Big Questions For Big Oil

Oil industry executives rejected charges Tuesday that they manipulated gasoline supplies to increase prices, but a senior senator said there is strong evidence that oil companies work to maintain tight markets that produce price spikes.

After spending several hours grilling the oil executives, Sen. Carl Levin, D-Mich., concluded that they had indeed kept supplies short to push prices up, CBS News Correspondent Bob Fuss reports.

"Price spikes are becoming a way of life ... and not without serious consequences," said Levin, chairman of the Senate Permanent Investigations Subcommittee.

Opening a hearing on the volatility of gasoline prices, senators said oil industry practices of maintaining low inventories, along with growing market concentration, invited the sudden gasoline price surges that have occurred in recent years.

Levin cited the findings of a subcommittee report that charged refiners had withheld supplies to force up gasoline prices during tight markets, including a 1999 BP Amoco memo that gives a blueprint of actions that might be taken to maintain high prices.

Levin said the "outrageous" internal memo considered by senior executives at BP Amoco — now known only as BP — outlined a series of actions that could help maintain high prices in the Midwest, including shipping gasoline to Canada or getting other refiners not to ship fuel into the region.

Ross Pillari, BP's vice president for marketing, called the recommendations in the memo inappropriate and said that they were not adopted. He said people who wrote the memo had been "counseled."

"They were rejected and never went anywhere," Pillari said of the suggested proposals to influence supplies and gasoline prices.

Other oil company executives told the subcommittee that recent price spikes simply reflect market conditions and that refineries have worked aggressively to maintain supplies in a tight market.

"There has not been any conspiracy," said David Reeves, president of North American Products at ChevronTexaco Corp.

Contrary to conclusions by the Senate subcommittee report that industry mergers have added to the price problem, Reeves argued that the mergers "have increased competition ... created stronger companies better able to compete."

The report, released Monday, concluded: "In a number of instances, refiners have sought to increase prices by reducing supplies."

Levin acknowledged the investigation "did not discover any evidence of collusion," but he argued that gasoline markets are so "highly concentrated ... you don't need collusion to have a big artificial impact on supply" and, in turn, prices.

The report cited several internal memos dating back to 1998 from major oil concerns that reflected a general strategy by individual companies of using supplies to influence prices.

The 1999 BP Amoco memo outlined a series of "significant opportunities to influence" the balance of supply and demand in the tight Midwest gasoline market to assure higher prices.

Among the potential actions cited in BP's "Midwest, Mid-Continent Strategy" memo was to reduce refinery production or ship supplies to Canada instead of making them available in the tight Midwest market. It also suggested limiting pipeline capacity from the Gulf of Mexico to the Midwest by shipping products other than gasoline, providing incentives to other producers not to provide additional gasoline or using environmental regulations to slow fuel shipments.

The Senate report also said that in the spring of 2000, when prices soared past $2 a gallon, Marathon held back some of its cleaner burning, reformulated gasoline from the market "so as not to depress prices."

The report cited one internal Marathon e-mail that warned that if the company unloaded too much of its gasoline it could "thrash the market."

Gary Heminger, president of Marathon Ashland Petroleum, said allegations that his company had withheld supplies were untrue.

"Marathon produced 33 percent more RFG (reformulated) gasoline than the year before and we sold every drop. ... Any assertion to the contrary is just plain wrong," Heminger told the senators.