Power Play At The Pumps

I wrote this in 2007 as gas prices were in the 1.20-1.40 a litre range. Now that they have broken 1.50 today in Quebec, it seems opportune to republish this. Sadly the numbers quoted here are more or less the same as seven years ago. It is a crisis. It is also unconscionable. ~ BW

"The bottom line is that in the life of every nation there comes a time of reckoning. That reckoning determines whether its people have the maturity to cast aside false notions and fictitious pieties and assert the strength of their nationhood. If that maturity is lacking, if there is no courage, then citizens condemn themselves to eternal subservience to vested interests."

• Free Market or Conference Call?

• Vertically Integrated Collusion I: The Business of Oil

• Vertically Integrated Collusion II: The Politics of Oil

• Oil Prices and Open Markets

• The Lies about Supplies: The Canadian Case

• The Real Numbers on Supply and Demand

• The Plague of OPEC

• Where Can We Go From Here? 

Free Market or Conference Call?

God knows I am not a fan of eco-theocrats’ hysteria nor of their questionable science. But when I read commentaries over the past several weeks that laid the blame for surges in gas prices at the feet of environmental lobbies and legislation that have supposedly made it too difficult for the oil industry to expand refining capacity to meet demand, that sophistry was simply too much. And when those apologias were overlaid with calls from other quarters for yet another government commission to look into the problem because Canada’s Competition Commissioner couldn’t find evidence of collusion and anti-competitive practices, I gagged at the fecklessness. The answers are all out there. All we need do is examine the numbers.

In spite of what is unquestionably an over-regulated and in many cases unnecessary, body of environmental legislation that can certainly use a good deal of constriction, the real push behind today’s pressure at the pumps is greed not greens. Corporate concentration in the oil industry is the over-riding factor that not only allows for instant manipulation of prices, but has had as one of its primary aims the massive reduction of refining capacity in North America to effect that manipulation even in the face of growing consumer demand. Today’s problem is not one of excess conservation. It’s about lack of competition.

Free-market arguments that this industry can self-regulate through classic supply and demand scenarios have been compromised and corrupted by big oil itself. It has created an environment that is neither free nor much of a market. It’s more like a conference call. And as much as this observer would like to see a significant reduction in state control at all levels of society, including the economy, there is a role for the state in curing economic torts committed against the body politic. They are as much acts of aggression as any violent crime.

Despite the lure of oil and gas tax lucre that has led to inappropriate institutional intimacies between all governments and this industry for far too long, it is time to face the fact that there can be no free market in the face of cartels. Corporate leviathans are as much of a threat to economic liberty as statocratic engineers. As far back as the turn of the 20th century a Republican President recognized that. Teddy Roosevelt enacted and enforced tough anti-trust laws. Those laws were used against monopolies in many industries including oil. Effective monopoly is our problem again today. We don’t need more laws. We’ve got competition policies. It’s time to use them. 

Vertically Integrated Collusion I: The Business of Oil

Any examination of this issue has to begin with the United States. Canada, whether we like it or not, is part of the North American market, and is very much – as a net exporter - a drawer of crude oil for American producers. Our retailers, for the most part, are part of the American multinationals and what goes on south of the border is almost immediately reflected back here. 

Big oil’s push is not to assure reasonable profitability and sustainability in the industry. It’s to protect the “right” to ever-growing profits fiscal quarter after fiscal quarter, year in and year out. After examining the industry’s own numbers, the premise of shortage of supply is, by any standard, a fallacy of staggering proportions and the propagation of this myth is an act of fraud.

The early 1980’s marked the beginning of the broadest takeover trend in the oil industry. In 1982 the vertically-integrated refiners – those that had the mass networks of gas stations – distilled 13,391,776 barrels per calendar day in 108 refineries in the United States. They were responsible for 76% of refining capacity. Over the next twenty years of conglomeration and concentration 41 refineries were closed. By 2002, America’s vertically-integrated refiners distilled only 10,423,970 barrels per calendar day from 67 refineries. An almost 33% drop in supply even though American demand over that same period grew at an average annual rate of 1.5% exceeding by about 6% the worldwide demand growth in that same period of 24%. The Canadian story is similar and we’ll get to that further on.

For now, let’s look at some of the major deals. Texaco bought Getty Oil. Three refineries shut. Chevron bought Gulf. Five refineries shut. Tosco bought Unocal. Five refineries shut. Exxon bought Mobil. Six refineries shut. Chevron bought Texaco. Nine refineries shut. BP bought Amoco. Seven refineries shut. BP bought ARCO. Five refineries shut. You get the picture. These consolidations allowed big oil to generate ever growing profits through pre-meditated reductions of supply that artificially inflated prices. This brazen manipulation corrupted any possibility of a truly free and competitive market.

But ever-rising demand and consumer contempt over ever-rising prices made even big oil realize it had gone too far in refining cuts. Did environmental legislation stop the industry from expanding capacity as its defenders claim? Not at all. What the vertically-integrated majors did however was reduce their risk. They started opening what are called “vertically-integrated joint venture” refineries. Partnerships of concentration that did not even exist at the beginning of the takeover trend. Partnerships with some very interesting participants.

Let me cite just one example. At this time of global war on terror with 19 of the 20 killers on 9/11 coming from Saudi Arabia and that kingdom’s Wahabbi clerical establishment – that controls religion, education and internal affairs – busy exporting its brand of Islamist lunacy through the western world as well as funding every terrorist group from Al-Qaeda on down, Saudi Aramco is a 50% owner in the largest of these joint ventures.

And the numbers from these joint ventures are very curious indeed. These joint venture refineries – of which 11 now operate in the United States – distill 2,747,400 barrels per calendar day. When you add that number to the 10,423,970 barrels per calendar day from the 67 remaining wholly-owned vertically-integrated refineries discussed above, we come to a total of 13,171,370 barrels per calendar day. More than 200,000 barrels per day below 1982 supply levels despite significantly greater demand. And guess what this joint production number of the majors accounts for in overall American refining capacity? 70.6%! Just six-tenths of one percent more than in 1982! Did the non-vertically integrated refiners making up the 29.4% balance of distilling capacity make up any of the difference between supply and demand? The answer is no. Over the past twenty-five years their production of barrels per day is down almost the same 200,000 that the majors are from 4,227,096 in 1982 to 4,006,001 today. Lock-step. Got the picture?

So how do the American refiners meet demand after reducing domestic capacity? By importing more expensive distilled product and once again artificially driving the prices up. By the way, in case you’re wondering whether this writer chose 1982 as a baseline in order to skew comparisons I didn’t. It was the U.S. Energy Department that started to see something happening in the early 1980’s. The 1982 baseline is the DOE’s.

Vertically Integrated Collusion II: The Politics of Oil

Do governments know? The facts suggest they do. And, unfortunately, at the highest levels. Former U. S. Senator Frank Lautenberg of New Jersey – a product of big business not the tree-hugging left - lambasted President Bush following evidence that Bush agreed to a secret deal with Saudi Prince Bandar bin Sultan to help the President with his election in November 2004. The deal allegedly allowed high oil prices for most of that year in return for a boost in oil production and lower gas prices in the three months immediately prior to the election.

Lautenberg said, "One must ask why Saudi Arabia has such a privileged position with this Administration. This supposed friend of America has traditionally failed to support us when they are most needed. We put hundreds of thousands of American military men and women on the ground to stop Saddam Hussein from expropriating their land in 1991, but when American soldiers were killed in the Khobar Towers bombing, the Saudi government hindered the investigation. Now, with gasoline prices going through the roof, the Saudis have decided to cut back on production, making prices even higher. The President should be working to stop this fleecing of Americans at the gas pump."

The following year Sen. Carl Levin of Michigan, then Chairman of the Senate's Permanent Subcommittee on Investigations, uncovered regular manipulation of prices by American oil companies that of necessity would have required government complicity. A startling example was the discovery by Levin’s investigators of internal memos from BP Amoco PLC that set put a plan to "…influence the crude supply/demand balance by offering supply agreements to other oil majors in exchange for refining capacity shutdown and movement of product from the U.S. to warehousing in southern Ontario."

When Levin asked Rob Routs, president and chief executive of Shell U.S., one of Saudi Aramco’s partners in the Motiva Joint Venture whether, he was troubled by, "The fact that gas prices go up and down together everywhere almost at once,” Routs replied, "No, it doesn't trouble me at all." Levin suggested that such pricing, while legal, ought to be considered "an anti-competitive act" and that juries should be allowed to consider whether that is an antitrust violation.

Not a bad suggestion from where I sit. Beats the hell out of yet another government Commission of Inquiry.

Oil Prices and Open Markets

The retail prices of oil and gas have little to do with open market regulating principles of supply and demand. From the famous Gulbenkian (Mr. 5%) grouse hunt weekend in Scotland in the 1920’s that set the borders of today’s Arab oil-producing states through the growth of the “Seven Sisters” conglomerates in the 1950’s and 1960’s, the compact between big oil and big government has been renewed year in and year out. They are partners.

Regulatory agencies mandated to enforce anti-monopoly and open competition policies turn a blind eye to oil companies. The reason is very simple. Depending on the jurisdiction, 40-60% of the price at the pump goes to governments in taxes. But don’t cry for the oil companies. It doesn’t affect them one iota.

Do you ever wonder why there is no pressure from governments whenever crude prices fall substantially but there is no commensurate drop from the refiners nor at the pump? The reason is that governments profit more through higher taxes. So they shut up.

Officially, most western governments, back the pious claims of the oil companies that prices have to be kept high even when crude drops because of the increasing costs of production, diminishing supply, and rising demand. I think the facts so far examined make clear the transparent falsity of these excuses. But what about the pricing pressure from the crude supplier? Might there be a mitigating circumstance there? Not at all.

The price of extracting a barrel of Saudi light crude, which represents almost 30% of world supply, from wellhead to ship is $3.00 US a barrel. That’s right. Three dollars a barrel. In Canada we are now paying $1.20-$1.40 CDN a litre and in many American states the price per gallon is now touching $3.00 US. Even factoring in transportation costs that’s a helluva profit from an extraction cost of $3 a barrel. For those who’ve been wondering, one barrel equals 42 US gallons, or 159 litres.

Where are the anti-gouging regulators when you need them?

The Lies about Supplies: The Canadian Case

Well, sometimes they hide behind door No.2. Governments put out the line that due to diminishing supply, oil companies have to be given a wide berth and prices cannot be controlled or reigned in. That’s how they also excuse allowing massive research and development credits to the oil industry that help to keep gross margins and taxable profits in check. Though as I’ve demonstrated there is certainly no development in refining capacity that could actually help consumers by keeping prices down. And that brings me to Canada, the Peaceable Kingdom, and the ideal case study on this issue.

The fact is that Canada has surpassed Iraq as the world's second-largest holder of oil reserves because the Alberta oil sands have finally been taken into account now that its “heavy” oil is not considered too expensive to exploit. And who finally acknowledges that the sands are now not too expensive? The Canadian Association of Petroleum Producers if you please. CAPP Vice President Greg Stringham admitted that oil sands projects are economically viable at market prices of $18-$20 a barrel. Well they’ve been way over that for a long time.

The numbers are staggering in their discrepancies. The Canadian oil industry has traditionally maintained that Canada’s oil reserves were 4.9 billion barrels. But the U.S. Department of Energy’s International Administrator Guy Caruso stated in his 2005 briefing that indeed the Alberta oil sands are economically viable and Canada’s real reserves are 180 billion barrels. Iraq’s reserves are 112.5 billion barrels and Saudi Arabia’s are 264 billion barrels.

Oil sands development will require drilling assisted by steam-injection pressure or from simple mining. But CAPP's own estimate of Canada's recoverable oil sands is even higher than the DOE’s Caruso. CAPP puts the number at 315 billion barrels - 20% from mining and the rest from steam-assisted drilling. Stringham said despite Canada's ratification of the Kyoto Protocol limiting carbon dioxide emissions, the industry expects the international agreement to add only 25 cents to 30 cents a barrel in development costs.

Why haven’t Canadian governments encouraged development in order to bring retail prices down? Because governments make more tax revenue at higher retail prices. I can’t repeat this often enough. And big oil wants to keep the public image of limited supply alive in order to have higher wholesale prices.

Why doesn’t big oil exploit the oil sands in a bigger way? Because it wants government to subvent the extra costs even though huge profits are already built in. Who pays in the end? We do. The consumers.

Canada has mirrored the United States in contraction of refining capacity. In 1970 this country had 44 refineries. Today that number is down to 19. According to the Canadian Petroleum Products Institute demand has increased by about 1.5% annually, roughly the same rate as the United States.

The CPPI maintains however that, “The remaining refineries produce more products more efficiently through new technologies and processes.” In other words, be happy, don’t worry. Average daily production reached some 3,000,000 barrels in 2006 while consumption was at approximately 1,750,000. And according to the U.S. Energy Information Administration the CPPI may be right. At least for Canadian oil producers, but not for consumers.

The EIA projects that Canadian consumer demand may actually be flat-lining due to slow population growth and a sluggish manufacturing sector. It projects Canadian consumption for 2007 and 2008 to be below 2006 levels. But it projects production levels to rise to 3,200,000 barrels per day this year and 3,400,000 in 2008. That should ease the pressure at the pumps right? Increasing supply, decreasing demand. Well…wrong. 

The dilemma for Canadian consumers is even more frustrating than for Americans. Canada is a net exporter of oil supplying the U.S. with 11.5% of that market’s “needs”. Almost one-third of our production is exported. And the prices at our pumps are even higher than America’s. Since resources are a provincial jurisdiction Alberta will continue to export all the oil it wants to the United States. The American companies are more than happy to pass on the higher prices of imported product to their consumers since they have already hit them with artificial spikes. As for Canadians, though we are awash in oil, supplies will never outstrip demand because of our unregulated export policies that puts Canada second and we will have no relief.

The Real Numbers on Supply and Demand

Much has been made recently of the growing Chinese demand for crude pumping up prices and the natural disasters from Asia to America that have closed refining capacity. The reality is that both these factors have had minimal impact.

Closures of refineries from Indonesia due to the Tsunami, to the offshore Gulf installations due to Hurricane Katrina, have been relatively short-term in nature. They amounted to weeks, not the long-term closures big oil’s spin-doctors warned about.

For all of China’s economic surge, growth in world oil demand has remained fairly stable. In fact discoveries of new reserves have outstripped growth in demand.

In 1980, worldwide oil consumption was 63 million barrels per day. Today it’s about 78 million barrels per day. That’s about a 24 percent increase, from approximately 23 billion barrels a year to over 28 billion barrels per year.

It is estimated that as world economic growth continues, including China’s, crude oil consumption will rise to 90 million barrels a day in 2010 and 103 million barrels a day by 2020.

Estimates of reserves have kept pace and more. Let’s take just the Middle East as an example. According to the industry bible, the Oil and Gas Journal, Middle East reserves in the 1950’s were estimated at 16 billion barrels. As new fields came on stream by the mid-1970’s reserves rose to approximately 250 billion barrels. Today Middle East reserves are estimated at over 500 billion barrels.

That’s a 50% increase in supply from the Middle East alone, which accounts for only 55% of world oil supply, as against a 24% increase in demand for the same period. There is far more oil in the world than big oil or big government want the public to know about.

Leaving the Middle East aside, the Venezuelan government estimates that there is enough oil in Venezuela alone to power the world for 44 years at current consumption levels. Add that to Middle East numbers and Canada’s oil sands reserves and one can see that actual world reserve life is pushed well out into the 23rd century. The oil will not be as cheap as current reserves, but it will not be prohibitively expensive if the problem of refining capacity manipulation is solved. Please note that these numbers do not take into consideration Russian reserves which, even though they are the world’s most difficult and unconventional to exploit, are proven as to quantity and are greater than the Middle East’s.

The Plague of OPEC

No examination of the problem of big oil would be complete without a look at the plague of OPEC. As intimate as its members are with their western producer and refiner cousins, they still make them look like pikers when it comes to skewering the public.

Reasonable, thoughtful citizens everywhere should wonder at the motives for the excuses constantly offered up for this band of brigands by oil industry and government spokespeople. There is a veritable flood of statements that appear whenever public anger vents its spleen at the cartel. We are constantly told that OPEC is a “stabilizing” factor on the world oil scene. The reality is that the only thing OPEC stabilizes is the ability of producers, refiners and heads of government to cut up the oil pie, and oil policies, in council rooms apart far from the maddening eye of public scrutiny.

At OPEC’s founding conference in 1960 in Baghdad, it claimed as its rationale the creation of a necessary counterweight to Western oil interests. But what followed could truly be termed a grand conspiracy. Wave after wave of state oil nationalizations followed OPEC’s founding. But the curious and common element in them all was that the new “state” entities that were established always had western oil companies as partners.

Far from being upset, big oil came to rely on these nationalizations as a crutch claiming it was no longer in charge of oil prices and laid off blame on their state partners. Both sides benefitted as prices continued to rise. The OPEC oil states really didn’t care about public anger in the west. And their corporate partners could use the oil states as scapegoats as they reaped greater profits. Because of the incredible jump in market price per barrel the oil giants didn’t even lose money as a result of the nationalizations. The public paid the price for the bigger cut the oil states demanded.

Using the OPEC nationalizations as a cloak, western oil companies continued to provide the operating and managerial expertise for the producing countries and their profits actually grew after the nationalizations. And all this was before the 1973 OPEC oil embargo ostensibly put into effect to protest American support for Israel during the Yom Kippur War. That embargo was just another in a long line of fabrications and excuses invented at every opportunity by OPEC to hike prices. And always with the complicity and acquiescence of its western corporate and state partners. Journalist Bhushan Bahree has chronicled how even the U.S.-led International Energy Agency is now cozying up to OPEC in ways that actually help keep oil prices high. The reason for the complicity? Big oil’s profits grow and big government’s tax revenues swell.

Christina Rosset of the Wall Street Journal accurately summed up OPEC as the “Outrageously Predatory Energy Cartel” out to gouge consumers. She has rightly pointed out that the blatant collusion of OPEC and its fellow travelers “…is the kind of stuff that would get private capitalists in the U.S. fried on prime-time TV and thrown in prison.”

The only continuous loser is the consuming public.

The other losers are the poverty-stricken citizens of the oil states themselves. London-based oil reporter Nicole Gelinas labeled OPEC "an eternal summit of failed states--Algeria, Nigeria, Libya, Iran, Venezuela and Saudi Arabia among the worst." OPEC's overall rate of economic growth this year is estimated by its own analysts at 1.4%, or less than half the world average of 2.9%.

OPEC is the central controlling mechanism for the worldwide oil rip-off. The one time it almost lost control, during the 1998 Asian economic collapse, oil plunged to about $10 a barrel. Now that’s the kind of stabilization we could all use.

Where Can We Go From Here?

Without passing value judgments on the issues of the internal combustion engine, energy waste in the west and greenhouse emissions, it is clear that at current consumption rates, oil reserve life can be measured in centuries, not decades. Those obsessed with worry about the environment may see this as bad news. The problem at hand however is how to protect consumers and stop the profiteering and price-gouging that has reached unprecedented proportions.

We can’t solve the problem of global oil power, but we can make a start here at home. The "invisible hand" of the marketplace will not come to our rescue. Energy is, in the final analysis, a political matter. As citizens we need to force our elected officials to reign in the voracious appetite of an industry operating without restraint of consequence. 

With the reserves Canada has we need strong central policies that will not only put the people’s interests ahead of the petroleum industry’s, but will also put Canada’s national interests ahead of the parochial interests of the provinces. This must be our first priority. That means forcing the oil industry to re-invest a much larger percentage of its profits into a massive development of the Alberta oil sands immediately. It also means a renegotiation of the current status quo that allows provinces to sell their resources outside of Canada without prior consideration of national needs forcing Canadians to live with artificially high energy costs.

Many have argued that the latter suggestion would require a constitutional convention. So be it. Let’s have it. If Canadians cannot benefit as a people from the patrimony of national resources then what is this country about?

Secondly, we need effective enforcement of our competition policies. Uncontrolled energy costs due to refining, production and price manipulations are hurting people. And not only in the pocketbook. But in their very ability to survive.

Enforcement of our competition legislation should not have as its goal the artificial fixing of low prices by decree, but rather the undoing of current market conditions set by cartel fiat. Ending he incestuous institutional intimacies will still enable companies to profit but not to profiteer.

Thirdly, governments at all levels will have to be true partners in these reforms and reduce their untenable taxes at the pump. That may finally force them, at both the provincial and federal levels, to curtail nanny-state programs that soak up as much as a third of some budgets feeding cash to unnecessary bureaucrats administering programs no one demanded and no suffrage affirmed.

The bottom line is that in the life of every nation there comes a time of reckoning. That reckoning determines whether its people have the maturity to cast aside false notions and fictitious pieties and assert the strength of their nationhood. If that maturity is lacking, if there is no courage, then citizens condemn themselves to eternal subservience to vested interests.

Canada faces such a moment today. The resolve of our response will be the true determinant of where Canadians can go from here.