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What's the Deal with Oil Prices?

September 8, 2003

While they may not be able to solve many of the problems they create, the political classes of this country have proven they are still adept at causing crises—and then blaming others for the results. With gasoline prices rising to their highest levels in years, and then falling again after Labor Day, it was inevitable that the politicians would come out of the woodwork and demand yet another costly investigation of the U.S. oil industry.

According to  Reuters, US Energy Secretary Spencer Abraham has ordered the energy department to "investigate" the spike in gas prices.  "The nature of this (price) fluctuation struck me as being unusually large as well and in need of greater explanation," Abraham told a Congressional committee.

This is a response to pressure from Congress. According to another report from Reuters:

Democrats criticized record high U.S. gasoline prices on Friday and demanded that the Bush administration investigate if big oil companies were gouging consumers at the pump.

Democratic Rep. Edward Markey of Massachusetts sent a letter to U.S. Energy Secretary Spencer Abraham on Friday asking for a probe into the skyrocketing of motor fuel costs that occurred just as many Americans took to the roads for a final summer holiday. Markey is a senior member of the House Energy and Commerce Committee.

"If the oil industry is going to tip the driving public upside down to shake their vacation money out of their pockets, then it is time to tip the industry upside down and shake out a few answers," Markey said Friday at a rally at a gas station in Lexington, Massachusetts, near Boston.

Trying to do Markey one better, at least one contender in the California recall election has decided that the state must do what it can to force down prices, according to Reuters:

High gasoline prices have become an issue, too, in the California governor recall and election. California Lt. Gov. Cruz Bustamante, who is the leading Democratic candidate for governor, has called for regulating the state's gasoline prices, which are among the highest in the nation.

Of course, at least one Democratic candidate for president, Joe Lieberman (who in 1990 introduced a bill calling for five years in federal prison for anyone who raised gasoline prices without his permission), also demanded some answers from U.S. Energy Secretary, Spencer Abraham. Leiberman also asked the Energy Department for an immediate probe into the causes for the price spike just ahead of the Labor Day holiday weekend and its impact on consumers. (Earth to Joe: people paid a few cents more for gasoline; that's the impact.)

"It is imperative that this investigation determine both the underlying causes for these price increases, and whether or not industry participants are gouging consumers," Lieberman said in a letter to Abraham.

Actually, for all of the handwringing that is coming from the political classes, one does not need to consult Spencer Abraham—or even Abraham, himself, for that matter—to know why gasoline prices have spiked so high recently. The cause is simple and tragic: policies that come from Washington, D.C., and many state governments (such as California). If the politicians really want to know who is responsible for forcing up gasoline prices, all they need to do is to look in the mirror. A bit of recent history is in order here. As I wrote in 2001, there are a number of myths about oil companies, and especially about their vaunted "market power." [i]  One of the most important things one discovers when researching this industry is that its profitability relative to other U.S. firms has been down for more than two decades.

To put it another way, oil has not been a particularly good investment since the government finally deregulated oil and gasoline prices in 1981. This has been 180 degrees different from the predictions that oil industry critics like Ralph Nader and a number of politicians were making when President Jimmy Carter first began the price deregulation process in 1980.

With that in mind, the "price gouging" accusations made by the above-quoted politicians ring a bit hollow, since if oil companies actually possessed the "market power" that Lieberman and others claim, then oil executives are guilty of a great dereliction of duty towards oil stockholders. If the executives had this "market power" but did not use it to make better-than-average profits, then one would wonder why stockholders even permit these folks to draw salaries.

Yet, it is clear that gasoline prices have increased substantially from even a few weeks ago. While Markey and others claim that oil companies were trying to use the Labor Day holiday to "gouge" consumers, even the anticipated increase in demand would not explain such high price spikes. (Indeed, the holiday premiums rarely are more than a few cents per gallon—and without them there would be almost certain chaos at the gas pumps, as lower-than-market prices would create shortages.)

No, the answers lie not with scheming industry executives or incompetent managers. Politicians and the bureaucrats they empower, on the other hand, have caused major disruptions to oil supplies. Let us count the ways.

  • A new oil refinery has not been built in the United States since the administration of Gerald R. Ford. Environmental laws virtually guarantee that refineries are going to be out of compliance at one time or another, and with avaricious U.S. attorneys anxious to prosecute "environmental criminals," refineries are a losing proposition.
  • The recent East Coast blackout really did disrupt the refining and transportation process, and because the East Coast is a major conduit of oil and gasoline into the interior of this country, a massive shutdown of northeastern refineries is guaranteed to disrupt supplies across the country.
  • The Environmental Protection Agency-enforced regulations set by Congress in the 1990 Clean Air Act Amendments calls for a crazy-quilt set of standards for different areas of the country. When those rules first went headlong into effect in 2000, small pipeline and refinery glitches became major barriers to some cities like Chicago, where special clean air standards kept producers from trucking in gasoline from other parts of the region where gasoline was more plentiful. Chicagoans, according to the polls, believed it was an oil company plot, but their friendly members of Congress who voted for the standards actually were to blame.
  • From high gasoline taxes to a constant stream of condemnation from the political classes, the oil industry has been a favorite whipping boy of politicians since the 1970s. Whether it is blaming oil companies for the war in Iraq or blaming oil companies for global warming, the critics are always out in force demanding new taxes, new regulations, convictions and fines or even outright property seizures.
  • The ongoing political crisis in Venezuela has disrupted the reliability of that nation’s oil industry, which has the USA as its largest customer. As long as Hugo Chavez is in power, one can expect that turmoil to continue. Chavez wants to be a "Castro with oil," (as opposed to a Castro with sugar); his policies have angered the dwindling Venezuelan middle class so much that for the most part he has been Castro without oil or sugar.
  • Finally, there is the continuing U.S. occupation of Iraq. Government and industry planners had believed that oil revenues from that country would be enough to pay U.S. firms to "rebuild" the country (that was destroyed by U.S. bombs and other weapons of large-scale destruction). Instead, resistance groups have sabotaged pipelines, refineries, and the oil fields, making the anticipated Iraqi flow very unreliable.

These reasons certainly do not ring with politicians in the way that words like "greed" and "gouging do," nor are U.S. politicians willing to admit that for the last four decades, they have openly made oil companies Public Enemy Number One—and that such attacks have their deleterious effects.

No, all they can do is to repeat the same tired arguments of the past—and the same lies. Politicians and bureaucrats created the oil crises of the 1970s, and it looks as though these folks in the Class of 2003 are trying to outdo their forbears of 30 years ago. Of course, successes of the political classes are gained only at the expense of everyone else. Would be that oil company executives were permitted to investigate Congress and the Energy Department. They would find more than a few smoking guns.

William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him MAIL. See his Mises.org Articles Archive

[i] Studies in Social Cost, Regulation, and the Environment: No. 5
Uncle Sam's Energy Mess: How the U.S. Government Empowers the OPEC Cartel and Takes Power from the People, March 2001, Institute for Research on the Economics of Taxation ( www.iret.org).

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