Pain at the pump

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Pain at the pump: Gas crisis that put drivers over a barrel shows weaknesses in U.S. fuel lifeline

October 16, 2000

BY ALEJANDRO BODIPO-MEMBA FREE PRESS BUSINESS WRITER

Sam Simon was running out of gas. And time.

He picked up the phone.

From his Taylor office, sitting beneath a Bengal tiger gazing down from a mural on the wall, Simon called a Lansing number.

Gov. John Engler said he would call back in a few minutes. It was about 1:30 p.m. on Friday, June 9.

Simon waited, fretting.

His Atlas Oil Co., which supplies fuel to 120 gas stations around metro Detroit, had run out of premium gas. And his six huge tanks, which can store a total of 300,000 barrels of fuel, held only 25,000 barrels of regular unleaded, about three or four days' supply.

Prices at retail pumps were surging. Regular had jumped 6 cents on Sunday, a dime on Tuesday, another dime on Thursday, plus another dime this day. Prices of $1.95-$1.99 were typical in Detroit on June 9, an increase of almost 40 cents in a week.

Gas prices nationwide had been climbing all year, because of rising crude oil costs and low inventories. But not like this. Michigan had just been hit with a triple whammy: Rising gas use at the start of summer, the switch to a special blend of low-vapor gas for the summer months, and a nasty pipeline accident near Jackson on June 7 that was choking off fuel supplies to distribution terminals like Atlas, and thus to stations where drivers fill up.

Simon, the owner and CEO of Atlas Oil, waited in his office with Brian Hopps, his vice president of terminal operations, for Engler to call back.

The phone rang. They put the governor on the speaker phone.

Hopps did most of the talking. Engler listened to worst-case scenarios -- gas lines, empty pumps, zooming prices -- and asked questions: How long would it take to resupply the Detroit market? What could he do to help?

Simon and Hopps asked Engler to consider requesting a waiver from the Environmental Protection Agency that would allow the Detroit area to use conventional gas -- which was more widely available -- instead of the low-vapor summer blend during the crisis.

They signed off after 45 minutes, confident something would be done. "We hoped a waiver would be granted," Hopps said.

But there was no waiver granted-- or requested. Engler decided the supply disruption was temporary, something "we could live through," said his spokesman John Truscott. And the Republican governor, always a tad distrustful of the EPA, was wary of future edicts or conditions that might get attached to a waiver.

"We were kind of surprised it didn't happen," Hopps said. "Had we been able to get that waiver, in a matter of days we would have had 2 million gallons of gasoline in our terminal from another source."

During the next two months, things played out about the way Engler gambled they would. Detroit area prices for regular unleaded leaped to $2.15 in mid-June, but began easing after the pipeline break near Jackson was repaired. A few stations ran out of gas for a few days, but no widespread panic occurred. By mid-August, regular unleaded was selling for around $1.40 in Detroit.

The triple whammy that made Detroit's gas the most expensive in the country at one point had passed. Gas prices in metro Detroit are currently around $1.55.

But the alarms raised by the summer's gas pains showed anew how vulnerable we are to contractions in fuel supply. Indeed, events of the past six months have put energy issues in the spotlight for the first time since the Gulf War.

Just last Thursday, crude oil prices shot up nearly $3 per barrel to about $36, the biggest one-day jump in more than two years, in response to violence in Israel and the attack on the USS Cole in Yemen. The same day, said Hopps of Atlas Oil, his suppliers boosted wholesale gasoline prices by 5 to 9 cents a gallon.

In a recent Free Press poll of 600 Michigan adults, more than half said higher gas prices had affected their lifestyles either somewhat (29 percent) or quite a bit (23 percent).

Last month, President Bill Clinton ordered the release of 30 million barrels from the nation's Strategic Oil Reserve, in an attempt to avert shortages of gasoline and home heating oil this fall. In Europe, rising fuel prices have sparked massive street protests in France, England and elsewhere.

A Free Press examination of recent supply and price swings shows how intricately politics and oil pricing are woven, how vulnerable our fuel distribution system is to slight hiccups and why the summer of 2000's oil shock won't likely be our last.

Big Oil's bad guess

This year's oil shock, like most economic jolts, had its roots in simple supply and demand swings.

Late in 1998, after the near-collapse of Asian economies, global oil demand was weak. The price of crude oil -- the basic raw material for all petroleum products -- had collapsed to $10 per barrel. The Organization of Petroleum Exporting Countries (OPEC), whose 11 members produce 40 percent of the world's crude, cut back output in an attempt to boost prices. It worked: the spot price nearly tripled during 1999.

The United States imports 57 percent of the oil it uses, mostly from members of OPEC.

In late 1999, the big U.S. oil refiners that make gasoline, heating oil and other products from crude -- companies like ExxonMobil and Marathon Ashland Petroleum LLC -- made a bad business decision. They chose to curb oil imports and make less gasoline, hoping crude prices would come back down and thus make it more profitable to make gas. They guessed wrong. Prices didn't drop, and U.S. inventories of oil hit a 24-year low this year.

David Littmann, chief economist with Comerica Bank, said, "in the spring, about 65 percent of the reason for the sharp spike was due to the worldwide supply/demand imbalance of oil." Regular unleaded, which sold for $1.00 a gallon in March 1999, surpassed $1.50 by March 2000 in Michigan and across the country.

Politicians squawk

As pump prices rose, consumers -- and inevitably, politicians -- started to squawk.

U.S. Rep. Debbie Stabenow, D-Mich., who is challenging incumbent Republican U.S. Sen. Spencer Abraham this November, wrote a letter March 9 to Clinton decrying the high prices and recommending that the president release oil from the U.S. Strategic Oil Reserve.

"The current supply of available oil is dangerously low and the resulting high prices merit a crisis response from the U.S. government," she wrote.

Three months later, after prices reached $2.00, Stabenow and fellow Congressman David Bonior, D-Mich., called for an investigation by the Federal Trade Commission into possible price-fixing by oil companies. In another letter to Clinton, the two wrote that high gas prices "seem to be targeted specifically at Midwestern states such as Michigan, while prices in many eastern and southwestern states are up to 50 cents cheaper per gallon."

Not to be outdone, Abraham convened an outdoor town meeting in June at a Warren gas station.

Amid honking horns -- some participants held up signs that read "Honk If Gas Costs Too Much" -- Abraham called for suspension of the 18.4 cents a gallon federal gasoline tax. And he, like Stabenow, proposed use of U.S. reserves to ease the fuel shortage.

When Clinton did ultimately decide Sept. 22 to release 30 million barrels of oil, however, many Republicans howled that the action was timed to help Vice President Al Gore in his campaign for the presidency against Texas Gov. George W. Bush.

The Free Press poll of Michigan residents, taken a week after Clinton's decision, showed support for the action by a 2-1 margin.

At the worst time

Bonior and Stabenow noted correctly in their June 13 letter to Clinton that a huge gap had opened between gas prices in Michigan and the rest of the country. The week of June 19, for example, the average U.S. price of regular unleaded was $1.68. In metro Detroit it was $2.15.

But the disparity didn't mean Michigan was "targeted" by Big Oil or some unseen manipulator. Rather, Michigan drivers were victimized by a bad pipeline accident, at the worst time of year, in an industry where distribution of different fuel mixtures is more complex than ever -- and thus more vulnerable to isolated supply disruptions.

The worst disruption for Michigan came with the June 7 pipeline break near Jackson, but a sign of things to come had happened in Texas two months earlier.

On March 9, a 4-foot section of the Explorer pipeline ruptured, spilling 600,000 gallons of gasoline about 23 miles northeast of Dallas. The 1,400-mile Explorer pipeline system, which carries up to 720,000 barrels of fuel a day, is an important supplier of gasoline to much of the Midwest. The pipeline snakes its way from refineries near the Gulf of Mexico to pump stations and gasoline terminals through the Midwest, ending in the Chicago area.

Prices throughout the Midwest surged in March, then eased a few weeks later.

The Explorer pipeline connects in Hammond, Ind., to the Wolverine pipeline, which is a primary artery for much of the gasoline that flows to Michigan. It was a break on the Wolverine line that really wreaked havoc on the Michigan gasoline scene.

Boom in the creek

Just after noon on June 7, Sheila Comperchio was resting at her home in Blackman Township, near Jackson. She was nine months pregnant -- her son Robert Joseph was born two days later.

Her rest was interrupted when she saw men dressed in brown jumpsuits scurrying in her front yard.

"I was sitting in the living room when a gray truck came barreling down the driveway and a couple guys jumped out," she said. "They didn't explain why they were there."

She walked to the door and asked them what company they were from. The men mumbled something that she didn't understand and walked toward the yard and creek behind the house.

They asked if they could throw a boom into the creek. Not knowing what a boom was, Comperchio asked. The men were vague, she said. "They didn't even say there was a gasoline spill. They didn't even tell me to stop drinking my water."

She called her husband at work to see if he knew what was going on. He hadn't heard anything.

At 1:15 p.m., a representative from the Department of Natural Resources came to tell Comperchio not to drink the water and that they were to be evacuated from their home. They would not move back for 3 1/2 months.

Wolverine pipeline officials said 72,000 gallons of gasoline had spilled into the Tobin Snyder Drain creek that runs behind the Comperchios' home; 580 families were evacuated from homes nearby.

The rupture of the Wolverine pipeline, which carries about 7 million gallons of fuel to Michigan daily, one-third of the state's consumption, is the latest example of the strain on the nation's fuel distribution system.

A year earlier, a pipeline accident in Washington state had claimed the lives of three people. On June 10, 1999, the Olympic pipeline in Bellingham, Wash., suffered a failure that released more than 200,000 gallons of fuel into a nearby park. The spill caught fire and caused an explosion.

"The Jackson spill was the latest in a series of spills this year that had serious impacts around the country," said Lois Epstein, a senior engineer with Environmental Defense, a Washington, D.C., nonprofit environmental research organization. "This is a very disturbing trend."

Across the United States, pipelines stretching more than 157,000 miles carry the 130 billion gallons of gas that U.S. drivers burn each year, plus other petroleum products.

The Wolverine pipeline, which sends gasoline to Detroit from Joliet, Ill., was shut down for 10 days after the break, leaving Detroit-area wholesalers and some gas stations without gas. Following repair work, the pipeline was back up at 70-percent capacity. Since the second week of August, the pipeline has been at 100-percent capacity, which matches the pre-spill volumes and capacity of Wolverine pipeline.

On the day of the rupture, the Mobil station run by Yacoub Saad at Trumbull and Fort in Detroit was selling regular unleaded for $1.76 a gallon. Eight days later his price was $2.16. And then he ran out of gas.

"We get most of our gas from the Wolverine pipeline and we were out of regular unleaded for four days," Saad said. "It was hard getting through to our suppliers when it happened. And when we did, they kept telling us the same excuses about the pipeline."

Fuel cocktails

How can a hiccup in one pipeline shut down fuel supply to a region as large as southeast Michigan? Aren't there lots of intersecting pipelines? Can't fuel be rerouted to places in need?

Those were obvious questions during the turmoil of mid-June. And yes, terminals like Atlas Oil or stations like Saad's could have found alternate sources of gas -- if it was April or December or February. Anytime but summer.

To improve air quality, the 1990 Clean Air Act amendments established the reformulated gasoline (RFG) program. This program requires most major metropolitan areas to sell different

blends of gas during summer months -- typically June 1-Sept. 15 -- to limit harm to the ozone layer.

But different regions use different blends. Chicago and Milwaukee, for example, use RFG with ethanol.

But for seven counties in metro Detroit, the state opted to use a different blend called 7.8 RVP (for Reid Vapor Pressure) to achieve the federal clean air goals.

"As we start to make different gasolines for Chicago, southern Illinois, Detroit and so on, which are all pipeline connected, it puts a lot of constraints on the refineries," said Kenneth Warren, refinery manager for ExxonMobil in Joliet, Ill.

His facility provides fuel to the more than 500 Mobil gas stations located in Michigan, including 250 in metro Detroit, by way of the Wolverine pipeline.

"Twenty years ago all you worried about was how the gasoline performed in the car, but today what we worry about are not only those things but environmental regulations as well," Warren said. The Joliet refinery makes six different blends of gas. Each needs to be stored in its own tank, limiting the company's flexibility to shift production for emergency needs.

Nationwide, refiners produce more than 50 blends of gas.

The usual suspects

Whenever fuel prices shoot skyward, the usual targets for blame are Big Oil or OPEC, or both. Saad, the Mobil station manager, thinks Big Oil is at least partly to blame for the summer 2000 runup.

"Usually the prices go up in the summer, because consumption goes up. And it usually takes a month to increase supply," he said. "We weren't expecting the huge spikes. In my opinion, I think it was intentional."

Exxon Mobil Corp., the largest oil company in the United States, doubled its profits in April-June this year, and most other oil firms posted similar gains. ExxonMobil third-quarter profits, to be reported in a few weeks, are expected to nearly double again.

Fadel Gheit, oil analyst with Fahnestock & Co. in New York, warned against making too much of one or two periods' financial reports. Noting that ExxonMobil lost $19 million on refining and marketing operations in 1999's fourth quarter, he said, "If someone hits a grand slam in a game let's not extrapolate that someone will hit 700 home runs in the season. He may never hit another in his career. So history is the great equalizer."

In its preliminary report on the summer fuel price surge, issued July 28, the Federal Trade Commission spread responsibility widely. OPEC's 1999 oil production cuts were a factor, the FTC said, along with strong demand, reformulated summertime gases and pipeline breaks. The FTC's final report is expected at the end of the year.

That's about what the Michigan residents polled by the Free Press concluded. When asked who was most responsible for recent gas price increases, 34 percent cited foreign oil producing nations; 27 percent said major oil companies; 16 percent blamed government taxes and policies; 9 percent said market forces, and 5 percent said drivers of gas-guzzling vehicles.

Whatever the reasons for Michigan's wild ride this year, it appears that continued oil price volatility is a given.

In July testimony before the U.S. Senate committee on energy and natural resources, John Cook, director of the petroleum division of the Department of Energy's Energy Information Administration, said that very low gasoline stocks in a market short on crude oil generates an environment ripe for price volatility.

"I think things will stay very volatile for a long period of time," Hopps of Atlas Oil said Sunday. Inventories are low, consumption remains strong and U.S. refineries are running at 94 percent-96 percent of capacity, he said.

"Crude oil supplies seem adequate, but there isn't enough refining capacity," he said. "Any little disruption will most likely lead to panic buying, which is the No. 1 cause of volatility."

Contact ALEJANDRO BODIPO-MEMBA at 313-222-5008 or bodipo@freepress.com.

http://www.freep.com/money/business/gas16_20001016.htm



-- Martin Thompson (mthom1927@aol.com), October 16, 2000


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