Motor Head {road scholar}: Gouge away

IF THE WAR IS CAUSING THE SPIKE IN GAS PRICES, WHY ARE OIL COMPANIES POSTING RECORD PROFITS?

By Newt Briggs

At the Chevron station at Maryland Parkway and Sahara Avenue, a gallon of 87-octane gasoline costs $2.19. It's neither the cheapest nor the priciest gas in town. According to VegasGasPrices.com, it's actually a penny below the current Las Vegas average. But it does cost about 40 cents more than fuel from the same pumps one year ago. And none of the Chevron customers is exactly sure why.

"I don't really know," says 23-year-old Pablo Medina, who estimates he spends $75 per week on gas for his two cars. "I think it's got something to do with the Middle East."

"It's like the oil in Iraq or something. That's what I heard," says 16-year-old Valley High School sophomore Destiny Oscars. "I just put in $10, and that's a lot for me."

"It seems like when the war started coming, the prices went crazy," says Juan Cardenas, 19, noting that he spends $20 to $30 per week on gas for his import coupe. "I just don't need to be laying down that kind of money on gas."

Although they all have their own explanations for the inflated fuel prices, all their answers are peppered with "like" and "you know" and vague, unreferenced pronouns such as "they" and "it." Of more than a dozen pump patrons, only three use the phrase "crude oil," and only one--39-year-old Roxanne Hart--suggests that the rising costs are a reflection of anything but the American occupation of Iraq. One thing's for certain, though: None of them likes what the prices are doing to their pocketbooks.

"It's still less than a jug of milk," says Judy Lewis, who now spends up to $60 to fill her three-quarter-ton cargo van. "But my family doesn't drink five gallons of milk a day."

If it did, then the National Dairy Board might be as fat and happy as the executives at the five largest oil companies operating in the United States (ExxonMobil, ChevronTexaco, ConocoPhillips, British Petroleum and Royal Dutch Shell). Or so says a new report authored by Tyson Slocum, research director of the energy program at the Washington, D.C.-based watchdog organization Public Citizen. According to Slocum's 13-page study, these corporate entities have established a virtual oligopoly over the U.S. oil industry, artificially inflating fuel prices and raking in an annual after-tax profit of more than $50 billion.

"I hate to sound like a cynic because I'm not," says Slocum from his office at 215 Pennsylvania Ave., just a short walk from the Capitol. "But the primary reason that gasoline prices are as high as they are is that domestic markets are no longer competitive. Much is often said about OPEC's cartel-like control over crude oil prices. Others blame environmental regulations over the refining industry. But our research has documented that under-regulation of the industry has allowed a smaller and smaller group of companies to control too huge a share of the gasoline market, which makes it easier for them to set prices."

In other words, the oil industry has the average American suckling on the pump nozzle like a junkie on a crack pipe. Forget about Teddy Roosevelt and the Trustbusters; the modern-day "oiligarchs" have established a market stranglehold that might have given even original oil magnate John D. Rockefeller pause. As Slocum's report notes, over the past decade the top five U.S. oil companies have more than doubled their interest in the retail gasoline market (from 27 percent in 1993 to almost 62 percent in 2003). During that time, they've also significantly increased their stakes in global oil production, domestic oil production and domestic refinery capacity by swallowing up smaller oil companies and forcing independent refineries out of business.

And it's all gone on with the approval of the Federal Trade Commission--the organization that, according to its own website, "works to ensure that the nation's markets are vigorous, efficient and free of restrictions that harm consumers." But Slocum's study quotes one FTC investigation that uncovered clear instances of a major oil company intentionally reducing gasoline supply to increase its profit margin. Says the FTC document: "An executive of this company made clear that he would rather sell less gasoline and earn a higher margin on each gallon sold than sell more gasoline and earn a lower margin."

"Obviously, the FTC found widespread examples of companies intentionally withholding gasoline from the marketplace," Slocum says. "If a company is intentionally withholding gasoline, then that's clear evidence of an uncompetitive market. Because if you have true competition, you're going to have another supplier come in and offer that product to the market. But that's not happening because we have allowed so many mergers that a handful of companies controls way too much of the market, and that gives them uncompetitive control and allows them to price gouge."

Slocum characterizes this practice as "de facto collusion"--not necessarily conspiracy in the conventional sense but certainly complicity to create an industry-friendly environment. "You can learn in any MBA class that large industries will tend to collude rather than compete in certain key areas. Cutthroat competition is uncertain. It's volatile. And the one thing that companies and shareholders like is a certain amount of stability. And if companies--particularly energy companies--can ensure a healthy bottom line by manipulating costs, then they'll do it."

According to Slocum, the problem is uncovering evidence of this collusion. "No longer is it men in top hats and suits, smoking cigars and setting prices in the back room. Now, the ability of these companies to utilize a lot of computer modeling of markets and supply-and-demand data, combined with their very large actual ownership of the upstream and downstream oil facilities, really gives them an unprecedented ability to better predict changes and fluctuations in the marketplace and how to exploit them. "

But if you're waiting for government officials to step in and put the smackdown on the American oil cartels, don't hold your breath--particularly not for the GOP. Since the 2000 election cycle, ExxonMobil alone has contributed almost $3 million to political coffers (74 percent of it to Republican officials). During that same period, ExxonMobil has claimed an after-tax profit of more than $48 billion. "For the same reason that Ken Lay remains a free man, the oil companies have escaped tougher scrutiny," Slocum says. "Campaign contributions and political connections buy individuals and companies a certain immunity from regulation."

Of course, there will always be those who decry industry regulation and insist that government intervention would bog down American business interests. Right now, there no doubt are media pundits falling back on the age-old argument that, adjusted for inflation, gas prices are actually lower than they were in the 1950s.

"That's bogus," says Slocum, noting that the oil industry has undergone a "revolution in technology that has slashed capital expenditures related to exploration and production of oil." "No one would make that argument for personal computers, CDs or any other technology-dependent industry, where prices traditionally plummet after the introduction of a new technology into the market. Today, the industry is able to successfully utilize imaging technology that has radically reduced the costs of exploration and prediction. So, for the same reason that you can expect the price of DVD players to go down, you should be able to expect the price of gas to do the same."

Besides, says Slocum, the energy industry's bloated profit margins are having "a profoundly negative effect on the American economy." "I'm not advocating that private enterprise be denied the ability to profit off of its hard work. What we're saying is, we need to evaluate whether these profits are artificially swollen due to uncompetitive practices. For the most part, the American economy flourishes because of robust competition, but that type of competition is lacking in our energy markets--especially with gasoline. And we need to re-evaluate the way that government is regulating--or, in this case, not effectively regulating--the industry."

But that might compromise the astronomical profits being reaped by the oil industry, and no one would want that. No one, that is, but the millions of Americans being pickpocketed at the pump every day.

"Those sneaky bastards," says Cardenas after hearing Slocum's conclusions.

"I want my money back," adds Oscars.

"I knew it," Hart says. "You just can't trust anyone anymore--especially not big business. They're all a bunch of crooks."

The full text of Tyson Slocum's paper--"Mergers, Manipulation and Mirages: How Oil Companies Keep Gasoline Prices High, and Why the Energy Bill Doesn't Help"--can be found at www.citizen.org.