World's Biggest Oil Companies Settle Price-Fixing Scheme

It’s been nearly a year since the government of California started legal proceedings against the world’s biggest oil and gas companies. The Golden State accused Exxon, BP, Chevron, ConocoPhillips, Shell, and the American Petroleum Institute (API) of decades of deception and environmental harm.

Now, it looks like that lawsuit might finally be coming to a close, but without a trial win for either side. A federal judge has just granted the preliminary approval for a monetary settlement for the people affected. Let’s rewind to how we got here before we talk about what the settlement would look like.

Torrance Refinery Explodes

In February 2015, a significant explosion occurred at the Torrance Refinery in California, which ExxonMobil owned at the time. This refinery produced a significant portion of the alkylate used in premium gasoline blends. Alkylate helps improve a gasoline's octane. ExxonMobil made approximately 20% of the gasoline sold in Southern California and 10% of the statewide supply. The explosion caused substantial damage to a key part of the refinery, leading to an unexpected reduction in gasoline production, including high-quality gasoline blending components like alkylate.

Because the Torrence refinery was such a key player in the California gas market, this disruption resulted in a significant undersupply of gasoline in the state, causing gasoline prices to spike at the pump and in commodities trading.

Supply Disruption and Price Surge

In the wake of the explosion, gasoline prices in California's spot markets surged almost immediately. A spot market is where natural gas is bought and sold for a quick delivery turnaround, usually 30 days or less. The disruption caused by the refinery's shutdown created a ripple effect, leading to unprecedented price increases at the pump for California motorists.

The situation was further complicated by California's stringent vehicle emissions standards. The state requires a unique gasoline blend known as California Reformulated Gasoline Blendstock for Oxygenate Blending (CARBOB), making it a critical component of the state's gasoline supply. The disruption in the production of CARBOB due to the Torrance Refinery explosion led to a significant undersupply in the state.

As the supply shortage persisted, gasoline trading firms with global reach, including Vitol Inc. and SK Energy Americas Inc., moved quickly to negotiate large contracts to supply gasoline and blending components to California. But these firms aren’t exactly seen as heroes who stepped in to save the day, at least not by California’s prosecutors. A legal complaint filed by the California Attorney General's Office five years after the incident alleges that these firms exploited the situation to manipulate market prices and reap windfall profits.

Golden State Gears Up for Justice

According to the Attorney General’s complaint, the undersupply created an opportunity for market manipulation by the defendants, who allegedly engaged in fraudulent trading practices to inflate gasoline prices and profit from the situation. California claims that the manipulation of CARBOB prices directly impacted the overall gasoline market in California, leading to higher costs.

The AG alleged that Vitol and SK Energy engaged in a scheme to drive up the spot market price for gasoline by executing trades through intermediaries or directly between the firms. These trades were allegedly aimed at creating the appearance of high demand and inflated the benchmark prices of Regular and Premium gasoline published by Oil Price Information Service (OPIS), a worldwide provider of petroleum pricing information. This was done during key pricing windows for large contracts, according to the AG's complaint.

The complaint further alleges that Vitol and SK Energy engaged in facilitating trades to disguise the nature of their scheme, limit market risk, and share profits. These trades, sometimes referred to as "wash" or "accommodation" trades, effectively negated the volume of gasoline purportedly exchanged and ensured that no actual gasoline changed hands.

The bottom line is that California alleges the manipulation of spot market prices had a broader impact on California's gasoline market, leading to inflated wholesale and retail prices that ultimately harmed consumers. With such big claims against the gas companies, the state decided by 2020 that it was high time to bring a lawsuit.

California AG’s Legal Complaint

The legal basis for the lawsuit filed by the State of California against the various gas companies alleges violations of the Cartwright Act and the Unfair Competition Law.

Regarding the Unfair Competition Law, the AG claimed that the defendants committed acts of unfair competition by engaging in unlawful, unfair, or fraudulent business practices. Specific violations include wash sales, accommodation trades, prearranged trades, and transactions made to manipulate the benchmark prices reported on the California gasoline spot market – which is in violation of both California's commodities fraud statute and the Commodity Exchange Act.

The lawsuit aimed to address the harm caused to California consumers who paid higher prices for gasoline due to the defendants' alleged market manipulation and to restore fair competition in the state's gasoline market. The state sought a jury trial and relief in the form of treble damages, restitution, and civil penalties of $2,500 for each violation. They also requested injunctive relief to prevent future violations, mandatory injunctions to restore fair competition, and orders to return any money or property obtained through unlawful practices.

Case Looking to Settle

Fast forward to 2024. Clearly, the lawsuit has been dragging on for years. Finally, last week, U.S. District Judge Jacqueline Scott Corley granted preliminary approval of a settlement for $13.9 million.

The settlement class includes non-California residents and businesses that purchased gasoline in California from February 2015 to May 2017. The agreement requires the creation of a $13.9 million escrow fund, with 85% allocated to businesses and 15% to non-California consumers. Purchases in Southern California will be compensated at twice the rate of those in Northern California.

Judge Corley noted the settlement was fair, given the significant legal hurdles the plaintiffs faced. A separate $50 million settlement for California consumers was announced in July by the AG’s office. Lawyers for both parties did not respond to requests for comment.

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