As the great exercise in American democracy called the congressional midterm elections grew closer this fall, the political rhetoric grew ever more shrill and strident. No surprise there; it happens every two years. Simultaneously, however, another, more unexpected development was taking place. High gasoline prices, which plagued us throughout the summer and were predicted to become permanent, unaccountably began to moderate. Perhaps a coincidence, perhaps not.
Less than a month before voters were scheduled to troop to the polls, pump prices that averaged close to $3 per gallon in August had fallen to around $2.30. Retail prices were still historically high -- the typical per-gallon tab was $1.70 as recently as 2003 -- but heading in the right direction for consumers. Nevertheless, many Americans expected things to reverse themselves again following the elections, once Big Oil's presumed strategy of reelecting a friendly Republican Congress had run its course one way or the other. They may yet turn out to be right; we'll know soon enough.
One thing is certain beyond a doubt: the long-range direction of gasoline prices will be upward. Two factors dictate this certainty. First, the oil that produces our fuel is a finite product; no one, as they say, is making any more of it. Second, the oil industry has no incentive to lower prices over the long haul; it is unregulated and increasingly monopolistic, and it has a captive consumer base with a proven inability to say no. Americans will pay, no matter what the cost.
As to monopoly, which stimulates upward pressure on prices, Big Oil isn't there yet, but it's getting close thanks to the merger mania of the last decade. Oligopoly (domination by a few) best describes the current situation. The "seven sisters," the fabled oil giants that ruled the world industry in years past, are now down to four; Exxon and Mobil have become one company, as have Texaco and Chevron, which earlier absorbed Gulf. At the retail level, California's Attorney General Bill Lockyer says that barely a halfdozen gasoline suppliers control 95% of the market in his state.
Such concentration has led to some interesting anomalies on the Pacific Coast. Last April, Democrat Lockyer reported that California's gasoline prices had gone up 130% over the previous several months, while crude oil prices had suspiciously risen just 14%. During the same period, California oil refiners tripled their profit margin on gasoline from 30 to 94 cents per gallon. The conventional wisdom blamed such increases on Hurricane Katrina's disabling of the Gulf Coast refineries in late 2005, but refiners raised prices across the board, even the vast majority with no facilities in the affected region.
Katrina's devastation, which provided the rationale for last year's price spike in refined fuel, when gasoline exceeded $3 per gallon for the first time, made the supposed need for higher charges appear plausible. In reality, it was merely a convenient backdrop for the most dramatic recent incidence of the standardized price gouging that has become the industry norm in the era of oligopoly. It's all completely legal, and, quoting Bill Lockyer once more, "if it's legal," the oil companies will do it. Why not? The result was record industry profits symbolized by ExxonMobil's $36 billion in 2005 earnings, the most by any corporation in history.
For those reluctant to accept the thesis of oligopolistic pricing, there are a number of alternative explanations, mostly external, for continued pain at the pump. Costly imports of crude from unstable parts of the world and supply manipulations by OPEC (Organization of Petroleum Exporting Countries) are two hardy perennials. Yet Exxon-Mobil, our biggest domestically based company, is relatively self-contained; it drills for petroleum, refines it, and markets it as gasoline -- at an average profit of 29% on its oil, according to ABC News.
Imports are a factor, more for some companies than others, but not the deciding factor. Prices have stayed high in recent years, MidEast war or no MidEast war, OPEC supply cut or no OPEC supply cut. And most of the money has gone not to independent producers, distributors, or retailers, but to the big integrated refiners responsible for the final product, who, a Washington Post investigation found, accounted for twothirds of the price runup following Katrina.
There are other culprits to consider, of course. Recent attention has focused on the futures market of the New York Mercantile Exchange, where institutional investors literally bet on the scarcity of future oil supplies and in the process bid up socalled spot (or current) prices in times of worldwide political and economic disruption or uncertainty. A Senate subcommittee has concluded that this sort of financial speculation contributed significantly to the rise in prices between 2002 and 2006. The industrial emergence of China has also been advanced as a causal factor. China's growing demand for oil (up 36% since 2001) has been suggested by economist Robert J. Samuelson as a principal reason for supply shortages and price spikes, along with the speculative activities of oil traders.
All of these external explanations -- natural disaster, war in the Middle East, OPEC's machinations, market speculation, China's impact -- carry weight; they have all had an effect. But pricing policies can't be understood without reference to internal developments within the oil industry itself. The growth of oligopoly, bringing with it administered prices, has been ignored by analysts, but it's key to clarifying the current chaos at the pump.
Consider this: From 1985 to 1999, oil and gasoline prices, while substantial, were relatively stable. Since 2000, however, their direction has been steadily upward, leading to an approximate tripling in seven years. This price expansion coincided almost exactly with the five-year wave of industry concentration that began in 1998 with British Petroleum's absorption of Amoco and Atlantic Richfield, and culminated in 2002 with the merger of Conoco and Phillips. There are now many fewer competitive firms than existed just a decade ago.
President Bush was quoted earlier this year as cavalierly saying the market controls oil prices and "that's the way it should be." But thanks to his anemic (if not negligent) antitrust policies, and those of his predecessor, we have a restructured oil industry that manipulates, instead of responding to, the market. Until this changes, expect those oily prices to stay high and keep climbing.
Wayne O'Leary is a writer in Orono, Maine.
Subscribe to The Progressive Populist