<a href=www.sfgate.com>SFGate.com Verne Kopytoff, Chronicle Staff Writer Wednesday, April 2, 2003

An investigation ordered by Gov. Gray Davis into California's escalating gasoline, diesel and natural-gas prices has found no evidence of illegal manipulation.

Rather, the probe attributed the higher costs this year primarily to tensions over the war in Iraq, a strike in Venezuela and an unusually cold winter on the East Coast.

The conclusion, to be officially released today, is a setback for those who believe that the soaring gas prices and heating bills this year are due to collusion. But it is an obvious victory for the oil and natural-gas industries,

which have maintained all along that market forces, not manipulation, were responsible.

"The governor was rightly concerned about prices," said Steven Maviglio, a spokesman for the governor. "Just because they can't find anything, that doesn't mean it doesn't exist. We're going to keep our eyes on it."

Dave Fogarty, a spokesman for the Western States Petroleum Association, an industry trade group, applauded the findings. "We understand consumers are angry about the increase in gas prices, and we are pleased that the report validated what many other investigations have validated."

Davis ordered the probe on March 13 when the average price for a gallon of unleaded was about to hit a state record of $2.15. Natural-gas prices had also increased, but were still lower than during the 2001 energy crisis.

Davis said any evidence of wrongdoing would be forwarded to state Attorney General Bill Lockyer for further investigation and possible legal action.

The California Energy Commission, the state agency that oversees energy planning and policy, completed the gasoline and diesel portion of the investigation. The Public Utilities Commission, the state energy regulatory agency, focused on natural gas.

The report found that higher gasoline prices are being driven mostly by a big surge in oil costs. The price for a barrel of crude on the spot market leaped nearly 40 percent to a high of $37.96 last month, compared with $26.80 in December.

But some of the responsibility also lies with California's peculiar gasoline market, the investigators found. Prices here usually rise in March when refiners perform maintenance and retool their equipment to produce a summer blend of fuel.

This year, the process was complicated by a change in additives to reduce smog. MTBE is being phased out in favor of ethanol.

The overall effect was tight gasoline supplies, the probe found.

Investigators noted that refiner margins had reached unusually high levels. Margins are the refiners' combined costs -- not counting oil -- and profit.

The seven-year average margin for each gallon of gas sold is between 29 and 32 cents. But since the beginning of the year, the margin has ranged from 19 to 76 cents.

The conclusions reached in Davis' investigation aren't new. Many of the problems were cited in a probe by Lockyer of a gas price spike in 1999.

No criminal charges or civil suits came out of that probe. The investigation is still open.

"This pretty much verifies what we've been saying in our report issued in 2000," said Tom Dresslar, a spokesman for Lockyer. "That there's some market conditions in California that make us susceptible to price swings."

Gasoline prices have ebbed modestly since their peak last month. They're down 1.5 cents per gallon during the past two weeks, though they are poised to go far lower, according to William Keese, chairman of the California Energy Commission.

He said retail prices should fall below $2 across much of the state by the end of the week because wholesale gas prices have dropped 42 cents per gallon since mid-March.

Maviglio and Keese stressed that this investigation was done in only 15 days and that the investigation will continue until June, at which time recommendations will be made to stabilize the state's volatile market.

Possibilities include encouraging the development of alternative fuels or building a state fuel reserve that can be tapped in emergencies.

Charles Langley, gasoline project manager for Utility Consumers Action Network, a public interest group in San Diego, said he is disappointed that the investigation didn't uncover any wrongdoing. But he added that any legal action would have to come from the federal government.

"I was hoping there would be some positive news here," Langley said. "But there's not a lot that can be done at the state level."

E-mail Verne Kopytoff at vkopytoff@sfchronicle.com.

Atlanta Business Chronicle

Atlanta-based Colonial Pipeline Co. will pay a $34 million penalty and spend at least $30 million to improve safety to settle pollution charges for spilling 1.45 million gallons of oil and petroleum products in five states, the U.S. Environmental Protection Agency said.

The EPA said the $34 million payment is the largest civil penalty a company has ever paid to the agency.

The government found Colonial violated the Clean Water Act when the company's pipeline corrosion, mechanical damage, and operator error resulted in the release of approximately 1.45 million gallons of oil and other petroleum products. In one spill, more than 950,000 gallons of diesel fuel spilled into the Reedy River in South Carolina.

The U.S. Justice Department said Colonial, operator of the world's largest pipeline for refined petroleum fuels, will upgrade environmental protection along its 5,500-mile pipeline stretching from Texas to New Jersey. Colonial pleaded guilty in 1999 to a criminal charge and paid a $7 million fine stemming from the spill in the Reedy River case.

Colonial's owners include Koch Industries Inc., ConocoPhillips, Marathon Oil Co., Shell Oil Co. and the Citgo Petroleum unit of Petroleos de Venezuela.

Colonial will be required to inspect the pipeline for corrosion and make repairs under the supervision of a monitor.

The EPA said it has recently taken action against several other pipeline companies for oil spill violations, including Olympic Pipe Line Co. and Shell Pipeline Co.

Reuters, 04.01.03, 10:48 AM ET NEW YORK (Reuters) - U.S. average oil refining margins slipped for the third week in a row last week, but thin gasoline supplies kept margins well above normal for this time of year, a report said Tuesday. U.S. margins slipped 91 cents to $6.21 per barrel, much above the $4 mid-cycle average, the Salomon Smith Barney report said. U.S. gasoline stocks fell 2 million barrels to 199 million barrels, about 16 million barrels less than this time last year, the federal government reported last week. Despite the drop in gasoline stocks reported last week, U.S. refiners were expecting gasoline from Venezuela soon -- the first since a two-month strike that began late last year. The first cargo should leave Venezuela on Wednesday, according to the state oil company. It will hold some 360,000 barrels. The journey takes about five days. Margins were highest in California, despite slipping $1.05 to $11.59 per barrel. Midwest margins slipped 47 cents to $7.05 per barrel. East Coast Brent margins slipped $1.22 to $6.78 per barrel. Profits were lowest in the U.S. Gulf Coast, which dropped $1.28 to $4.60 per barrel. U.S. refiners may have had a profitable first quarter this year as cold weather, and the workers strike in Venezuela bit into gasoline and heating oil stocks. First quarter refining margins averaged $5.84 per barrel, almost double the year ago level, the report said.

<a href=www.sfgate.com>SFGate.com Verne Kopytoff, Chronicle Staff Writer Tuesday, April 1, 2003

Energy Secretary Spencer Abraham pointed Monday to a modest dip in gasoline prices during the past two weeks as a sign that record high fuel costs may be ebbing.

In interview in San Jose, Abraham called the drop good news. But he declined to say whether illegal market manipulation caused prices to jump in the first place, as some consumer groups have said.

Instead, Abraham cited a number of benign explanations for the sticker shock at the pump, ranging from tensions over the war in Iraq to a cold winter on the East Coast to a workers' strike in Venezuela. He added that his agency wants to hear from anyone with evidence of gouging so the information can be forwarded to the proper authorities.

Abraham's comments came against the backdrop of the federal government's disclosure Monday that California gas prices have dropped for the second straight week. During that period, the average price for a gallon of unleaded in the state has dipped to $2.13 after hitting a record $2.15 on March 17, according to weekly surveys by the Energy Information Administration.

"The trend is at least starting to move in the right direction," Abraham said.

He was in Silicon Valley to support technology and alternative energy by attending an annual information technology conference. His department has been the focus of several major debates during the past couple of years. They included the California energy crisis and the ensuing findings that a handful of energy companies were to blame, proposals to drill for oil in the Arctic National Wildlife Refuge and, most recently, high gasoline prices.

For its part, the Department of Energy has avoided accusing oil companies of purposely driving gas prices higher. In fact, the Energy Information Administration, part of the Energy Department, said in a report last month that there is no evidence the oil industry is engaging in profiteering. It described refiner margins as strong, but added that they are within normal levels.

Abraham said that California's status as one of the most expensive places to buy gas is at least partly a product of its unique smog-reducing fuel blend,

which makes importing additional gasoline from outside the state difficult. The blend recently switched from MTBE to ethanol, causing refinery disruptions and contributing to the current price increase.

Gov. Gray Davis and Sen. Barbara Boxer, D-Calif., have called for separate investigations into California's high gas prices. Abraham said his agency has no investigative arm or regulatory authority over the matter.

Nationally, gas prices have gone down far faster than in California. An average gallon of unleaded in the United States now costs $1.65, down nearly 7 cents during the past two weeks.

Abraham underscored his department's role in maintaining the National Petroleum Reserve, which holds millions of gallons of oil. He said, as he has repeatedly over the past couple months, that he would allow it to be tapped only in an emergency.

"We work to make sure that we are prepared to use the strategic reserve if we need to do so and if a severe disruption in supply takes place," Abraham said.

Charles Langley, gasoline project manager for the Utility Consumers Action Network, a public interest group in San Diego, said the small dip in gas prices by a penny or two is hardly comforting. He said that refiners, especially those with their own chain of service stations, are still gouging drivers.

Oil prices have declined by about $6 per barrel from their 12-year highs reached last month. It usually takes gasoline prices about two weeks to a month to react to a drop in oil prices.

"We're not being screwed as badly as we were," Langley said. "But really, prices ought to plummet."

E-mail Verne Kopytoff at vkopytoff@sfchronicle.com.

By Peter Behr Washington Post Staff Writer Monday, March 31, 2003; Page A22

The rebound in crude oil prices last week, triggered by Iraq's resistance to U.S.-led forces, has slowed the flow of oil imports to U.S. refineries and the production of gasoline, leaving motor fuel stockpiles at historically low levels as the summer driving season approaches, energy analysts warn.

The uncertain course of the war and the accompanying gyrations in oil prices are making U.S. energy companies wary about rebuilding depleted fuel inventories with high-priced crude. The companies also are worried that a sudden favorable turn in the war could caused oil prices to plummet.

"If we ever get past this crisis, crude prices will drop like a rock," said Mary Rose Brown, vice president and spokesman of Valero Energy Corp. in San Antonio, one of the largest U.S. refiners. "Does it make you more cautious? Yes. Any barrel you buy today that would have been be cheaper next month -- that would be a stupid move."

The caution is widespread among refiners, too. In the week ending March 21, U.S. refineries produced less gasoline and other products than the week before, even though oil is available.

But if gasoline inventories are not in better shape when gasoline demand picks up on Memorial Day, pump prices could stay high through next fall, the Energy Information Administration warned last week.

A big increase in crude imports is needed to refill gasoline stockpiles, the EIA said. "However, the evidence so far suggests that either this is not happening, of that if so, the pace is barely perceptible," it warned.

Gasoline inventories in the United States have been falling since early this year, following a strike in December that closed down Venezuela's oil fields, a crucial source of both oil and gasoline imports. As of mid-March, U.S. gasoline inventories were 6 percent below levels a year ago and pump prices have risen as inventories shrunk.

Motorists got a bit of relief after oil prices plunged in energy markets' optimistic reaction to the onset of the Iraq war on March 20. The cash or spot prices of a benchmark U.S. crude brand, West Texas Intermediate, stood at $37.87 a barrel on March 12, but by the war's second day, had plunged to $27.18, the EIA said. Gasoline prices followed with a small downward move, with the national average price for regular brands dropping from $1.72 in mid-March to $1.69 at the end of last week.

But the end of last week, crude oil prices had climbed to $30.16 a barrel on U.S. markets, and gasoline prices generally follow the direction of oil prices. In trading early today, U.S. light crude rose 13 cents, to $30.29 a barrel.

With an uncertain war timetable, U.S. refiners cannot reliably predict when oil prices and gasoline prices might drop. That makes them unwilling to take the risk of increasing their import purchases on a large scale, even though there is plenty of oil around, said Jeff Goetz, director of Poten & Partners, a New York-based marine consulting group that tracks oil tanker shipments. "There's enough oil."

The Iraq war did not cause an immediate oil shortage, even though the conflict cut off nearly 2 million barrels of daily crude oil supplies, or about 3 percent of the world's needs.

In February, Saudi Arabia and other Persian Gulf producers increased oil production to counter a sharp increase in crude prices caused following the Venezuelan strike. Now that additional oil, equal to 1.5 million barrels of daily supply, is arriving at refineries along the Gulf of Mexico, completing a 45-day voyage from the Persian Gulf.

But all the cargoes are not being snapped up by refiners, industry analysts and officials said. Many refiners apparently are buying enough to serve motorists' current needs, but not enough to rebuild stocks. "They are looking to buy the oil when they need it," Goetz said. "When they are uncertain about the future, they hold back."

A refiner that bought a supertanker's cargo of 2 million barrels of oil at $30 a barrel could lose millions if gasoline prices fall before that tanker cargo can be refined into gasoline and the fuel is distributed for sale to service stations. "The risk of oil prices going from $40 to $25 [a barrel] are much higher than going to $60," he said.

Valero lines up two-thirds of the oil it needs through advance contracts. The rest is purchased just as it's needed, on the spot market. "There are a lot of cargoes on the water, and a lot of oil headed this way that doesn't have a buyer," Brown said.