May 3, 2004
Vol. 20, No. 9
by William Norman Grigg

Amid soaring gasoline prices, the incumbent administration came under heavy rhetorical fire from its challenger during the presidential campaign. The candidate, speaking in a community that had been hit particularly hard by the price spike, unleashed a populist broadside against the White House.

"My opponent is giving major oil companies a huge tax break," complained the challenger, pointing to a moratorium on royalties paid to the government by oil companies exploring for natural gas in the Gulf of Mexico. "I believe the royalties moratorium ought to happen when the price declines. We ought not have moratoriums when the price is high. I look forward to hearing his explanation on why big gas producers ought to be given a big tax break." What the candidate failed to explain was how the consumer would benefit from oil companies paying more in taxes, since, after all, they would simply pass the cost on to the consumer.

The administration was also scolded for appeasing the Organization of Petroleum Exporting Countries (OPEC), the 11-nation cartel controlling roughly 40 percent of the world‚s known oil supply. Despite skyrocketing gasoline prices, OPEC announced a production cutback ˜ which was seen by many as yet another instance of price gouging by the cartel. Yet the White House did nothing.

"What I think the president ought to do is get on the phone with the OPEC cartel and say we expect you to open your spigots," declared the opposition party‚s standard-bearer. "One reason why the price is so high is because the price of crude oil has been driven up. OPEC has gotten its supply act together and it‚s driving the price, like it did in the past. And the president must jawbone OPEC members to lower the price." Nor should domestic price-gougers consider themselves safe from presidential retaliation: "And if in fact there is collusion amongst big oil, [the president] ought to intercede there as well."

No, the foregoing words were not spoken by John Kerry in 2004, but by George W. Bush in 2000, assailing the energy policy of Bill Clinton and Al Gore. Now, four years later, an updated version of the same refrain was sung by Bush‚s Democratic challenger, whose choreographed outrage mimicked Bush‚s in practically every detail.

"For three years, George Bush and Dick Cheney have bent over backwards to help their big contributors in the oil industry," bellowed Kerry at a rally in front of a San Diego gas station. Signs in the background reflected the fact that gasoline prices in that city had surged to over $2.35 a gallon ˜ the highest in the nation. Accusing the Bush administration of letting the problem of high gas prices "fester," Kerry ˜ who twice married into staggering sums of inherited wealth ˜ tried on the rhetorical garb of a populist: "I‚m going to stand up for students and middle class families and all those who need relief at the pump."

Given that the price Americans pay at the pump is a nearly universal household concern ˜ and that it is factored into grocery bills as well ˜ it‚s hardly surprising to see it become a standard presidential campaign issue. "Presidents usually face trouble when prices go up, and gas prices in particular," observes Professor Jack Pitney of California‚s Claremont McKenna College. "It doesn‚t matter what the causal link is, presidents usually get blamed."

And for their part, presidents prefer to redirect the wrath of the public toward OPEC.

"The president is disappointed in today‚s decision," said White House press secretary Scott McClellan, reacting to OPEC‚s announcement that it would lower its oil production targets to 23.5 million barrels a day. "Producers should not take steps that harm American consumers and our economy."

But does OPEC actually have power over "American consumers and our economy"? If so, why?

Artificial Scarcity

OPEC is a cartel in the classic sense: Its membership consists of 11 nationally owned oil companies, many of them built on assets seized by governments (often from American owners) through brute force. Like any other cartel, OPEC‚s continued existence depends on government cooperation to protect it from the competitive pressures of the marketplace. In this case, astonishing as it may seem to most Americans, our own government has been OPEC‚s greatest ally.

"The U.S. Government itself has been a major culprit in ∑ oil price increases," observes Dr. William L. Anderson of Frostburg State University. "Government restrictions on U.S. energy exploration, production, and sales have enhanced OPEC‚s monopoly power in world oil markets.... OPEC‚s power over American energy consumers, during the 1970s and again in this latest episode, is the result of U.S. regulations that have kept competition out of the market and reduced the ability of American consumers to diversify their sources of energy."

In the early 1970s, notes Professor Anderson, "Washington was favorably disposed toward the fledgling OPEC," supposedly out of a desire to cultivate greater prosperity in the Middle East, thereby deterring Soviet expansion. (This assumption was belied by the close relations some OPEC governments had with Moscow.) For that reason, continues Anderson, "the U.S. government did not object as foreign governments began forcing less favorable contracts on ∑ energy exploration and production companies."

American consumers first felt OPEC‚s bite in 1974 as a result of the Arab oil embargo, imposed in the wake of U.S. intervention in the 1973 war between Israel and a Soviet-backed Arab coalition. The Nixon administration reacted to the radical reduction in the available supply of oil by imposing price controls and a centrally directed distribution system that allocated oil on the basis of political decisions in Washington, rather than market forces. Long lines appeared in front of American gas stations, just as they would in 1979 following the Iranian revolution.

Curiously, however, similar lines failed to materialize in Germany and Japan, despite the fact that those nations ˜ unlike the U.S. ˜ were entirely dependent on imported oil. The difference, notes Nobel laureate Milton Friedman, is that in the United States government intervention "did not permit the price system to function." The result was surpluses in some areas, and shortages in others. This is a familiar phenomenon to students of central planning in the Soviet Union, where long lines for basic consumer goods were a common spectacle.

Just as Soviet subjects had to queue up for bread, American drivers had to wait in line to buy gas ˜ and for exactly the same reason, notes Friedman: "The smooth operation of the price system ˜ which for many decades had assured every consumer that he could buy gasoline at any of a large number of service stations at his convenience and with a minimal wait ˜ was replaced by bureaucratic improvisation."

As the crisis mounted, William E. Simon, deputy secretary of the treasury in the Nixon administration, was appointed "energy czar." In that post, wrote Simon years later, "I myself became an illustration of a free-market principle ∑ [namely] that government planning and regulation of the economy will ultimately lead to shortages, crises, and, if not reversed in time, some form of economic dictatorship.... Years of incoherent government intervention strangled energy production, domestic supplies diminished, artificial shortages emerged, a foreign embargo on oil precipitated a crisis, there was a violent public outcry for an instant solution, an energy Œdictatorship‚ was established to allocate the rare commodity ˜ and I, incredibly, became the Œdictator.‚... There is nothing like becoming an economic planner oneself to learn what is desperately, stupidly wrong with such a system."

The dictatorship Simon was appointed to head had been decades in the making. "I was shocked to learn the degree to which our energy supplies were stagnating and struggling futilely against regulatory shackles," he recalled. "In the oil realm, demand was rising constantly; but domestic exploration and production were declining sharply, and from year to year we were growing more dependent on imports. All the elements of an impending energy catastrophe were visible."

Choking Off Domestic Suppliers

Between 1955 and 1972, the number of oil wells drilled in the United States was reduced by nearly two-thirds. Washington imposed import controls on crude oil, supposedly to "help" the domestic oil industry. However, the feds encouraged importation of refined petroleum products, such as gasoline. The market dislocation was exacerbated in 1971, when Richard Nixon imposed price controls on practically all consumer goods. Shortly thereafter, Nixon rescinded price controls across the board ˜ except on domestically produced crude oil and gasoline.

Additional controls on the domestic energy industry were imposed in the early 1970s, in large measure inspired by the radical environmental lobby. In response to the 1969 Santa Barbara oil spill, Washington began imposing severe restrictions on offshore drilling. The predictable results of these policies included a reduction in domestic oil production, shortages, price increases and increased dependence on imported oil.

The picture has not improved in subsequent decades. Between 1983 and 2000, writes John Carlisle of the National Center for Policy Analysis, "federal land available for oil and gas exploration in the western U.S. ˜ where 67% of the nation‚s onshore oil reserves and 40% of natural gas reserves are located ˜ has decreased by more than 60%. In total, more than 300 million onshore acres of federal land have been effectively removed from the market for oil exploration."

Other potential new sources of oil and gas were rendered inaccessible by the Clinton administration‚s ban on new road construction on 43 million acres of federal land. Clinton‚s 1996 executive decree locking up Utah‚s coal-rich Kaparowitz Plateau placed another valuable energy source off limits. (Clinton‚s decree enhanced the commercial prospects of Indonesia‚s China-connected Lippo energy conglomerate ˜ a major illegal contributor to Clinton‚s 1996 re-election effort.)*

Washington has also banished oil exploration and production from 460 million offshore acres, confining most of it to a small section of the Gulf of Mexico. Alaska‚s much-touted Arctic National Wildlife Refuge (ANWR) is believed to contain between 9.2 and 16 billion barrels of economically recoverable oil, placing it on par with the state‚s Prudhoe Bay field ˜ the largest in the nation. Accessing that reserve would require the use of 2,000 acres of the 19 million acres of drab, barren wasteland that is ANWR. In 1995, Congress authorized oil drilling in ANWR, only to have Clinton, acting on behalf of the eco-socialist lobby, veto the measure. That ban remains in place today.

Given Washington‚s successful efforts in choking off domestic oil production ˜ while encouraging the importation of refined petroleum ˜ it should surprise nobody that our heavily regulated refinery industry has very limited capacity. "There has not been a refinery built in America in the last 20 years," observed Adel Al-Jubeir, spokesman for Saudi Crown Prince Abdullah. "So if you can produce more crude oil but you can‚t refine it, it‚s not going to translate into gasoline."

Some might contend that Al-Jubeir, a spokesman for the cornerstone member of OPEC, is merely trying to shift the blame. But since OPEC members ˜ not to mention terrorists funded by petrodollars ˜ benefit from the conditions he describes, Al-Jubeir‚s comments represent testimony against interest. As long as Washington continues its stranglehold on domestic energy production, OPEC will endure.

Diminished Dollar

The relative scarcity ˜ artificial or otherwise ˜ of oil is merely one ingredient in the formula that yields higher prices at the gas pump. A more important ingredient is the infusion of dollars into the economy.

The most recent surge sent gas prices through the $2.00 a gallon barrier in some parts of the country; nationwide, the average price for a gallon of unleaded regular was pegged at $1.77. Countless news reports described this as an all-time high price for gasoline ˜ which is true enough when the price is measured in nominal terms, but not when it is measured in constant (inflation-adjusted) dollars.

In 1981, the price of a gallon of gasoline peaked at $1.35; in today‚s dollars, that would translate into a price of $2.77 a gallon. According to the Energy Information Administration (EIA), a branch of the U.S. Department of Energy, nationwide average gas prices will crest at $1.83 per gallon this spring before subsiding to $1.74 during the summer months. This government projection may prove to be wrong, of course. Nevertheless, gasoline prices still have a long way to climb before reaching the record high in terms of constant dollars.

In early April, at about the same time OPEC announced its production cutback (which was triggered by rising oil inventories), petroleum futures were falling on the New York mercantile exchange. Many observers speculated that the cutback may help propel world crude prices above what was described as the "psychologically significant" $40 per barrel benchmark ˜ that‚s the price level associated with the dreaded "stagflation" era of the late 1970s. But, once again, that benchmark means little once inflation is factored in: In today‚s dollars, crude oil would have to cost nearly $80 a barrel to reach the record high set in 1980.

It is entirely possible that gasoline prices ˜ along with prices for other important consumer goods ˜ will continue to increase dramatically in the future, irrespective of the actions taken by OPEC.

As Richard C. Leone and Bernard Wasow of the Century Foundation stated in an April 2 Los Angeles Times column, gas and heating oil prices "remained relatively steady" in Europe, even as they‚ve climbed in the United States. This is not because oil is more abundantly available in Europe, but rather because the euro ˜ a contrived currency ˜ is stronger than the inflated dollar.

"Between the end of February 2002 and the end of February 2004, the price of oil in dollars rose by 51 percent (from $20 a barrel in 2002 to more than $35 a barrel today), but it rose by only 4 percent in euros," recall Leone and Wasow. "Over the same two-year period, the US currency plunged from 1.16 euros per dollar to 0.80 euros per dollar. In this situation, it is perfectly rational for foreign suppliers of oil to charge more dollars.... Dollars today simply do not possess the same purchasing power that they did a few years ago ˜ a situation that will persist as long as it is painfully obvious that the administration has no plan to reduce the deficit. As the value of the dollar falls, of course, OPEC raises the dollar price of oil."

Abundance, Not Scarcity

At present, the U.S. is dependent on OPEC and other foreign sources for roughly two-thirds of the oil we consume. But our own resources would be more than adequate to provide for our energy needs ˜ if Washington would allow us to develop them.

According to a November 2002 report from the EIA, economically recoverable U.S. reserves of crude oil ˜ those that can be profitably accessed with current technology ˜ actually increased between 1998 and 2001 ˜ from roughly 21.0 billion barrels to 22.4 billion. As of 2001, reports the EIA, "technically recoverable" petroleum resources ˜ quantities of oil that can be recovered using current technology regardless of costs ˜ amounted to another 104.9 billion barrels.

As environmental science analyst Ronald Bailey points out, "ŒAvailable supply‚ [of oil] is not merely a geological fact. It depends on technology and economics as well." When oil exploration and production are allowed to be profitable, the result is an expansion of the available supply. This is true both here and abroad. It is the politics of government-created cartels ˜ not a scarcity of natural resources, or lack of technical ingenuity ˜ that limits the availability of petroleum.

Writing in the Oil and Gas Journal, Dr. Henry Linden, professor of energy and power engineering at the Illinois Institute of Technology, estimated that the world may contain technically recoverable reserves of eight trillion barrels of oil, gas, and oil sand. The U.S. Geological Survey posits conventional world oil reserves of between 2.2 and 3.9 trillion barrels. At the current rate of production, Bailey points out, "oil supplies would last at least 90 years."

Michael Lynch of Strategic Energy and Economic Research contends that removing political impediments to energy production is urgently necessary in order to permit a smooth transition to new energy sources. Just as our ancestors moved away from wood as their primary source, our society‚s energy demand "is going to move away from heavy hydrocarbons," Lynch predicts. "Coal is first, oil is next.... It will be much like the transition in the 20th century from coal to oil in the residential heating and transportation sectors or like the transition from horses to cars."

Advocates of political control over energy assume that "markets are so myopic that they cannot foresee future supply trends; that markets won‚t realize when a resource is running out," Lynch points out. In fact, the free market system is the only means whereby supply can be reconciled with demand. Allowed to function properly, the market would not only ensure sufficient supplies of current energy resources, but spur development of resources that are presently underutilized (such as nuclear fission) or not yet available (such as nuclear fusion). This would dramatically enhance the quality of life and individual freedom of people in the U.S. and abroad. In fact, it would likely spur development of energy resources most of us could not even imagine today. (Prior to World War II, how many conceived of unlocking the power of the subatomic nucleus for the production of electricity?) The key is to allow entrepreneurs and consumers to determine our energy future through a free market.

But that, of course, is an outcome stoutly resisted by the political elite responsible for our energy mess.

* The Kaparowitz Plateau is believed to contain an abundance of clean-burning low-sulfur coal; Lippo controls the largest known deposit of similar coal outside the U.S. Kaparowitz also offers abundant natural gas and mineral wealth.


How Washington Gouges Us at the Pump
by William Norman Grigg

Gasoline itself has become less expensive because the industry has become more efficient. The pump price is higher because government has also become more efficient at picking consumers‚ pockets.

In late March, the Environmental Protection Agency indicated it may grant waivers to New York and California exempting them from clean-air rules requiring the use of reformulated gasoline (RFG). Gasoline futures immediately plummeted in the mercantile exchanges, offering a potent illustration of the role played by federal regulations in jacking up gasoline prices.

Under the Clean Air Act of 1990, passed with the emphatic support of the first Bush administration, the EPA was given the power to mandate the use of RFG blends that include oxygenates such as ethanol and methyl tertiary butyl ether (MTBE). The assumption is that the use of such blends, which would reduce gasoline evaporation and help gasoline burn more thoroughly, would reduce smog in certain cities. However, a 1999 study by the National Academy of Sciences concluded that "commonly available ethanol and MTBE blends do little to reduce smog." In fact, MTBE has infiltrated the groundwater of many communities, causing dire health hazards and imposing hugely expensive clean-up and recovery efforts. Of course, the media pundits and pencil-pushing bureaucrats will blame the market system for this, not the government‚s own meddlesome regulations.

RFG mandates, noted an April 1 Bloomberg wire service story, "have helped boost the average retail price of [gasoline] to an all-time high," in large measure because the costs they impose on our already overburdened refining sector are passed along at the pump. The rules also create needless shortages. For example, noted Bloomberg, "Fuel for New Jersey cannot be sold in New York ∑ because New Jersey is still using MTBE to meet the federal rules. Most ethanol is shipped by rail or barge from the U.S. midwest, raising the possibility of supply disruptions." Granting RFG waivers, noted commodities analyst Jim Steel, would give refiners "the flexibility to meet demand for gasoline this summer."

As noted in the accompanying article, the current average gasoline price of $1.78 a gallon represents a record high in nominal terms, but not in inflation-adjusted terms. A March 22 analysis from the American Petroleum Institute (API) observes that 1981‚s record high price of $1.35 a gallon would translate into an inflation-adjusted price of $2.77 a gallon ˜ meaning that the average price noted above represents a real decline of 98 cents a gallon.

This decline results from decreases in practically every component of the pump price of gas ˜ crude oil, manufacturing and marketing. "Only taxes have increased," observes API. In March 2004 the taxes collected on a gallon of gasoline amounted to 47 cents a gallon, including 18.4 cents in federal taxes and 24.3 cents a gallon "in volume-weighted average state taxes." In 1981, by way of contrast, taxes accounted for 29 cents of the per-gallon price of gas.

In other words: Gasoline itself has become less expensive because the marketplace has dictated that the industry become more efficient. The pump price is (relatively) higher because government has also become more efficient at picking the pockets of consumers.

This not to say that there are no examples of corrupt collusion by retailers to keep prices high. Economist Walter Williams of George Mason University points out that 12 states ˜ including New York, Michigan and Wisconsin ˜ have "statutory minimum gasoline prices," a form of "government-sponsored seller collusion." In Wisconsin, the relevant measure bears the Orwellian title "Unfair Sales Act" ˜ which is meant to describe what would supposedly happen if gas prices were permitted to fall to market levels.

http://www.thenewamerican.com/tna/2004/05-03-2004/index.htm