Detroit Free Press

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LOCAL COMMENT: Don't buy into gas conspiracy

BY MARK J. PERRY

October 12, 2006

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If you've been following recent media coverage of the elections next month, you've probably heard a fairy tale that goes something like this: President George W. Bush and the major oil companies have conspired to cut gasoline prices for electoral gains.

In fact, a recent Gallup poll found that 42% of the general public believes the Bush administration has deliberately manipulated gasoline prices in advance of the fall elections. But a careful examination of the oil market reveals a much different explanation of why gasoline prices have been falling for the last three months.

The simple truth is that changes in the world price of crude oil account for nearly all changes in the retail price of gasoline -- and so recent international events such as an easing of tensions in the Middle East and growing inventories of oil exerted substantial influence in reducing both oil and gasoline prices -- exactly what textbook economics tells us to expect.

Indeed, global oil prices have dropped from almost $80 a barrel in July to less than $60 a barrel now, causing retail gas prices to fall from $3 per gallon in early August to $2 per gallon now in many parts of the country.

Further, the basic economic reality of world oil trading is that even the biggest oil companies don't set gasoline or oil prices, any more than farmers set the price of corn, soybeans, coffee or sugar.

Oil and gas prices, like all world commodities, are set by the twin forces of global supply and global demand in a competitive international marketplace, not in the conference rooms of oil companies.

And many people also mistakenly think that the major U.S. oil companies are still sitting on top of most of the world's oil. But U.S. oil companies today control only a small fraction of the world's oil reserves -- about 2.5%.

Most of the world's oil is owned by the national oil companies of foreign governments such as Saudi Arabia, Iran, Russia, Venezuela, China and India. The fact that U.S. oil companies control such a small fraction of the world's global supply of oil is another reason that makes it almost laughable to think that they could deliberately manipulate gasoline prices for political reasons.

Oil and gasoline prices in the United States change daily, in response to the relentless and dynamic changes in global economics, forces that are totally beyond the control of U.S. oil companies. Unfortunately, any one of a number of things could go wrong in the world, from hurricanes in the Gulf of Mexico to political upheavals in the Caspian Sea region, sending oil prices back up.

The irony here is that if there is any single group making our energy situation worse, it is Congress, not oil companies. Consider just two salient facts:

It is Congress whose environmental mandates require oil refiners to produce 18 different types of boutique automotive fuels.

It is Congress that has failed to agree on legislation that would open up more federal land and offshore areas to oil production, which would expand oil supplies and could help keep gasoline prices affordable for the average American.

The United States now consumes 21 million barrels of oil a day but produces fewer than 6 million barrels. Many of those who blame major oil companies for increasing U.S. dependence on foreign oil also oppose domestic oil production in the Outer Continental Shelf and in the Arctic National Wildlife Refuge, though together these two areas might possibly contain enough oil to replace Persian Gulf imports for decades.

At a time when the nation is more vulnerable than ever because of our persistent and rising dependence on foreign oil, one would hope that the wide swings in energy prices in recent years would help initiate a national discussion of what could be done to bring greater stability to oil prices. And yet, even in an election year, these critical energy issues have not been addressed in a meaningful way by politicians.

When gas prices were rising earlier this year, oil companies were accused of "price gouging" and were investigated by the U.S. Senate. Now that gas prices are falling, many Americans believe in a gas-price conspiracy by oil companies to lower prices deliberately for political reasons.

Whether gas prices are rising or falling, we're quick to scapegoat U.S. oil companies for our energy problems, but unfortunately, we're very slow to enable them to increase their output to meet our rising demand for oil.

MARK J. PERRY is an associate professor of finance and economics at the University of Michigan at Flint. Write him at U-M/Flint, 350 David M. French Hall, Flint, Mich. 48502-1950, or at mjperry@umflint.edu.

Copyright 2006 Detroit Free Press Inc.