As Americans struggle to fill their tanks for a summer trip to Disneyworld or the Grand Canyon (or just to get to work), oil companies, in a bid to fend off government intrusion, have been busy trying to convince consumers and elected officials that skyrocketing gas prices are out of their hands. Though the prospect of Americans scaling back vacations and trading in their SUVs, even while Big Oil rakes in record profits, should put the industry in a tight spot, the oil companies are trying their best to turn a PR nightmare into a possible growth opportunity. While the Democrat-led Congress, which held its latest hearing on escalating gas prices on Wednesday, has failed to reign in Big Oil, the companies themselves are using the price spike to advance a long-standing agenda: drilling for oil in environmentally protected areas, from the Rocky Mountains to the outer continental shelf to Alaska's Artic National Wildlife Refuge. And public desperation may finally make it possible to do so: Already there have been calls—from the president and GOP nominee John McCain, among others—to lift a decades-long ban an offshore drilling.
In April and May, House and Senate committees called industry executives on the carpet for hearings, and earlier this month Congress took another run at imposing a windfall profits tax on the five major US oil companies, which together made a record $36 billion in the first quarter of 2008.
But the windfall profits bill—which also included measures to rescind some $17 billion in industry tax breaks—died a swift death in the Senate, garnering 51 votes, but not enough to overcome a filibuster. (The president also vowed to veto it.) And the hearings themselves amounted to little more than political theater, allowing members of Congress to talk tough on behalf of their suffering constituents without demanding anything that would make the lineup of oil execs—from Exxon, BP, Chevron, ConocoPhillips, and Shell—break a sweat.
To repel public hostility and government action, meanwhile, the American Petroleum Institute, the main oil and gas lobbying group, has launched a multimillion dollar media blitz. The campaign, according to the Washington Post, is aimed at convincing "voters—who, in turn, will make the case to their members of Congress—that rising energy prices are not the producers' fault and that government efforts to punish the industry, especially with higher taxes, would only make pricing problems worse."
Oil companies are trying their best to promote the highly counterintuitive idea that what's good for Big Oil is good for America. As Peter Robertson, vice chairman of Chevron, told the Senate Judiciary Committee in May, "Americans need companies that can effectively compete for access to new resources. Punitive measures that weakened us in the face of international competition are the wrong measures."
In denying responsibility for high fuel prices, the oil execs also evoked the ultimate mantra of the free market. "The fundamental laws of supply and demand are at work," said Shell president John Hofmeister—meaning, there's less oil and more people want it so the price has to go up. The law of supply and demand, however, is not a natural, immutable law, like the laws of physics. It is simply a way of describing the relationship between buyers and sellers in the marketplace. That is, sellers of an in-demand product can charge higher prices for it, but they don't have to do so; they could choose, instead, to trim their own profits—or at least pay their fair share of taxes. Before the judiciary committee, ExxonMobil VP J. Stephen Simon insisted that "it's not our profitability in this business that is driving the higher prices that consumers pay." This despite the fact that ExxonMobil alone reported $10.9 billion in earnings for the first three months of the year, up 17 percent over 2007, while BP's profits rose 60 percent, Shell's 25 percent, ConocoPhillips's 17 percent, and Chevron's 10 percent.
In fact, there's plenty that could be done to ease the burden on consumers. A proposal from the Center for American Progress, to name just one, calculated that simply by closing several tax loopholes and collecting royalties it is due on oil and gas extracted from public lands, the government would have enough to fund a substantial fuel price "reliefbate" for low- and middle-income Americans. (The Center's plan doesn't even include a windfall profits tax, which, if instituted, could be used to exponentially increase the government's investment in renewable energy.)
Nonetheless, Big Oil seems to have had some success in framing the debate over who is responsible for high gas prices, advancing not only the laws of the marketplace, but the bogeyman of the big nationalized foreign oil companies. "Government-owned national oil companies dominate the top spots," Exxon's Simon told the judiciary committee. The argument, now popular on both sides of the aisle, is that state-owned outfits control most of the supply and have their comparatively puny American counterparts over a barrel. (Only California's Maxine Waters dared, at a House hearing, to suggest that the United States might try nationalizing its own oil industry.)
It's been Big Oil's long-standing contention that the rapacious state-owned Middle Eastern, African, Asian, and Latin American oil companies are responsible for the price gouging. But this is a dubious argument. The United States is currently the third largest oil supplier in the world, following Saudi Arabia and Russia, as well as the single largest consumer. Tyson Slocum, the director of Public Citizen's energy program, says that on any given day ExxonMobil alone produces as much petroleum as the kingdom of Kuwait. US oil companies, of course, all have a hand in exploitation within many of the very state enterprises they decry, through outright contracts, service contracts, production agreements, and joint ventures. Currently, ExxonMobil, Chevron, and Shell, among other oil companies, are zeroing in on service contracts that will open the way for them to begin producing oil in Iraq.
As the energy crisis deepens, oil companies also hope to gain entrée to domestic lands that have previously been closed to drilling. But when Rep. Waters asked Shell's Hofmeister to guarantee that prices at the pump will go down if companies are allowed to drill where they please, he replied, "I can guarantee to the American people because of the inaction of the United States Congress...$5 [a gallon] will look like a very low price in the years to come if we are prohibited from finding new reserves, new opportunities to increase supplies."
But giving the oil industry rights to exploit more of the public domain would likely have no impact on gas prices. Oil companies already have huge swaths of federally owned territory available to them, and on much of it, they are doing nothing. As the New York Times pointed out last week in an editorial on the "fiction" that "huge deposits of oil and gas on federal land have been closed off " to drilling, four-fifths of the oil thought to lie offshore in Alaska and Gulf of Mexico are already available for development, along with two-thirds of the oil reserves on federal lands, according to the Interior Department's Mineral Management Service. Of the 90 million acres of public lands under lease to oil companies, about three-quarters—68 million acres—are not being used to produce energy.
A strong case can be made that speculative trading, not slackened supply, is a major force in the continued rise of oil prices. In May, during the same week that Goldman Sachs (the leading commodities trader in oil) predicted that oil prices could rise to $200 a barrel over the next six months to two years, crude oil prices went up to $123.90 a barrel. Every increase in price enriches speculators who are betting that the price of oil will go up. In May, Sen. Carl Levin estimated that speculation had added as much as $35 to the price of a barrel of crude. "This is not a supply and demand issue," he said.
The history of oil is the story of an industry bent on avoiding surplus, not shortage. An oil glut, which could drive down prices, is what spells ruin for Big Oil, and from the very beginnings of the industry, John D. Rockefeller's Standard Oil Co. fought to control the deluge of oil, primarily through ownership of pipelines. In this sense, the idea of peak oil—that we will reach a maximum level of oil production, after which there will be a declining supply—serves industry well, since it encourages tolerance of higher prices. And of course, while some may see the peak-oil scenario as a reason to support alternative energy, it can just as easily be employed to support the push for more drilling and less regulation.
During the last energy crisis, in the 1970s, the energy industry warned that federal regulation of natural gas prices at the wellhead would lead to a shortage of that fuel. Holding down prices, so the argument went, would deprive the oil and gas producers any incentive to search for and tap gas in difficult terrain. Under a ferocious industry assault, Jimmy Carter opened the way for deregulating oil and natural gas prices, a process that would be completed by Ronald Reagan. As soon as that happened, the threat of a gas shortage miraculously disappeared. In 1977, congressional investigations led by John Moss, a Democratic congressman from California, alleged that energy companies were deliberately withholding supplies of gas from the market to force prices up.
Public Citizen's Tyson Slocum believes that today, as well, there are instances where the industry is driving up prices by controlling the supply. He cited a 2001 investigation by the Federal Trade Commission into a spike in the price of gas in the Midwest, which identified some suppliers who "withheld or delayed shipping additional supply" for the sake of preserving profits. "An executive of [one] company made clear that he would rather sell less gasoline and earn a higher margin on each gallon sold than sell more gasoline and earn a lower margin," according to the investigation. "Another employee of this firm raised concerns about oversupplying the market and thereby reducing the high market prices." There may be many other instances of this, but they are seldom investigated since weak anti-trust laws make most of these practices perfectly legal, even in a time of crisis.
With a setup like this, it's no wonder Big Oil has shown so little genuine interest in renewable fuels—despite considerable efforts to market themselves as green. In congressional hearings, the oil company executives have touted their investments in alternative energy, with Shell's John Hofmeister declaring, "Like most energy companies, we are engaged in the race to develop these technologies and fuels and make them commercially viable." But Rep. Jay Inslee (D-Wash.) cited the real numbers on the companies' investments—Exxon, for example, spends less than half a percent of its gross revenues on research and development of "clean energy"—calling their efforts "pathetically small." Inslee then asked the executives how they thought alternatives could be developed if the country's biggest energy companies refused to invest in them: "Is it going to come from the oil fairy?"