It’s Raines-bashing day here at the Curious Capitalist! First Frank, now my old friend Howell (full disclosure: the man bought me lunch once, and has always been very nice to me). In his newish incarnation as media critic for Conde Nast Portfolio, Howell has written a column arguing that the “children of Reaganomics” now populating newsrooms are way too willing to swallow the oil company line that high gas prices are merely the result of supply and demand. If only, he says, today’s reporters would dig deep for explanations the way the great Don Barlett and Jim Steele did in the pages of TIME in 2003.
What did Barlett and Steele find back then? Well, some appalling stuff about the U.S. government blowing zillions of dollars on energy boondoggles that’s still worth reading today. But here’s their explanation for high oil prices:
While the world is swimming in crude oil, it already trades at an inflated price of $30 a bbl., a level essentially dictated by Saudi Arabia with the approval of the U.S. government.
Now, I wrote something similarly boneheaded in 2002, so I’m not holding that against Barlett and Steele. But it seems pretty clear in retrospect that (a) $30 a bbl. wasn’t an inflated price and (b) it probably wasn’t being dictated by Saudi Arabia. By far the biggest story in global oil markets since 2003 has been sharply rising demand from China, India and other emerging economies, coupled with lots of declining big oilfields and more and more questions about whether Saudi Arabia really does have enough excess capacity to manipulate oil prices. In other words, it’s a supply and demand story. Do I think this because I’m a child of Reagonomics? Maybe that plays a role. But the supply-demand thing also happens to be the only credible explanation for why Barlett and Steele were so wrong in 2003 and why oil prices have gone up so much since then. Yes, some of the price premium right now seems to be the product of a futures market feeding frenzy. How much? We’ll find out over the next year or so.
ExxonMobil and the other big Western oil companies are of course happy spectators to this price rise. They certainly aren’t doing much to thwart it. I wrote a column last year about how ExxonMobil now spends more money on dividends and share buybacks than it does on exploration and capacity improvements. But that’s partly because so much of the world’s oil is now off limits to Big Oil (countries would rather exploit it themselves), and I certainly can’t believe that a company that produces only 3% of the world’s oil is capable of pushing prices from $30 a bbl. to $140.
When it comes to the domestic gasoline market, ExxonMobil and its cohorts do have some pricing power, especially during the summer when high demand exceeds U.S. refining capacity. But while that drives up gas prices most summers, it’s not so much of an issue this year because demand is falling. Raines does make an interesting point about prices at the pump being set by the latest spot prices for bulk gasoline, not how much it actually cost to make the gasoline. That would presumably deliver a windfall to refiners when oil prices are rising. But it would cut into profits when oil prices fall.
Where the oil companies are very much culpable is in their influence on U.S. energy policy, which has been a joke for decades. Even a child of Reaganomics like me can see that.