Is Big Oil holding down the flow?

BAKERSFIELD, Calif. — In California’s lower San Joaquin Valley, petroleum has gushed up more riches than the whole gold rush.

That’s why the rumor sounded so wrong. Why would Shell Oil Co. simply close its Bakersfield refinery? Why scrap a profit maker?

Yet the rumor was true.

The company says it could make more money on other projects. It denies it intended to squeeze the market, as its critics would claim, to drive up gasoline profits at its other refineries in the region.

Whatever the truth in Bakersfield, an Associated Press analysis suggests that big oil companies have been crimping supplies in subtler ways across the country for years. And tighter supplies tend to drive up prices.

The analysis, based on data from the U.S. Energy Information Administration, indicates that the industry slacked off supplying oil and gasoline during the price boom between early 1999 and last summer, when prices began to fall.

The industry counters that it’s been working hard to meet untiring demand. It faults output quotas set by Mideast oil powers, global competition for oil from booming economies like China’s, and domestic challenges like depleting wells, clean-air rules, and hurricanes. They do make things harder.

Yet the AP analysis found evidence of at least an underwhelming industry performance in supplying the domestic market, when profits should have made investment capital plentiful:

“During the 1999-2006 price boom, the industry drilled an average of 7 percent fewer new wells monthly than in the seven preceding years of low prices.

“The national supply of unrefined oil, including imports, grew an average of 6 percent during the high-priced years, down from 14 percent during the previous span.

“The gasoline supply expanded by only 10 percent from 1999 to 2006, down from 15 percent in the earlier period.

The findings support a conclusion already reached by many motorists. Fifty-five percent of Americans believe gas prices are high because oil companies manipulate them, a Pew Research Center poll found in October.

Even in Bakersfield, which lives off oil, many suspect that the industry goes easy on supply for its own reasons. “They ain’t trying: that’s more money for them,” snorted JaRayle Madden, a construction worker filling up his little sedan recently at a local Shell station.

It turns out that the industry exerts quite a bit of control over supply.

For one thing, it decides to invest in new wells and refining equipment — or not to. Though reserves have kept pretty steady, the oil industry taps those resources to varying degrees from year to year. The long price run-up first took off as the number of new wells abruptly dropped by a total of 59 percent in 1998-99, federal records show.

One consumer advocate, Mark Cooper, refers to industry-induced supply bottlenecks as “strategic underinvestment.” He views references to “discipline” in annual corporate reports as a code word for going easy on supplies.

“Anytime someone talks about ‘discipline,’ this suggests to me that they have market power. They’re choosing what investments to make,” says Cooper, research director for Consumer Federation of America.

There’s evidence he may be right. A 2001 study by the Federal Trade Commission reported that some firms were deciding to “maximize their profits” by crimping supply during a Midwestern gasoline price spike. One executive told regulators “he would rather sell less gasoline and earn a higher margin on each gallon sold.”

This year, the FTC reported that some oil companies were storing oil, instead of selling it right away, to await higher prices anticipated in the future.

The industry has shelved an average of 21 percent more unrefined oil from the start of 2004 through last June, the AP analysis indicates. Last spring, stocks of shelved crude reached their highest level in eight years, despite the fabulous riches at hand in high prices then.

Such a strategy could conceivably extend to drilling too. “If you think prices 10 years from now are going to be $100 a barrel, you might not be that enthused about producing as much as you can now,” suggests energy economist Allan Pulsipher at Louisiana State University.

However upsetting to drivers, such tactics are usually viewed as legal. “A decision to limit supply does not violate the antitrust laws, absent some agreement among firms,” regulators wrote in one FTC report.

Also, individual companies are freer to bottle up supplies without fear of losing business to competition, because fewer companies now control a production choke point: refining. Thanks to mergers, the top 10 companies now control three-quarters of national refining capacity, up from half in the early 1990s.

“A handful of very large companies realize it’s in their mutual interest to keep prices as high as possible,” says Tyson Slocum, an energy expert at the consumer group Public Citizen, founded by Ralph Nader. “I don’t think they’re sitting around a table smoking cigars and price fixing, but I think there are sophisticated ways to manipulate the market.”

Bakersfield, a fast-growing city of 300,000, shuddered in November 2003 when Shell confirmed it would soon close its local refinery. Plant workers, consumer activists and public officials rose up in resistance, firing off letters and demanding meetings.

The 70-year-old refinery only produced 2 percent of California’s gasoline and 6 percent of its diesel fuel. Yet opponents feared its demise would push up prices in the tight markets all along the West Coast.

In these circumstances, surely the plant was worth something to someone, if not to Shell. After losing $57 million mostly in the aftermath of the Sept. 11 terrorist attacks, the refinery was making money again, Shell acknowledged.

Though set back temporarily by the attacks, the oil business has profited handsomely since then. For example, the biggest six refiners — Shell is only No. 12 nationally but powerful in California — rang up $400 billion in profits since 2001, according to the consumer group Public Citizen and corporate reports. Even compliance with complex clean-air rules hasn’t spoiled business.

The industry also protected profits by not building any new refineries, instead expanding existing ones when it could.

Shell portrayed its Bakersfield refinery as old and unfit. One executive said there was “simply no longer an adequate supply of crude oil” nearby.

Imports were impractical at inland Bakersfield, Shell explained. Lynn Laverty Elsenhans, the head of Shell Oil Products US, said the refinery just wasn’t viable anymore.

“For this reason, we have not expended time or resources in an attempt to find a buyer and do not intend to do so,” Elsenhans wrote to U.S. Sen. Barbara Boxer, D-Calif.

Government regulators eventually began to nose around, wondering if Shell hoped to game the market. But the company finally hired an investment banker to scout buyers. In January 2005, it announced a sale to truck-stop operator Flying J, of Ogden, Utah, which also runs a small refining business. The price was kept secret. Shell did nothing wrong, federal regulators later decided.

Since the sale, drillers and refiners have been making profits as never before.

In Bakersfield, Flying J’s 350 refinery workers now process 2.7 million gallons of oil a day — as much as Shell did .