Comment: A Gouging Market

June 2006 Issue

Accusing oil companies of price gouging is like accusing sharks of swimming. That’s what oil companies do. In fact, that’s the imperative of the marketplace: to charge whatever you can get.

When I was taking Economics 101 at college, my instructor told us that on a hot day the ice cream parlor should raise prices. Well, it’s a hot day right now, and the oil companies are jacking up the price at the pumps.

If you worship the market, fill your tank and smile.

But the free market is not exactly in textbook shape right now when it comes to oil. Rather than having a multitude of ice cream parlors to choose from, the consumer can select from only a few oil companies, and they own not only the parlor but the cows and the dairies, too.

Plus, there’s another big difference between ice cream and oil. The choice of having an ice cream cone is a luxury. Driving a car, for many of us, is a necessity.

That’s something the hardcore free market apologists don’t grasp.

“Gas station owners cannot force us to buy gasoline,” writes Alex Epstein of the Ayn Rand Institute, in an article entitled “The Myth of Price-Gouging.” “They can only offer us a trade, which we are free to accept or reject.”

But how free is the independent trucker, or the taxicab driver, or the traveling salesperson? How free is the service worker who can’t afford to live in the expensive city where she is employed, so she has to live thirty miles away, where there is no public transportation?

Oil companies know that they have a lock on a crucial product. They’re charging accordingly.

Still, fantasies of a free market die hard.

“There is no such thing as ‘price gouging’ by private business,” writes Epstein.

It very well may be that what the oil companies have been doing over the last couple of years does not technically qualify as collusion.

“The real problem is legal manipulation of prices,” says Tyson Slocum, acting director of Public Citizen’s Critical Mass Energy and Environment Program. “The oil companies have gotten so big they don’t need to collude anymore. Advances in computer modeling have really aided the ability of the big companies to game the market.”
So game it they do.

And because the five largest oil refining companies in America control more than 50 percent of the market, they can individually decide to limit the supply of refined oil products. If ExxonMobil sees Shell taking gasoline off the market, it can do likewise, and they will all end up making more profits without ever needing to huddle together in a boardroom to fix prices.

Even George Bush, as ardent a defender of the oil companies as ever set foot in the Oval Office, has begun to make noises. With his popularity down at the freezing mark, he’ll say just about anything. But he won’t say “windfall profits tax,” even though, according to an Opinion Research Corporation poll (and this was back in September, before the current hike), 80 percent of Americans are in favor of it, including 76 percent of Republicans.

Bush ruled that out in his April 25 speech. “What can the government do?” he asked. “One of the past responses by government, particularly from the party of which I am not a member, has been to have—to propose—price fixing, or increase the taxes. Those plans haven’t worked.”

No, we can’t have that, can we? Never mind that the windfall amounted to $36 billion last year for ExxonMobil alone.

Democratic Senators Byron Dorgan and Christopher Dodd have introduced legislation to impose a 50 percent excise tax on oil profits when it is selling for more than $50 a barrel. Representative Dennis Kucinich has proposed a 100 percent tax on windfall oil profits. But not only are Republican Congressional leaders opposed to these ideas, they don’t even want to strip out some of the tax benefits the oil companies have been reaping already.

“While Republican leaders sharply criticize soaring gasoline prices and energy industry profits, GOP negotiators have decided to knock out provisions in a major tax bill that would force the oil companies to pay billions of dollars more in taxes,” The Washington Post reported on April 26. No surprise there. Since 2001, the oil industry has gurgled up $55 million in campaign contributions, with 81 percent going to Republicans, according to Public Citizen.

Bush talked the talk. “These energy companies don’t need unnecessary tax breaks,” he said. But he didn’t walk the walk. All he proposed was phasing out $2 billion in tax breaks over the next ten years. This is a pittance after giving the oil companies billions of dollars in tax breaks in last year’s energy bill, along with preserving their holiday on royalty payments on oil and gas they extract from public lands.

Bush proposed several other measures that won’t solve the problem of high gas prices.

First, he offered to give bigger incentives to consumers who purchase hybrid or clean-diesel vehicles. There’s nothing wrong with that. But it won’t do anything in the short term. “There is already a long waiting list to buy certain hybrid cars,” Slocum notes. And it’s not aimed at the people who are being most disadvantaged by high oil prices.

Bill Wineke, a columnist for the Wisconsin State Journal, put it well. “Tax credits will help people like me, but they won’t help people like my son, Andy,” he writes. They both drive a fair distance to work. But “the difference between us, frankly, is that I have more money. . . . I can buy a new car. Andy can’t. . . . If he could afford a new car, he could afford the gasoline for his current car.”

Second, Bush said the U.S. government would stop purchasing oil for the Strategic Petroleum Reserve so as to increase supplies of oil on the market. But the problem this spring is not one of supply. (There is a serious problem of supply in the long term, but the current price hikes had more to do with speculation in the market and oil company grabs.) The Department of Energy revealed in April that oil inventories in the United States were at an eight-year high.

And anyway, Bush’s move would account for less than half of 1 percent of U.S. oil consumption. His newfound religion on this issue is interesting. “We will not play politics with the Strategic Petroleum Reserve,” Bush said on the 2004 campaign trail. Well, what’s he doing now?

Bush also seized on high gas prices to advance his anti-environmental agenda. He proposed waiving clean air rules for gasoline blends, and he insisted that oil refinery construction permits should be decided on within one year’s time. This will greatly diminish the ability of consumers, environmentalists, cities, and states to properly investigate the risks that such construction could bring. To top that off, Bush once again put drilling in the Arctic National Wildlife Refuge on the table.

“We can gut our environment to match that of Bangladesh, and all it’ll accomplish is to make our air quality poorer and our people sicker,” says Slocum.

Bush and conservatives love to harp on the fact that refinery capacity is way down in this country, and they blame that on environmentalists. But as Slocum notes, a small oil company, Arizona Clean Fuels, has managed to navigate the bureaucracy and get all the permits it needs. If it can do this, asks Slocum, “why can’t the world’s most powerful corporation?” He offers an answer: “ExxonMobil has no interest in creating additional refineries because it will drive prices down.”

Finally, Bush ordered the Federal Trade Commission, the Department of Justice, and the Energy Department to investigate whether the price of gas has been “unfairly manipulated.” The tip-off here is the word unfairly. Because the Bush Administration doesn’t believe there is such a thing, short of outright collusion.

We should all live long enough to see the day when the Bush-Cheney Administration hauls ExxonMobil and the other big oil companies into court.

What Bush didn’t propose is as telling as what he did. He didn’t propose busting up the oilopoly. He didn’t propose new legislation making it illegal for oil companies to manipulate supplies. And he failed to require the automakers to increase the fuel efficiency of their vehicles, though he sought unilateral authority to do so in his never-ending quest to expand Presidential power.

The average car and truck on the road today gets only twenty-one miles to the gallon. In 1987, the average was twenty-two. We’ve been going backward. And in last year’s energy bill, Bush, the Republicans, and many Democrats, too, blocked an amendment to boost fuel efficiency standards.

“President Bush continues to ignore the most obvious and practical solutions,” the Sierra Club says. “The biggest single step we can take toward saving money at the gas pump, curbing global warming, and cutting America’s oil dependence is to make our cars, trucks, and SUVs go farther on a gallon of gas.”

Granted, this will take time, too, just as giving people incentives to buy hybrid cars will. But it at least offers a greater likelihood of cleaning up the fleet and curbing consumption.

We already have the technology, says the Sierra Club, “to make all new cars, SUVs, and other light trucks average forty miles per gallon within the next ten years.” According to the Sierra Club, this would “save more oil than the United States currently imports from the entire Persian Gulf and could ever get out of the Arctic Refuge, combined.”

Or, as Daniel A. Lashof, science director of the Natural Resources Defense Council, puts it, “We cannot drill our way out of this crisis.” The only solution, he says, “is to use less oil. Period.”

But that goes against the entire ethos of the Bush-Cheney policy: Consume until we drop. Bush after 9/11 told us to go shopping. Sticking with that mindset, Republicans floated the idea of sending a $100 rebate to 100 million taxpayers. But citizens reacted harshly to that idea, recognizing it as a crass attempt to buy them off while doing nothing to get at some of the basic issues.

Bush is very late to the conservation dance. And Cheney famously derided conservation as a mere lifestyle choice. His energy report in the spring of 2001, where he was counseled by energy executives, took as a given that the United States would be as dependent on foreign oil in twenty years as it was then. The Cheney solution was to make sure the United States had better relations with foreign oil producing nations, and to have the oil companies essentially act as U.S. ambassadors, showing the wonders of the marketplace to countries all over the world.

In practice, Bush and Cheney have decided that the best way to establish those relations is to go to war.

They invaded Iraq, with the second biggest oil supplies, and now they’re threatening Iran, another top ten oil supplier.

In fact, the instability of Iraq and the belligerent threats toward Iran have done a lot in themselves to push oil prices up.

“The Iranian situation obviously causes markets to—creates angst in the marketplace, and the result of which is higher prices,” admitted Al Hubbard, Bush’s director of the National Economic Council, on April 25.
What we’re seeing at the pumps is part of the bill for Bush’s reckless militarism.

Ultimately, to solve the problem of oil we need to solve the problem of empire, we need to get over the illusion of the self-regulating marketplace and the sovereign consumer, and we—and everyone else on the Earth—need to place sustainability over short-term growth.

Americans cannot keep consuming 25 percent of the world’s oil when we have 2 percent of the world’s oil supply and 5 percent of its population.

We cannot keep invading and bombing countries that have oil. (Bush, in his April 25 speech, acknowledged that “some of the nations we rely on for oil have unstable governments, or agendas that are hostile to the United States.”)

We cannot keep imposing an economic policy on the rest of the world that is designed for the oil industry and other private companies.

They are the ones that benefit the most from the empire.

We need to bring the giant corporations to heel.

Otherwise, they’ll keep gouging us. And not just at the pump.

—Matthew Rothschild