Why does gas cost so much?

H.N. Funkhouser and Co. President Bob Claytor.
In-depth with H. N. Funkhouser President Bob Claytor
Transcript by PAULA CONROW
Warren County Report
Dan McDermott: With me is Bob Claytor. He is president of H.N. Funkhouser and Co. They operate the Exxon, Shell, and Texaco plants in Winchester, Woodstock, and Front Royal and they operate Napa Wholesale Auto Parts Stores, Handy Mart Convenience Stores, and sell industrial and automotive lubricants in the Northern Shenandoah Valley. Mr Clayter, how in the world did you find the time to be here today. You’re a very busy man.
Bob Claytor: I appreciate the sales pitch very much but I also appreciate that this is a very sensitive subject and people are very concerned about it. I’m here to try to give a few facts and figures to you.
Dan McDermott: Let's start off with the obvious questions. Gas is almost at post-Katrina levels. What’s the reason? Whats going on?
Bob Claytor: There are two reasons. One factual and one not factual. The easy answer is the oil companies are taking advantage of us. That’s very popular but not supported by fact. The other is that internationally there is tremendous demand in growth for petroleum and that we cant keep up that capacity to meet that demand. And the supply and demand issue, economics 101 is taking place. So as the demand dramatically goes up and the supply stays the same price goes up.
Dan McDermott: Now you gave me a statistic about Asia and I remember about 10 years ago the Internet became popular. When you go to Wal-Mart and get your taxes done they are sending them to India and E-mailing them back. And you don’t even know it. And when you call Dell you get an Indian or Pakistani. I’ve lived in both those countries and I applaud those folks and they are highly educated. But the problem is that people who used to walk or ride a bike can now afford a car. The energy demands . Why don’t you tell me that statistic that blew me away about China’s and India’s energy.
Bob Claytor: I tried to pick an airline ticket with United and I called United help line and talked to a person in India, so they are doing a lot of things. India and China, I think we lose grasp of how big they really are. China is about 1.4 billion people. America for example is about 280 million, so they are about 4 ½ or 5 times our size. India is over a billion people. Those two countries today are using more energy than the whole world used a little over 10 years ago. And they are not producing oil, they are net importers of oil. So you take 2 countries and dramatically increase consumption more than 10 years ago total world and you can see where some of our problems are. They’re affecting not just the energy market. They are affecting the gold market. They are affecting the concrete market, the steel market. You see gold going up a lot. People say why is that? Well because these developing countries now want to buy jewelry for their girlfriends and they’re so many of these folks over there gold is in strong demand right now so that price is going up as well.
Dan McDermott: Well they’ve been introduced to the concept of disposable income for the first time.
Bob Claytor: Their gross income for the year used to be in the two to three hundred dollar range. That was their total income. Now their up to about thirty five hundred dollars a year. Still pales by our comparison, but a lot of those people are getting up to five or six thousand a year and can start affording cars, houses and other consumable goods that we’ve been used to over the years.
Dan McDermott: I lived in India as a kid and it was a country of beggars, basically, not the whole country but you would see them everywhere. Just dirt poor. Poverty, heartache, tragedy everywhere, people dying of starvation, and that’s all changing. I think I contribute the internet to a lot of it because its breaking down the geographical borders that separated prosperity from destitution. It’s kind of leveling the playing field. It’s a fact of life and we’ve about tripled our energy in 10 years.
Bob Claytor: China last year was building a huge dam project and they were using about a third of all the concrete in the world. Because of that the concrete prices almost tripled. They were using almost half of all the rebar in the world, the metal that goes in the concrete. So those prices went up dramatically. It's just not the petroleum industry, its all commodities being consumed by these developing nations.
Dan McDermott: I think this dam was on the great wall of china scale. It’s a huge engineering feat. They are very proud of it but have used a lot of resources to do it. What was the reason the gas went up so quickly after Katrina. I think I saw some oil executives who said in order to prevent hoarding they deliberately raised the price right away. And it seems to me... I just want to punch them in the nose.
Bob Claytor: I never heard that. If that’s the case someone ought to punch them in the nose. We had three storms in a row that dramatically upset the petroleum industry, but Katrina was the worst. Katrina singlehandedly shut down about 600 oil producing platforms in the gulf of mexico. It singlehandedly shut down about 15 refineries and 2 if those refineries took over 2 months to restart. One was the big refinery in Pensagola, Mississippi which was gigantic, produces 400,000 barrels a day and was down for 2 ½ months. It also disrupted supply for about 3 days to the pipeline that comes up in Louisiana and Texas was closed. I know when you go to a pump you expect the gasoline to be there but it has to get there by a certain mechanism. We get all our product out of a pipeline that comes out of texas and Louisiana goes all the way up the East Coast and actually ends in Baltimore. So when that pipeline is sufficient we can barely keep up, when it is shut down for a day or two it takes a very long time to catch back up. These refineries they were down to the extent that they were bringing product in the New York harbor in order to get product down to us. A lot of our terminals were totally out of gasoline for weeks at a time. We hauled lots of product out of Pennsylvania because it wasn’t available here. The consumer doesn’t see that back all that disruption, all these pipelines going empty drives these prices up high, and it certainly did.
Dan McDermott: It we tripled our demand for energy, gas, oil, and other forms of energy in 10 years. I’m guessing its about triple.
Bob Claytor: Let's deal with America now. I have the facts and figures for that. America grows about 2 to 2 ½ percent a year. And our gasoline isn't our only demand…energy is a lot of things. It's gasoline, its diesel fuel, its jet fuel, its kerosene, heating oil, chemicals, plastics. But gasoline, this year, the '05 over '04 grew by 300,000 gallons a day. So that’s our growth for one year in America.
Dan McDermott: So as the need for energy is growing very rapidly in certain parts of the world and pretty conservatively here only by comparison to there, our refinery growth, the number of refineries which take 10 years to build has not kept up. Correct?
Bob Claytor: A refinery costs about 4 to 5 billion dollars, that’s with a 'b.' And we haven’t built a refinery in America…I think the last one was built in 1973. I read some articles where the last one was built in 1976. I don’t know where that refinery was, but I do know where the ’73 was. Now with either one of those numbers its been 30 years since we built a refinery in America. So we can buy crude oil from a lot of different countries, Mexico, Venezuela, certainly all the Saudi countries, but if we cant refine it into a usable form it does us no good. We desperately have got to start thinking about energy independence, and with that we have to refine our own product.
Dan McDermott: I want to move on to that when we come back. First I want to ask you another refinery question. I guess they switch blends in certain parts of the country to introduce more ethanol for pollution reasons. That was a noble goal in the ‘70’s, but today when every refinery is at peak capacity and we’re not really meeting demand or at least we’re barely meeting demand to the point where prices have skyrocketed, are we unnecessarily inconveniencing consumers to the tune of a buck a gallon extra for a relatively limited gain in the environment, or is it worth the cost?
Bob Claytor: There's certainly a lot of that going on in the pipelines coming up in the east coast they were designed for three products. They were designed for leaded regular, leaded super, and diesel which was also fuel back in those days. We now have 35 different blends of product coming up those pipe lines. We’ve gotta somehow, it’s called boutique gasoline, we’ve gotta take away the states rights to personally blend all these gasolines and have different specifications. Efficiency comes with running the same thing a lot. When you have to stop refineries, change blends, read vapor pressures and volatility points, and blend 35 different blends, that’s very inefficient. It causes a lot of transportation problems. And with all of that there is a cost associated with it that the consumer has to pay.
Dan McDermott: I imagine if they said I’m going to cut the power to your business for three days because we’re going to have a 3 percent decrease in pollution by switching blends and we’ve got to clean everything out, you wouldn’t stand for that.
Bob Claytor: And this recent blip in prices, you know we talk about the oil companies and shipping and transportation, but the government every may the first for the last five years has required that every gas dispensary in Virginia go to a lower re-vapor pressure gasoline. It’s a gasoline that doesn’t evaporate quite as much in the summertime. Well that requires that every tank farm empty their tanks and put in this new product by May 1st. We’ve got to do the same with all our tanks in the month of June and get it done by the end of june. So every tank in the whole eastern United States has to be emptied and refilled with this new product and then, again, this causes disruptions and shortages and it does have a price associated with it. I think it’s probably a good thing to do, but then it does cause peaks and valleys around the May-June frame because we are having to change all these tanks over.
Dan McDermott: Next we’re going to talk about moonshine, and can I go to McDonalds and get the fryer oil and stick it in my diesel engine like Rudolph Diesel said we could when he introduced the diesel engine at the Worlds Fair back in the day.
Dan McDermott: We're back. I see in brazil they have gone from 85 percent imported oil to almost zero reliance on foreign entities for energy and they have done it by growing a lot of sugar. This is not something they have done in the last year, its something they’ve been working on for 20 years I think. In the United States we are paying farmers to grow certain crops. I don’t know if we’re still paying them to plough under certain things and subsidizing this and buying food from them because they cant get enough profit. Should we switch all this to corn? Is that the answer? What is the solution? What else can we stick in our cars once you consider all the facts to stop having to burn liquid, decaying dinosaurs and plants?
Bob Claytor: You mentioned moonshine before the break, I thought you would come back with that. Moonshine is ethanol. Ethanol is a c2h50h. It is a thing you drink, so corn, George Bush said the other day, not only do you have to raise corn for this, but you have to feed corn to animals and not all corn goes to this purpose. You also have to compete with, when you buy a bottle of Jack Daniels at 20 some dollars a pint or a quart I guess it is or a fifth. Are you willing to pay that much for gasoline and the answer is no. There is no question that Brazil has gone this direction. The problem with alcohol, and certainly..i just cut a couple of articles out of Forbes. You know currently we are using about 4 billion gallons of ethanol in this country right today. And just recently all the reformulated gasoline, that is that which is used in the cities, in the high density populations, they had an additive called MTBE that was found out to be a carcinogen and just this year that was taken out and ethanol was put in most of those products. So if you buy gasoline in Washington, DC it has a 10 percent ethanol mix. Ethanol is very popular. It is grown in America. It has all the grandma and apple pie type things that people love. However alcohol does not burn as efficiently as does gasoline. This article in Forbes says if you are using alcohol today it would equate to about $4.50 a gallon of gasoline. So you don’t want to put 100 percent alcohol in because its expensive. Also alcohol is a very dry product so unless you have a flex fuel vehicle you can burn your engine up. So right now 10 to 15 percent is about all the alcohol your car can stand unless it’s a flex fuel vehicle. Alcohol made from corn is pretty heavily subsidized. Right now all the corn growers out in Kansas and Nebraska are getting about a 54 cents a gallon subsidy. About 40 percent of their income comes from government subsidy, not from selling the corn, so its not without some federal cost to it. Also if you burn alcohol in your car you get about 24 to 30 percent less energy, so your gas mileage will go down about that amount. It is not a utopian type of thing, but it does decrease our dependency, but it does have a price associated with it.
Dan McDermott: I think you said we would have to virtually plough down every crop in America to grow enough corn just to support the United States energy demand if we switched to alcohol.
Bob Claytor: This article said if the fuel demand continues into 2050 it would require 1.4 billion acres to eliminate importing gasoline. That would be every square inch in this country for a total of 1.4 billion acres. There would be no room left for building homes or food crops.
Dan McDermott: Wow if we could buy Australia, I think its about a billion acres.
Bob Claytor: Another thing about alcohol, we can raise it from corn, but we can also buy it from Brazil. Right this moment there is a 54 cent tariff. That is to say if we buy from Brazil again the taxpayer pays a tariff to the government because they want to make sure they protect local homegrown corn. So all these things have little strings attached and price points attached through taxes. Not that they can’t be eliminated. You can make alcohol a lot of ways; you can make it out of hay, you can make it out of anything that’s biodegradable. So alcohol is not just a corn crop. I think brazil gets most of theirs from sugar cane actually.
Dan McDermott: If corn is not the answer, or if ethanol is not the entire answer, what do you think is going to be the crop or what will be the crop or product that will be a renewable source of energy to try to eliminate our dependence on foreign oil?
Bob Claytor: Surely alcohol is one way. If we can take 10 percent of all our total gasoline demand away from importing it that’s 10 percent we don’t have to buy. You can make ethanol from a lot of different things. You can make it from seaweed, from sugarcane, you can make it from hay. There are lots of different ways to make it. There is lots of crude oil around. In fact just recently, you probably read in the news that our representatives again voted down oil exploration off the gulf coast, even though there are known oil wells that have been capped in recent years. There are known oil wells off the coast of California, known oil wells off the coast of Florida that have already been drilled and are capped because of environmental reasons. Again we have not had a major leak, there is so much technology with cameras and maintenance issues, that it really doesn’t create much of an environmental issue anymore. We’ve got huge reserves up in Alaska. We can become pretty self sufficient if we can just bring up this oil we already know exists and open refineries so we can put it in a usable form for ourselves. I think we’re going to be always importing product. Right now we’re importing about 62 percent. We certainly have to get that down below 50 percent. You know alcohol, conservation, certainly conservation is a big issue too, more miles per gallon, bringing up our own oil, building more refineries, more efficient distribution systems, getting all the boutique gasolines out of the system. All of those are important steps towards the independence issue.
Dan McDermott: I think both parties are to blame. The Republicans haven’t spent what we need to spend to try to find other sources of energy and the Democrats don’t want to drill anywhere. So I think both parties are to blame. What about vegetable oil? I heard you can go to McDonalds, drain their tank and stick it in a diesel engine. Is that accurate? Is that another solution?
Bob Claytor: You’ve gotta be careful because those products will solidify pretty easily. You have to make sure you put something in there. Back to the political issue. It is not a political issue at all. There has not been a long term energy plan in America for over 30 years. And no one is going to build a refinery at 3 or 4 billion dollars and not know what the outcome is going to be at the end. You could build that refinery and they could change the specification as they have in the last couple of years, and your refinery was built to produce a product that’s no longer allowed to be sold. So we have to get some long term, ten year energy plans out there so everybody can focus on that and build refineries, build specifications, have a direction and not have it change every couple of years.
Dan McDermott: Real quick answer to this. Coal…I forget what state, west Virginia, one of those states, they want to take coal and turn it into diesel and use the waste product to shoot in the oil wells to bring the oil up. It’s wonderful they say and they say we have 40 times the coal reserves compared to the world's oil reserves.
Bob Claytor: That’s a great question. There’s coal shale, there’s coal itself. All this can be made into energy. You know we’ve kind of gotten away from nuclear energy, but if we put a couple of nuclear power plants in and took a lot of our, energy dependence on electricity for example, and took it to another fuel. A lot of our plants are using fossil fuel oil to produce electricity. If we took that use to nuclear energy, we could take 15 to 20 percent need off line and not have to import that oil because nuclear would make that power. It was very popular about 25 to 30 years ago. No nuclear power plants in the past 20 years. You’re seeing now that even Green Peace is saying that’s a good direction to go.
Dan McDermott: I think Three Mile Island didn’t help the whole nuclear power cause.
Bob Claytor: Well there was less release there than when you get a dental X-Ray. But I think it was blown a little out of proportion but then again…certainly all of these issues have hot button issues for some people.
Dan McDermott: 300 million bucks for the president of Exxon. You run an oil company. When you retire are you going to get 300 million and go to Disney World? Will you take me with you?
Bob Claytor: Lets talk about profits of oil companies and I’ll back into that answer. First of all that was a stupid bonus to give anybody. You know if I had thousand dollars and I invested it today at 5% interest I would get 50 bucks a year. If you had a million dollars and invested it you would get 50 thousand dollars. Well Exxon has 380 billion dollars worth of moneys. That’s what their assests were the last time I looked. So 380 billion dollars at 5% gives them about 18 billion dollars a year. So we’re dealing with a huge gigantic company that’s international. Conoco Philips was 183 billion, they made 13 billion last year. Exxons return was about 10.7 %. The reason they made so much money, and all the oil companies, if you own oil wells you made money in the last couple of years. Oil used to sell for 20 to 25 dollars a barrel, now its selling for 70. So if you own oil wells, the mercantile exchange sets that price. It's an international price. The oil companies do not control it. If you own oil wells that’s the price that you sell for and you make huge sums of money when the price is up. Back as late as 1998-99, the barrel price was 18 dollars a barrel. They were losing money on that. That 10% return sounds like a lot. Chevron and Texaco were 7% return. If you look at other industries, like Yahoo!, they have a 45% return, Bank of America had a 26% return, Merk 19, IBM 13, most banks make about a 16% return. So it’s not a huge return, it’s just such a gigantic huge company. Keep in mind too that in Exxons case, 70% of that profit was made overseas and in America they made money on natural gas, chemicals, asphalts, plastics, jet fuels, kerosenes, heating oil, diesel fuel, and gasoline was only about 9 or 10 % of that profit. You know we can yell and holler about gasoline, but it’s pretty efficient. You go overseas you pay about 6 or 7 dollars a gallon.
Dan McDermott: I want to thank Bob Claytor, president of H.N. Funkhouser.
[This interview originally aired on The Valley Today talk show, heard live daily on Oldies Radio 95.3 and Real Country 1450 at 12:30 P.M., following the News at Noon.]




