June 11, 2007

Senator Wyden Blows the Whistle on Under-Investment in Oil Refining and Production

Oil companies should not be rewarded for short-changing American consumers"

Washington, D.C. - Illustrating how the oil industry's failure to invest in oil production and refining keeps gas prices artificially high, U.S. Senator Ron Wyden (D-OR) announced his plan today to take tax breaks away from oil companies that do not invest in new refinery capacity and upgrades.

"The consequences of the oil industry's anti-consumer behavior are clear. When there is less refining capacity, there is less ability to turn oil into gas. When there is less gas, prices go up. When gas prices go up, oil companies make more money," said Wyden. "It's a ‘heads the oil companies win, tails the American consumer loses' proposition."

Wyden offered several examples of how oil companies have tried to systematically limit investment in refining capacity, including:

  • In 2004, Shell Oil tried to close its refinery in Bakersfield, California, when it claimed that there was no longer enough oil in the refinery's surrounding oil fields. Wyden and others objected to the shut down arguing that it was a deliberate effort to reduce refinery capacity. As a result of these objections, Shell sold the facility to an independent refiner, which is still profitably supplying the West Coast with fuel today.

  • In March 2005, 15 workers were killed and another 170 were injured in an accident at a BP refinery in Texas City, Texas. The U.S. Chemical Safety Board (CSB) concluded that the Texas City disaster was a result of "organizational and safety deficiencies at all levels of the BP corporation." The CSB found that BP had systematically cut investment in refinery safety and maintenance despite plant safety personnel warnings that a major accident was imminent.

Wyden's proposal would prevent oil companies from taking advantage of a tax incentive for gasoline and other products they produce unless that output is from new or upgraded refineries and production facilities.

The tax incentive, contained in Section 199 of the U.S. Federal Tax Code, was enacted as part of the American Jobs Creation Act of 2004 to help promote domestic production activities by American businesses. Section 199 guarantees that the major U.S. oil companies will get more than $4 billion in tax incentives over the next five years regardless of whether they invest in their refineries or not. Wyden's plan would require companies to expand their refinery capacity by 15 percent over the next five years in order to be eligible for the Section 199 incentive.

Wyden would also require major oil companies to file quarterly reports with the Secretary of Energy and the Secretary of the Treasury on their investments in refinery capacity and their progress toward this goal.

"Simply put, taxpayers should not be rewarding oil companies for squeezing the supply of gasoline and diesel fuel," said Wyden. "Today, oil companies have perverse incentives to limit investment in maintaining and expanding refineries, because if they cut corners and refineries have to shut down, companies get rewarded with higher gas prices and higher profits. This behavior shouldn't be rewarded with billions of dollars in tax breaks."

Wyden announced that he plans to offer an amendment limiting these oil industry tax breaks during this week's U.S. Senate consideration of major energy legislation.