Politics & Policy

Oily Situation

Crude concerns.

The oil industry’s enormous profits have come under intense media scrutiny, and have piqued the interest–and the opprobrium–of many in Congress. The consensus attributes the oil industry’s windfall to strong global demand and tight supply, and the consequent high price of oil. Lee Raymond, ExxonMobil’s chief executive, when asked about his company’s record-breaking profits of $25.4 billion for the last three quarters, responded: “No, I don’t think they’re obscene. I don’t think they are obscene at all.”

What has not been said by Lee Raymond, by other oil-industry leaders, or by most commentators is that the oil industry is getting a free–and highly profitable–ride on the coattails of OPEC; and that the received wisdom of a free market in crude oil (the largest component, by far, in the price of gasoline) is misleading.

Of course, if Exxon and, say, BP had colluded with one another to bring about today’s egregiously high price for crude oil, Lee Raymond and Lord Browne (BP’s CEO) would have swiftly found themselves behind bars. But such collusion is simply unnecessary: The oil industry reaps enormous profits as the passive beneficiary of the manipulative practices of a cartel beyond the reach of U.S. law.

The result is that we, the consuming public, are being gouged–not really at the pump, but at the “well.” The Organization of Petroleum Exporting Countries controls some 40 percent of the world’s oil, enough by far to control the oil market and–if it chooses to do so–to manipulate its available supply and price. It is a given that any person or group that controls 40 percent of a major commodity can control its market price; and OPEC has done so with extraordinary success. In the last six years or so the price of crude oil has gone from near $10 per barrel to over $60/bbl (hitting $70 at the end of August): an increase of over 600 percent in a period of slightly over six years, an increase almost unheard of for a commodity of such wide distribution and volume as oil. This is, in its way, prima facie evidence of a manipulated market.

All this has taken place in a miasma of disinformation meant to feed fear–fear of supply constraints, not to speak of varied scenarios of outright supply disruption. (“Nothing moves markets like fear,” one prescient oil-industry wag is said to have remarked a few years ago.)

Last February, the Group of Seven finance ministers asked oil producers (read OPEC) for greater transparency about their reserves and production capacity. A Saudi official responded: “Western nations are not dealing with oil producers as partners. Why should they have the advantage of knowing details of oil producers’ reserves? Data is information and information is power.” OPEC has skillfully played the trumped-up card of limited production capacity to purposefully restrain production–and to rationalize the march to high prices.

And OPEC’s greatest cheerleaders have been Western oil companies, who have run interference for OPEC while playing on our fears, conditioning us to expect imminent shortages and supply disruptions, and convincing us that oil and gas prices are a reflection of free and unfettered market forces. After all, the more successful OPEC is at ratcheting up prices, the more money flows to the bottom line of the U.S. oil industry.

In doing so, U.S. oil has been an enabler for conditions that pose a risk to our national security. By encouraging these excessively high prices for crude oil, they are making possible the transfer of enormous wealth to regimes that spend tens of billions of dollars’ worth of oil wealth to export their intolerant and violent Wahhabi religious teachings around the world–this, in an era of the proliferation of weapons of mass destruction. Today, Iran, an OPEC hawk, is pursuing a program to arm itself with nuclear weaponry and, if past is prologue, make them available to terrorist organizations as well.

The price of crude oil is therefore a key national-security issue, and we need to begin to understand the distinction between the price of crude oil and the price of gasoline. The greater the price of crude, the greater the profits to oil companies–but also–and here’s the heart of the matter–the greater the transfer of wealth to regimes that pray for our demise. The price of gasoline, on the other hand, entails issues chiefly of environmental concern. It is time we separated the two issues (crude-oil prices and gas prices).

In September, Gordon Brown–Britain’s chancellor of the exchequer and likely successor to Tony Blair–blasted OPEC for causing the doubling of crude-oil prices over the previous 18 months. During that period, prices had risen from around $30/bbl to over $60/bbl; with OPEC currently producing slightly over 30 million barrels each day, the transfer of wealth to OPEC has increased by nearly $1 billion daily. Simultaneously, and as a direct result of OPEC’s manipulations–if one is to believe Britain’s chancellor of the exchequer–piggyback profits continue to flood the coffers of ExxonMobil, BP, et al. at levels even greater than those reported to date. We, the consuming public, are the losers–and so is our national security.

Raymond J. Learsy is the author of Over a Barrel: Breaking the Middle East Oil Cartel.

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