Unocal Uses Regulatory Process for Profit; Stands to Make Billions

Americans love a good scam. And nowhere more so than in the movies. That’s why films like “Tokapi,” “Dirty, Rotten Scoundrels” and “The Thomas Crown Affair” are such huge favorites at video rental outlets.

When a major oil company scams millions of consumers by unfairly hoisting gasoline prices, however, that’s no fun.

Federal and state officials are concerned that’s happening in California where Unocal, the world’s ninth largest oil company, is set to siphon more than a nickel per gallon off every fill-up by invoking questionable patent rights on a formula for cleaner-burning gasoline. The Federal Trade Commission (FTC) and the U.S. Patent Office are investigating a controversial gasoline patent that Unocal acquired after sitting in on official meetings to establish parameters for a cleaner-burning gasoline that would help California meet federal air quality standards.

The other participants, including officials from the California Air Resources Board (CARB) and many of Unocal’s oil industry competitors, thought they were cooperating for the commonweal.

Not Unocal. While the meetings rolled on, operatives from the El Segundo-based company stealthily planned to patent hundreds of possible formula combinations – taking their cue from Unocal officials inside the meetings.

By the time it was over, California had decided to mandate a specific gasoline formula. By participating in the regulatory process, Unocal learned enough to be able to patent the formula. As a result, California consumers will be forced to pay Unocal 5.75 cents per every gallon of gasoline they buy, even if they never buy a drop of gasoline from Unocal.

California officials allege that Unocal’s tactics amount to unfair trade practices and are urging that federal regulators suspend the company’s five patents for “reformulated” gasoline that burns cleaner than other blends. Michael P. Kenney, executive officer of the CARB, in a recent letter to the FTC, charged that Unocal withheld vital information from California and filed secret patent applications throughout the 1990s to profit from the new regulations for cleaner gasoline.

“Unocal’s actions threatened the integrity of the rule-making process,” wrote Kenney, warning that they will mean up to a 100% markup in the price other major oil refiners will have to pay to comply with California’s new specially-formulated requirement for gasoline.

For motorists in California and other states around the country that adopt the more stringent requirement that will mean an additional 5.75 cents per gallon – an add-on that could reach 11 cents a gallon by the end of this decade.

The fact that two federal agencies decided to probe the situation at roughly the same time is not unprecedented, but rare enough to have drawn applause from California officials and several consumer groups.

CARB’s Kenney said his agency “didn’t even know” Unocal had filed patent applications when the company announced it owned patents for the clean gasoline formula in 1995.

“They were participating in the process and making recommendations in a way that ultimately benefited themselves,” Kenney added. Other California officials said the Unocal patent should be overturned because the formula is inappropriate for patenting “because it’s the product of a public regulatory process.”

FTC investigators last year cited the Unocal patent as a contributor in last summer’s Midwest gasoline crisis, which created supply shortages that sent prices soaring to more than $2 per gallon.

Unocal defends it actions “as beyond reproach,” and consistently has suggested that its oil company rivals are trying to overturn the company’s clean gasoline patents simply because, as spokesman Barry Lane put it, “they don’t like the fact that we have them.”

Still, it’s clear that California officials, including Attorney General Bill Lockyer, have both logic and justice on their side when they argue that Unocal abused its role as a member of the advisory board that helped the state develop its new clean air standards.

The company is demanding its 5.75 cents “pound of flesh” on an estimated 25 billion gallons of gasoline this year. That’s a more than $1.4 billion payoff.

It may be a royalty for Unocal, but it’s a royal rip-off for motorists.


David Ridenour is vice president of The National Center for Public Policy Research, a Washington, D.C. think tank. Comments may be sent to [email protected].

The National Center for Public Policy Research is a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems. We believe that the principles of a free market, individual liberty and personal responsibility provide the greatest hope for meeting the challenges facing America in the 21st century.