Like a broken record, economists were ecstatic last week at the mysterious but exquisite workings of supply and demand in the free market that had pushed gas prices to $2 a gallon in the U.S., a “sustainable” level, as one happy economist put it.
Of course, there is not now and never has been in the history of this business anything resembling a free market in oil and gas. Ever since Rockefeller gained his Standard Oil pipeline monopoly at the turn of the last century, the name of the game has been to control the world’s enormous surplus of oil in such a way that prices would remain high and business could make enormous profits out of it. Avoiding being swamped by cheap petroleum was accomplished through tariffs and in world trade by means of the cartel of the “seven sisters”—the seven big international companies. The cartel had its beginnings a century ago in Mesopotamia (modern day Iraq), when the British and Americans carved up the world’s oil fields so as to maximize one another’s profits.
Recently the seven sisters were whittled down to five operating in the U.S., due to mergers among the giants. They are ExxonMobil, ChevronTexaco, ConocoPhillips, BP, and Royal Dutch Shell. According to a March 2004 report by Public Citizen, these firms now control 14 percent of global oil production (nearly as much as the entire Middle East membership of the OPEC cartel); 48 percent of domestic oil production; 50.3 percent of domestic refinery capacity; and 61.8 percent of the retail gasoline market. In addition, the five also control 21.3 percent of domestic natural gas production. The payoff is $60 billion in after-tax profits in 2003 alone.
These companies run the business under the PR slogan of free market economics. Congress once conducted inquiries into oil operations and even tried to regulate the natural gas markets until in Jimmy Carter’s administration, the pressures became too great, and regulation was abandoned. Today Congress sits by and watches. Why? The oil industry has contributed $67 million to federal politicians since 1999—79 percent of that going to Republicans. In addition, the oil industry spends an additional $50 million every year lobbying Congress and the White House.
With an election coming up, Bush doesn’t want to antagonize any part of his base—certainly not his oil pals. So, as is always the case, high gas prices are blamed on environmental rigidities and congressional failure to enact energy legislation that relaxes these environmental protections so that we can achieve energy security. The real reason: The mergers have forced the closure of smaller refineries producing a total of 920,000 barrels of oil a day, thus tightening the market. In March 2001, the Federal Trade Commission found that oil companies had deliberately withheld supplies of gasoline from the market as a tactic to drive up prices, part of a profit-maximizing strategy. Moreover, the Bush administration took even more oil off the market by filling the Strategic Petroleum Reserve to 90 percent of capacity. Since 2001, President Bush has been removing more than 100,000 barrels of oil a day from the market to stock the reserve, according to Public Citizen.
Shortening the market in this way was employed by the oil and gas companies in California to reduce natural gas supplies. That was a run-up to a speculative market that eventually led to a crash and the Enron scandal.