What To Do About the Price of Oil

Whether or not Big Oil is improperly restricting refinery capacity, whether or not Wall Street traders are driving up the traded price of oil to heights completely disconnected from supply-and-demand fundamentals, a few things are clear about gas prices — and so is the most appropriate, immediate policy response.

Current pricing arrangements are generating profit gushers for the large, integrated oil companies — ExxonMobil, ChevronTexaco and the like. While the price of oil is going up, these companies’ drilling expenses are not. Oil can trade at $40 a barrel, $90 a barrel, or $130 a barrel. It still costs ExxonMobil and the rest of Big Oil only about $20 to get a barrel of oil out of the ground.

The oil companies’ staggering profits are a windfall of the purest sort (Websters’ definition: “an unexpected, unearned, or sudden gain or advantage”). This is not a moral judgment about the oil companies, it is just a description of what’s happening.

A windfall profits tax could generate substantial government revenues. Allocated to investment in renewable energy, it could significantly increase funds directed to renewables, and be a small but important down payment on the massive investment needed in mass transit, energy efficiency and renewable energy.

Beyond the immediate future, it is important to get a better fix on energy markets. What’s clear now is that the U.S. refining market is very concentrated, thanks to a series of mergers permitted by antitrust authorities; and that oil and energy futures markets are dangerously unregulated.

Just five large oil refiners now control over half of the U.S. market, and the top 10 control over 80 percent, according to Public Citizen. There is very good evidence that the refiners have worked in the past to limit supply and drive up price. Whether this is an ongoing issue is perhaps less clear, given that independent refiners are now facing profit squeezes.

Still, for the medium term, either the government needs to scutinize refinery activity much more closely, adopt new regulatory authority and aggressively enforce antitrust laws, or it must intervene to deconcentrate the market.

Meanwhile, oil and energy markets have mutated in dangerous fashion over the last decade. At Enron’s instigation, these markets have become largely deregulated in the United States. Leading Wall Street firms like Goldman Sachs have subsequently bought up oil transport and storage operations — not because they are looking for new business outlets, but because they want insider knowledge about oil and gasoline markets. Meanwhile, investors large and small are pouring money into oil as a tradable commodity.

Are these markets being manipulated? Perhaps. But even with no manipulation, the intensified financialization of oil trading subjects the market to speculative frenzies characterized by sudden and severe price fluctuations. These prices swings have real impacts at the pump and in the overall economy (and much more ominous impacts for oil-importing developing countries than rich nations).

Re-regulating energy markets, imposing margin requirements and lessening investors’ ability to trade with borrowed money, and cracking down on market manipulation will all slow the Wall Street frenzy and limit price spikes.

For the long term, however, oil demand will continue to shoot up — though higher prices and the U.S. recession will moderate this tendency — and supply cannot keep up. Ultimately, new sources of oil may become available, including from deep water sites and tar sands and shale, but these will be more expensive to obtain.

The world is likely witnessing a long-term, steady (if bumpy) and permanent rise in oil prices. (More on the causes of oil price increases tomorrow.) This price increase will impose major economic hardships, unless there is a massive effort to shift to oil-displacing technologies and renewable energy.

That exactly this shift is needed to address the even more pressing threat of climate change, makes it all the more urgent that Washington adopt a windfall profits tax (and end governmental subsidies for Big Oil) and invest the proceeds in renewables. This is very unlikely for 2008. Will things be different in 2009?

Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor, and director of Essential Action. Copyright © 2007 Robert Weissman Read other articles by Robert, or visit Robert's website.

7 comments on this article so far ...

Comments RSS feed

  1. Seth Joyner said on June 30th, 2008 at 7:38am #

    I have been losing my mind lately over these crazy gas prices, and it’s to the point where my job is on the line because of this.

    I’m a single father of two teenage kids 14yr and 17yr old boys, and I’ve been in traveling sales for over 20 years now.

    I work pretty much the entire southern part of my state for the company I’m employed with. And for the past 7 months, since they have not found a replacement for the previous individual who held that territory, yours truly has gotten that load 2x’s per week, which equates to an extra 3000 miles per month on my car.

    Right now of course my company is paying my mileage, yet even they are feeling the pinch at the pump and are in the process of “restructuring” their comp plan, so I’m left with 1 or 2 options….Quit or Use an alternative fuel on my 2005 Range Rover.

    I’ve been surfing the net reading about hybrids, vegetable oil fuels, water, and even sand!

    What should I do?

    This one site I visited hypermiling,com had some pretty good tips, but some folks have told me that this technique is very risky and jeopardizing to myself and other drivers.

    Another site I Googled was water4fuel,info and they had this water conversion kit and manual for about $90-$100 which claimed to increase my mileage as much as 30-50% without any modifications to my engine or warranty.

    Veggy oil I was told worked on diesel, and I do not have diesel, so I won’t go there, and sand??? I think this concept is not only risky, yet way off base to even consider unless someone qualified could show me otherwise.

    Please Help!

  2. Edwin Pell said on June 30th, 2008 at 9:08am #

    Or trade-in your Range Rover for a Honda Civic Hybrid that gets 45 miles per gallon.

  3. Lynn said on June 30th, 2008 at 10:37am #

    Change your driving habits. It’s the fastest way to get a mileage bump. I recently tried it with our ’98 Mazda Protege which usually gets 28 mpg. By slowing down, avoiding fast starts and a few other things I stretched the mileage to 36 mpg. There’s a good article on the subject on Mother Jones web site or search on hypermiling. You won’t need to go to the lengths these guys do to get results. And ditch the Rover.

  4. rosemarie jackowski said on June 30th, 2008 at 12:25pm #

    Testimony during the Congressional Hearings on oil prices said that in New England people will freeze to death in the up coming winter. I might be one of the unlucky ones.

    Here’s the plan of action…
    1 Round up and arrest all of the Wall Street Speculators who are responsible for 50 to 75% of the increase in prices.

    2 Nationalize the oil industry.

    3 Require all new autos to get at least 50 MPG

    4 End the ethanol scam which has created food shortages.

    5 The Dems/repubs are beholden to the corporate world. Vote for Nader.

    6 End the obscene waste of energy by the military. Cut the military budget by 98%. It will save a lot of fuel (and a lot of lives).

    7 Show national respect for Chavez. Venezuela has been donating oil to the homeless and poor in New England for the past 2 winters.

    8 Develop a system of rail and public transportation. Many places in rural US have none – you can’t get there from here.

    9 Take farm subsidies from the large factory farms and instead subsidize small, organic family farms. It would save oil to not transport food across the country.

    10 If all else fails – think a bloodless revolution. Maye the time has come.

  5. michael said on June 30th, 2008 at 3:05pm #

    The chevy volt will be here in 2009. It will go 40 miles on a pure charge or the tiny gas motor on board will take it 600 miles on a very few gallons of gas. The gas motor is solely on board to charge the batteries. The expensive Tesla automobile is the real breakthrough with 200+ miles on a single charge and no gas required. The technology is in place. The technology is also in place for LARGE solar fields. Nevada and California both have large solar fields in place that power THOUSANDS of homes cleanly and efficiently, but guess who just declared a moratorium on these technologies? That’s right your US government at work through the bought and paid for EPA. The very same EPA who allowed coal companies to remove or refuse to install Scrubbers on their coal stacks. Get it the hell in gear and start building the Huge solar arrays in the wasted space of the southwest deserts and according to one scientist within five years the ENTIRE nation can be running on solar power with only 100 square miles of collectors. Think of plugging your electric car into a home outlet that is supplied by the sun. No waiting for hydrogen infrastructure to be put in place and no devoting farmland to Ethanol. Back to growing food on local farms and driving a car that is basically sun powered. ALL this tech is already available. Of course if you watch the new pure propaganda Enron commercials you will instantly realize why this isn’t being done. Kick them out and start fresh people. The next pres. should make solar and electric vehicles one of his highest priorities. Of course this still won’t stop the PNAC boys (Cheney and the rest) from wanting to control and therefore limit Middle East oil from going to China and India. The Tech is there. Make the demands. Hey you New Mexicans get Bill Richardson on the solar bandwagon. Lord knows you have the space out there in the New Mexican desert. Nuff Said. Michael

  6. realist said on June 30th, 2008 at 5:55pm #

    What To Do About the Price of Oil?

    Reduce your personal consumption by any means possible.

  7. Fran Barlow said on July 2nd, 2008 at 10:43pm #

    This discussion seems to be ignoring several salient points

    1. The age of oil is drawing to a close. Crude oil will continue to be available long after it has stopped being viable to use it.

    2. Combustion of crude is trashing our planet, and although I’m irked by the fact that the windfall is winding up in the hands of the filthy rich who use a slice of it to keep things just as they are, the fundamental problem is that the true costs of oil are not being paid by the users. How much per gallon, do you suppose, would it cost if *all* the costs to the commons associated with running an oil-intensive economy were applied to it? A lot more than $140 per barrel that’s for sure. Cheap oil produced massive urban sprawl, stole billions of hours from the lives of people sitting in tailbacks on crowded roads and underpinned the era of fast food and obesity. By driving people into autos, it was responsible and is still responsible for millions of road deaths and even more road trauma, especially in the developing world.

    Fuel is too cheap, even now.

    The very first thing that must be done is to reinvigorate mass transit. Years ago GM and the Fossil fuel morlochs bought up the trolley bus systems and closed them down, forcing people into cars. Reversing this environmental vandalism by rebuilding public transport and encouraging car pooling, more than any other single measure, would begin to allow people to reclaim their lives AND free them from soaring costs. We need cities designed around much higher population densities precisely so that each of us can get what we need with less travel. This would force down the effective cost of housing and commuting massively and reduce both stationary and transport energy demand per capita — and we could then begin to return whole swathes of the cities to greenspace or something like the original ecology of the place.

    All of that is far more sensible than contemplating how to keep living as we did when we had access to fuel that was cheap to buy precisely because the bulk of the human and environmental costs were not accounted for.

    While this process is in full swing, let us by all means use low carbon footprint energy sources to meet our needs, but let’s not delude ourselves into pining for the lifestyle that “cheap” oil made possible.