The Never-Ending Energy Conspiracy

Guest Commentary

The evil oil companies are at it again.  The price of a gallon of gas has jumped by more than 30 cents in the past month.  The gasoline gougers are busy reaping windfall profits.

It’s time for a congressional investigation!  New legislation must be introduced!  The administration must confront corporate thieves!

No, wait.  That all happened last summer.  Customers blamed gas station owners and oil producers alike.  Politicians moved from somnolence to frenzy at record speed.  Officeholders and candidates alike campaigned to stem energy costs.

Even Republican congressional leaders wrote the president to demand investigation and prosecution of “anyone who is trying to take advantage” of the tightening world energy market.  President George W. Bush agreed, explaining: “The first thing is to ake sure that nobody is getting cheated.”

Congress targeted gasoline prices, company profits, corporate taxes, federal royalties, and industry investments. State Attorneys General opened another front.

But prices soon fell dramatically, and remain well below their peak, when a gallon of regular unleaded gasoline ran about $3.00.  The price of crude oil dropped by 35 percent from its high.  If the energy producers controlled prices, why did prices decline?

To help the Republicans in the November election, ran one theory.  Last October, CBS anchor Katie Couric asked:  “Gas is the lowest it’s been all year, a nationwide average of $2.23 a gallon.  It hasn’t been that low since last Christmas.  But is this an election-year present from President Bush to fellow Republicans?”  If so, why didn’t Big Oil boost prices the day after last November’s election?  Why wait even an hour to collect those windfall profits?

Instead, oil prices continued to fall.  Indeed, gasoline prices actually peaked in September 2005 in the aftermath of Hurricane Katrina.  Why didn’t the companies use that natural catastrophe as an excuse to keep prices high?

It’s even harder to understand why the oil industry allowed prices to drop more than a quarter century again when President Ronald Reagan killed price controls.  That should have been the signal to energy producers to raise prices even further, looting and pillaging the entire population.  Instead, prices dropped dramatically.

Perhaps the conspiratorial corporate behemoths were working to reelect Reagan.  But if so, they should have jacked up gasoline prices after the 1984 election.  Instead, prices fell even faster through 1987 and remained low for years.

What gives?

Simple.  Energy prices are set by complex interactions in a global marketplace.  No one actor or set of actors controls prices.

The price run-up last year was a consequence of many factors.  Among the causes: rising oil consumption in China and India; continuing problems with Iraqi oil production; the unsettling impact of the Iran nuclear controversy; political instability in leading African and South American oil producers; limited U.S. refinery capacity; persistent production and refining problems left over from Katrina; the segmented gasoline market, requiring production of multiple “boutique” fuels; and the replacement of MTBE as a fuel additive.

This year has seen frigid winter temperatures, growing Chinese oil purchases to fill its strategic petroleum reserve, increased instability in Nigeria, continuing uncertainty regarding Iran, and selected refinery problems.  On the other hand, Saudi Arabia apparently has used its position as the world’s reserve producer to moderate prices (it fears a fall in Western demand as well as greater effort to develop alternative fuels).

The best response to such a complicated market is fewer government controls.  After all, it was deregulation in 1981 that encouraged new competition and attracted new supplies, putting powerful downward pressure on prices.  The best policy today would be to expand production opportunities—it makes no sense to rail against petroleum imports while placing American lands and coastal waters off-limits to exploration.

Inefficient regulations, such as rules that effectively balkanize the gasoline market, should be adjusted.  Barriers to refinery production should be lowered.  Subsidies for various fuels, whether proven or potential, should be ended.  Most important, Uncle Sam should leave energy prices alone.

Some people wish the world was a simpler place, which may be why they believe the energy companies set oil prices.  In fact, we must contend with sophisticated international markets—imperfect, but still better left free than controlled by government dictates.