Big Oil Song and Dance

The Big Oil Quintet made an appearance before Congress on May 22, singing their old standard: “The Magic of the Free Market.”

The CEOs of the five biggest oil corporations turned in a boffo performance for a demanding crowd of lawmakers: You ask us why gas prices are so high/But all we can do is sigh and say/It’s just that old free market at play. The lead harmonizer was Shell Oil President John Hofmeister, who crooned: “As repetitive and uninteresting as it may sound, the fundamental laws of supply and demand are at work.”

Bovine excrement! There is no free market in the oil industry. Supply is controlled by two intertwined oligopolies: OPEC and Big Oil.

Yet, most of our political stalwarts in Washington don’t mention this huge honking market reality. John McCain and Barack Obama, for example, have swallowed Big Oil’s line about supply and demand. While trying to sound sympathetic to consumers, both say we simply have to get used to high pump prices because of increased world demand by the likes of China and India. So that’s that.

Not so fast. Sure, global demand is on the increase, but under free market “law,” supply is supposed to rise to meet that need, thus holding consumer prices stable. However, here comes Oligopoly #1: oil producers. OPEC is the chief monkey wrench controlling the world’s flow of crude, and its members have refused to get off their ample rumps to ratchet up production enough to make a difference. Saudi Arabia alone could expand its output by two million barrels a day, but even presidential groveling has not moved the oil kingdom to take dramatic action. Twice this year, George W. flew there to hold hands with King Abdullah (literally—there are pictures!) and beg him to open the spigots, only to be rejected. Hold hands, yes; play footsie, no.

Enter Oligopoly #2: oil refiners. These would be the same gentlemen who sang that free market ode to Congress. Interestingly, the refiners don’t really want crude prices to come down, because they also happen to be oil producers—ExxonMobil, for example, produces more oil than any OPEC member except Saudi Arabia and Iran.

While more expensive crude does raise Big Oil’s cost of making gasoline, so what? Thanks to a rash of mergers waved through by Washington in the past dozen years, gasoline refining and marketing are in the oligopolistic grasp of ExxonMobil, Shell, BP, and ConocoPhillips. Even as oil executives were lecturing Congress about how the free market works, they were slashing output at their refineries in order to hold supply down and jack up prices.

But, wait—there’s another culprit in the fun-filled game of gasoline gouging: rich global speculators. Yes, the same manipulators who brought us the housing mess are presently squirreling the oil market.

In just the past year, crude prices have more than doubled, from $60 a barrel to $140. Even the Saudi oil minister has complained that “there is no justification” for this, and one oil marketer bluntly told a Senate committee last month that, “Excessive speculation on energy trading is the fuel that is driving this runaway train in crude oil prices.”

Through a mischievous mechanism known as the “Enron Loophole,” hedge funds are running a backroom electronic casino game, allowing global speculators to bet on the future price of oil. Using a few facts, wild guesses, and chicken entrails as the basis for their bets, commodity speculators have been artificially raising crude prices. Hedge funds at Goldman Sachs and Morgan Stanley, for example, own large amounts of these oil futures, and they’re already speculating on crude as high as $200 a barrel—a price completely detached from the real cost of producing oil, much less such niceties as supply and demand.

We have Enron to thank for enabling this costly tinkering. In 2000, a loophole was written into commodities trading law that exempted electronic trades from regulatory oversight, letting high-rollers make huge volumes of commodity purchases in the dark. The bill was drafted by Enron lobbyists, rammed through Congress by their trusted corporate whore, then-Senator Phil Gramm, and signed into law by President Bill Clinton. Enron used this electronic loophole in 2001 to manipulate electricity markets out west and bilk some $40 billion out of consumers. Today, this game has moved to oil.

A final twist. Gramm, now a vice chairman and sometime lobbyist for the huge international investment bank UBS, is John McCain’s top economic adviser. In May, Gramm got McCain to oppose an effort in the Senate to repeal the Enron loophole.