Getting To the Root Causes of Rising Fuel Prices

I agree with the criticism of many who want Congress and the Administration to stop oil speculators from running up prices in the world oil markets. New regulations, over speculators in all of the commodities markets, are long overdue. However, the abuse by speculators goes beyond the manipulation of oil prices. Critics are correct that this particular market has been especially abused, but I fear that many in the media may have been mislead by information that has been being drummed into the public realm by numerous interests groups from the oil industry, from financial houses, and from environmental groups who seem to tailcoat on the first two groups.

The price of crude oil sold by producers is one issue, but the bottom-line issue is what refined products cost the consumer and whether consumers are being treated fairly in terms of price. The last piece of that question is somewhat subjective, but there are reasonability tests that can be applied. Let me start with the assumption that the US must produce more oil in order to have an impact on prices. It often not clear to me if the media’s issue is oil or refined gasoline prices at the pump. Either way, producing more oil domestically has little to do with oil prices or prices at the pump. While the focus of some in the media has been on speculators, it is not true that producing more natural gas, coal, oil, or even wood from American land will necessarily affect the cost of those products to consumers. Power plants in the South, like those in South Carolina, burn coal from Brazil while China is keeping West Virginia mines operating. Producers of any product seek the lowest raw material costs they can find from any place in the world they can find it. The big picture issue is whether supply is meeting demand on a world scale or at least within a regional one where the cost of transport does not offset the cost of local products. For example, if Brazil can produce and ship coal cheaper than American mines can, then industry will buy from Brazil. In the case of oil, there are now just five major oil companies who represent most of the gasoline sold in this country. They pump the majority of their own oil from their own wells in this country, Canada, Mexico, and other places in the world. They just pay the countries for the right to pump it out. They will send to and use in their own refineries the oil that is the cheapest to produce and will sell to others that which they can get more money. When a company requires more than they can produce themselves or it is cheaper to buy from others, then they will supplement it from the cheapest sources. Producing more Alaska oil may only cause more sales to the Asian countries, just as it doesn’t all come here now.

While oil is destined to run out some day, there is no credible evidence anywhere that there are true shortages of either oil or refined products. Producers are meeting all consumer demands, therefore pumping more oil that cannot be consumed only means producers must store it or find some other consumer markets for it. It is far cheaper to leave it in the ground if it can be obtained elsewhere for less. This is a fairly complicated issue, but like so many that become political, no one seems interested in the root causes for escalating prices. Instead, they look at the symptoms and discuss various options that help individual interest groups. I hear no one even discussing the problem with the formation of oligopolies in the oil industry or various other industry segments. If the media was really curious, I would suggest looking at the huge number of mergers and acquisitions that have taken place in American industry over the last 25 years. Why aren’t journalists questioning the market share of some of these huge businesses and the level of control they have over the price to consumers. Most of these numbers are available through various government websites.

Yes, speculators have been and are a problem as far as running up oil prices, but they may have had less impact on oil company costs and subsequent price at the pump than some think. Speculation has clearly impacted the price of oil that companies must buy to supplement their own crude oil production, but not all of it. Having tracked this since the early 90s we have frequently seen that world spot oil prices do not correlate well with price at the pump. There is a variety of other issues in this complex equation, but I hear very little discussion of them beyond political talking points. I would encourage journalists in particular to be a little more curious beyond the comments from the talking heads on TV and from columnists.