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America, Over Big Oil's Barrel

What's really driving up your gas prices? Oil companies say it's government regulators, foreign dictators, and those pesky polar bears.

| Wed Jun. 25, 2008 12:00 AM PDT

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?"

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