporate profit in American history. “Now, with $40.6 billion in profit,” she said, “are you saying that every time the price of oil per barrel increases, that you have to keep increasing the price at the pump in some way?”

“When you look at that $40.6 billion, if you put that on a cents-per-gallon basis, on a global basis, it would be about $0.10 per gallon,” Simon answered. “When you come back to the United States and then you look at the cents-per-gallon on the piece of the business where we produce products, last year, it was $0.04 per gallon, and this year it’s $0.014. Now, in terms of where we are spending that in the United States, one thing we’re doing is expanding our refinery to meet the demands of our customers and your constituents.”

Gasoline taxes. This hot topic in the wake of presidential candidates John McCain and Hillary Clinton’s ill-considered proposal of a summer “gas tax holiday” was taken up by Rep. Jackson Lee to BP America’s Malone. “What I’d like to ask is the question of whether or not you would absorb [profits] in a moratorium on gasoline taxes,” said Jackson Lee.

Malone’s reply: “On your question about a tax holiday, we believe, first of all, [that the] street price is not set by us, and even if there was a moratorium, I can’t say that the retail outlets wouldn’t keep the price up, because it’s a commodity.” But, Malone continued, “let’s say they did bring the price down. I think it would be very short-lived and that we could actually see a run on those kinds of stations. Soon, the supply is gone and it’s going to come in from overseas. It’s just the supply-demand economics at play here.”

Antitrust. “As has been mentioned here, obviously this is an antitrust task force,” noted Rep. Sutton. “A while ago, I asked you guys questions about whether or not you or any of the officials from your organizations had participated in the energy task force meetings that Vice President Cheney held early in the Bush administration.” Sutton then produced a Washington Post headline: “Document says oil chiefs met with Cheney task force.”

Simon replied: “I think that might be the difference here, Congresswoman; that there are meetings that take place between us and government officials, but not in the capacity of that task force.” Malone added: “I was not there when our former chief executive had the meeting. It was not with the Cheney task force, but it was during that time period of your question.” Lowe: “No one [was there] from Phillips Petroleum Company at that time or, subsequent to that, ConocoPhillips. I have seen references to Conoco representatives, but I’m not aware of those.”

Salary and bonus. Of course, no congressional hearing on oil profits would be complete without a venting on executive compensation – in this case, the salary of Dick Cheney as the head of Halliburton. “It’s just kind of hard to believe, it’s almost surreal, that we’re saying this man didn’t make $400 million, he only made $42 million,” Rep. Cohen said. “There’s something wrong with that type of salary, and even if it’s just $42 million, it is obscene when people have to pay $4 a gallon. The … salaries are just obscene.”

In the Senate hearing, “Senator Patrick J. Leahy, Democrat of Vermont, the chairman of the Judiciary Committee, demanded that the executives tell him the amount of their pay packages and then ridiculed those who said they did not know exactly how much they earned,” noted the New York Times. “‘I wish I made enough money that I didn’t even have to know how much I make,’ Mr. Leahy told John E. Lowe, the executive vice president of ConocoPhillips.”

Tongues Will Lash

“Saying that Americans don’t understand how oil impacts the price of gas [is the] kind of patronizing attitude that has shaken the confidence of the American people in their government,” said Rep. Wasserman Schultz. “With all due respect,” she added, “the whole point of this hearing is so we can identify ways that we can dramatically reduce the cost of gas.” Wasserman Schultz pointed out that as “a mom with three young kids,” she spent $68 to fill her minivan in May. “That is real money,” she said. “I mean, it may not be real money to the five people right in front of us, because $68 is like a nickel, based on the income that you all earn.” (Wasserman Schultz may dislike rising pump prices, as most of us do, but as a U.S. representative she earns an annual salary of $165,200, which, many Americans may well agree, doesn’t exactly place her among the struggling.)

Then there are the can’t-win questions, like this one from Rep. Emanuel Cleaver (D-Mo.): “This is a rhetorical question,” he said. “What ever happened to shame?” Or this gem from Sen. Dick Durbin (D-Ill.): “Where is the corporate conscience?” “To me it was just a litany of complaints that you are all just hapless victims of a system, you blame one thing or another, which most people would say is just simply the cost of doing business,” said Dianne Feinstein (D-Calif.). “Yet you rack up record profits ... quarter after quarter after quarter, and apparently have no ethical compass about the price of gasoline.”

Been There, Heard That

There are signs that this brand of political theatrics is wearing thin with pundits, if not the public. Just read the views of commentators like one cited in the Las Vegas Review-Journal, who called such oil-price hearings “surely one of the most weirdly ritualized” displays on Capitol Hill. Over and over again, “a bunch of U.S. senators who probably couldn’t run a major U.S. corporation for a single day – many of whom have never shown a profit running so much as a shoeshine stand – demanded that America’s oil company executives be trooped in like defendants at one of Josef Stalin’s show trials for ‘hearings’ in Washington, where the lawmakers in turn snarled, lambasted and berated these heads of free-market private firms, demanding to know the dollar amounts of their salaries and how on earth they can justify their firm’s profits.”

“As they do every year, Congress is once again holding showy hearings to bemoan gasoline prices and oil company profits,” wrote George Landrith on Human Events Online. “The few questions that are actually asked are so biased and absurd as to hardly be questions at all. And legislators try to explain the impossible – why increasing taxes on oil companies will lead to lower prices for consumers at the pump.”

Denver Post writer David Harsanyi remarked that as the “lead demagogue” of the Senate hearings, Leahy “leveled numerous preposterous charges. He claimed that there was a ‘disconnect’ between supply and demand and the gasoline prices that consumers are wrestling with at the pump.” The senator, “one hopes, knows that oil companies have little to do with the price of oil per barrel,” he continued. Referring to supplies from the Organization of the Petroleum Exporting Countries and Venezuela, he added: “He knows full well that they can’t control OPEC production or Hugo Chavez or the dramatic increase in oil demand by China, India and other developing nations. So in this case, the only ‘disconnect’ is between facts and Sen. Leahy.”

“From their comments during their witch hunts among American oil company CEOs,” wrote C. Neul in Conservative Insights, the senators “clearly were more interested in grandstanding than in hearing the truth about global oil economics.

“Do they really think these CEOs of shareholder-owned oil companies are going to turn socialist and subsidize American drivers to the detriment of those shareholders?” Neul wondered. “More enlightened production policies for oil and natural gas by both parties in Congress years ago would have lessened this global oil situation. Now, it’s too late for a quick fix.”

Get the Point?

If even the media is beginning to get tired of the same set of moves, perhaps with enough repetition of the facts Congress will finally begin to understand:

• If you do not increase the supply of oil, the price will not come down.
• If you do not increase the refining capacity in the United States, the price will not come down.
• If consumers continue to use more gasoline, the price will not come down.
• If you increase the tax burden on the U.S. suppliers of oil, the price will not come down.
• If you continue to push solutions that cost more and deliver fewer miles, the price will not come down.

And if you continue to call the senior executives of these companies to Washington to answer the same questions year after year, the price will not come down.

If They’ve Said It Once …

Over the years, energy leadership has attempted to explain the rise and fall of oil prices to Congress – citing supply and demand, commodity prices, geopolitical events and consumer habits as mitigating factors.

In the face of a hostile Congress, the execs have repeatedly touched on:

Revenues

• Rex Tillerson, 2006: “Our revenues are large because we deal in tremendous volumes. But our costs – including taxes – are large, too. Last year, our costs totaled $335 billion. Subtract costs from revenues, and that leaves us with less earnings per dollar of sales than many other industries, even during periods of high prices. Moreover, we invest much of these earnings in developing future opportunities, most of which take a decade or more to show a return. The bottom line is that the global market for energy is enormous.”
• Robert Malone, 2008: “Today’s high prices are linked to the failure both here and abroad to increase the supply of oil and gas and renewables and to reduce demand through conservation and energy efficiency. The oil market is tight. Geopolitical risk and concern about future supply have had a big impact on price.”

Competition

• David O’Reilly, 2006: “We are dwarfed in size” by the world’s nationally owned oil companies.
• Steve Simon, 2008: “Our margins are tight because our industry is very competitive. The Federal Trade Commission and other government agencies have repeatedly confirmed this fact.”

Restriction

• James Mulva, 2005: “We need access – access so we can explore. We need streamlined approvals in permitting and regulation. That’s going to help us upstream and downstream. … That helps us do what we do best, which is develop energy and supply for the marketplace.”
• John Hofmeister, 2008: “In general, the United States tends to resist the need to develop new domestic energy sources. Can we afford to continue this approach while energy demand and costs are rising?”