"Why doesn't the law of supply and demand works in the oil industry?" Sen. Howard Metzenbaum (D-Ohio) kept asking yesterday at a hearing called to find out why retail gasoline prices are not falling rapidly in the face of records supplies.
"It does work in the oil industry," replied R. G. Weeks, executive vice president of Mobil Oil Co.'s domestic refining and marketing division.
Energy Secretary Charles Duncan told Metzenbaum he thinks competitive forces are beginning to cause price reductions at the nation's gasoline pumps.
And E. J. Hess, a vice president in Exxon Co. U.S.A.'s marketing department, said the same thing: "Currently there is some indication of more competitive pricing at the retail level."
But Metzenbaum, chairman of the Senate Judiciary Committee's antitrust subcommittee, could not be convinced. Surrounded by an array of charts, to which he kept pointing, and several large color photographs of gasoline pumps with prices ranging up to $1.41 a gallon, Metzenbaum accused the oil companies of "exploiting the market."
Duncan acknowledged that supplies are high. "Gasoline stocks at the primary level were about 268 million barrels (as of the end of the first week in June), near record-high levels and up 40 million barrels, or about 18 percent, over May 1979 levels," he said.
However, refiners' costs have been rising rapidly as the price of crude oil has escalated and the cost of operations has risen, Duncan continued. "Even in a market characterized by ample supplies, one would expect most of these cost increases to be reflected in product prices, since suppliers must price over time in such a way as to recover their costs," he said.
"Therefore, the existence of relatively abundant supplies is not likely to reverse the trend of increasing (gasoline) prices if crude prices and other costs are also increasing significantly," the energy secretary said. "But in a competitive market one can expect supply adequacy to have a moderating effect on the upward price trend . . . That in fact appears to have appeared over the last few months, although the results are not dramatic." h
Duncan provided estimates showing that in May the gross margin of refiners and wholesalers selling regular leaded gasoline began to fall, while retail dealers' gross margins were down about a half cent a gallon from their level in January. The gross margins are not the same thing as profits because all the operating costs of a refiner, wholesaler or retailer must be paid out of that difference between the cost of acquiring the oil or gasoline and the price at which it is sold.
The combined refiner-wholesaler margin peaked at 30.9 cents a gallon in April compared with 19.8 cents a year earlier and 25.7 cents this January. Meanwhile, the cost of crude oil to refiners hit 67.9 cents a gallon in May.
State and local taxes on gasoline have been going up, too, rising from 13.1 cents a gallon a year ago to 14.3 cents in May, according to Duncan's testimony.
Noted Exxon's Hess, "It is unrealistic to expect prices to reflect a higher degree of competition as long as federal price and allocations controls continue."