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Spokane, Washington  Est. May 19, 1883

Oil industry in no hurry to increase production


Birds roost on pilings in Galveston Bay in front of oil refineries in Texas City, Texas. With high gas prices and home-heating costs expected to surge this winter, the industry is doing its best to downplay the enormous sums of money it is making these days.
 (File/Associated Press / The Spokesman-Review)
Brad Foss Associated Press

WASHINGTON — Don’t expect the oil industry to boost fuel production merely to deflect criticism from Congress about soaring prices and profits.

Energy executives and analysts insist that in spite of the supply crunch that has kept oil above $50 a barrel for much of the year, demand and prices are still prone to ups and downs, so the industry should not rush to drill wells and expand refineries just because it is flush with cash.

“A surplus of supply is not good for the industry,” Shell Oil Co. President John Hofmeister said in an interview on Friday. “Just as a surplus of demand is not good for industry. We strive for balance.”

Hofmeister, speaking by phone from his corporate jet upon leaving Washington, said “we will continue to work as an industry to increase supplies to the American people.” But he said Shell executives were still debating whether it makes economic sense to expand the capacity of refineries it owns jointly with Saudi Refining Inc.

The companies said in September they were considering adding 100,000 to 300,000 barrels per day of capacity to plants in Louisiana and Texas.

Keep in mind, Hofmeister said, that “high-priced oil at 60-plus dollars leads people to seriously question their use of energy. And as they question that use of energy, they use less … let the market do its work.”

Washington’s complaint that the market might not be working well, however, grew this summer after hurricanes Katrina and Rita exposed the industry’s vulnerabilities, causing supply disruptions that sent gasoline prices above $3 a gallon. The backlash reached a bipartisan crescendo this week after Exxon Mobil Corp., BP Plc, Royal Dutch Shell Plc and Chevron Corp. reported combined third-quarter profits of $29 billion.

A congressional hearing on energy prices and profits is scheduled for Nov. 8.

With oil hovering above $60 a barrel and home-heating costs expected to surge this winter, some analysts believe the industry may have no choice but to work with the government to make the world’s largest petroleum-consuming market more secure and less volatile.

“There have been a flurry of proposals, some of which will undoubtedly lead to some kind of innovations,” said Antoine Halff, director of global energy at Eurasia Group in New York. But he added that “investment decisions are going to be made on commercial grounds.”

Congressmen say they are worried about the economic hardship soaring energy costs are placing on average Americans.

Sen. Bill Frist, R-Tenn., the Senate majority leader, said he would support a federal anti-price gouging law. Sen. Chuck Schumer, D-N.Y., introduced a bill that would place additional taxes on oil company profits to help reduce the deficit and pay for hurricane relief. Some want the industry to assist low-income families with their heating bills.

Even the industry-friendly Bush administration acknowledges that something must be done to fix the supply imbalances that underpin today’s high prices.

President Bush has repeatedly stressed conservation in recent weeks. Energy Secretary Samuel Bodman said the administration was considering a wide range of proposals, including the creation of an emergency reserve of gasoline, diesel and jet fuel. Bodman also encouraged the industry to increase U.S. refining capacity to make the U.S. less dependent on imports of gasoline and diesel.

But Bodman said he would not support the so-called windfall profits tax that Schumer has proposed.

Matthew Simmons, a longtime investment banker in the oil and gas industry, said he quietly lobbied Big Oil executives to create a Gulf Coast recovery fund of between $5 billion and $10 billion as a way to avoid the current public relations headache. But the “idea fell on deaf ears,” Simmons said in an e-mail.

Wall Street analysts said they’re getting calls from investors who are increasingly concerned about the pressure in Washington to do something about high prices and record profits. They oppose any tax that would punish companies for living up to their fiduciary responsibilities.