By Hank Stram, August 2008

Imagine for a moment that you are the owner of the most wildly successful business in human history. You manufacture a product upon which nearly every person in the industrialized world is utterly dependent.  

So dependent, in fact, that even as you’ve doubled or tripled your product’s price, your customers still consume it at the same rate. Every three months your company sets a new record for the greatest quarterly profits realized by a corporation. What could be better? You have a captive market that appears willing to pay whatever you charge for your product; as its price has marched skyward, so have your profits. Without fail. In this framework (one in which you pass your increased production costs on to the consumer, who continues to consume at the same level regardless of price), there’s only one way your profits can decrease: if you lower the price of your product. For your product, the price elasticity of demand is completely elastic. If your goal is to maximize profits, there’s absolutely no point in making capital expenditures in order to lower your production costs: why tie up your money and effort on expensive improvements that bring your costs down and have your customers wondering why you still charge so much for your product?

More than a mere thought experiment, I’ve just described the oil business to a tee. And it’s important to understand the oil business in order to avoid acquiescing to its demands in the face of a manufactured crisis. Despite their whining and the exhortations of their surrogates in government and the media, Big Oil is not a business in crisis. The twin demands – that it be allowed to build more refineries, and that it be granted access to domestic sites like the Arctic National Wildlife Refuge (ANWR) and the outer continental shelf (OCS) – are nothing more than distractions that are designed to have us believe that scarcity of resources and production capacity are responsible for the astronomically high prices we see. Furthermore, Big Oil would like us to believe that new refineries and domestic drilling sites will bring those prices down. Don’t believe it. For one thing, under the Bush administration, the regulatory and economic climates have never been more conducive to the construction of new refineries. The passage of the Gasoline for America’s Security Act of 2005 granted oil companies who wanted to build new refineries big tax breaks and freedom from pesky environmental review. Three years later, no new refineries are in the works. What about the idea that new, local sources of oil will lead to lower prices? Consider the oil coming from the tar sands of Alberta, Canada. This oil is practically domestic: under NAFTA, Canada is not allowed to cut off its supply to the US and it’s coming to us from a location that’s closer than ANWR. So much oil is now flowing in from Canada that they’re now the single largest supplier of oil to the US. According to Naomi Klein, author, journalist and activist, Canada increased its supply of oil to the US by more than 100 million barrels between 2005 and 2007. Meanwhile, prices have been going up the entire time.

You might also be interested to know that according to CNBC, US oil exports are up by 33 percent since 2007, hitting 1.8 million barrels per day in February for the first time in history. According to the CNBC report, “The surge in exports appears to contradict the pleas from the US oil industry and the Bush administration for Congress to open more offshore waters and ANWR to drilling.” How odd. So let’s recap. Despite the ultra-hospitable political/economic climate in which to build new refineries, so far there are no takers. The introduction of a massive new oil source in North America did nothing to slow the rise of oil prices. And oil exports from the US are at an all-time high. I smell a rat. Why, then, are the oil companies and the Bush administration (as if they’re separate entities) pushing so hard for domestic drilling? I suspect it’s all kabuki theater. Specifically, the mean ol’ Democrats’ refusal to allow them to drill provides expedient political cover for today’s high prices. Plus, there’s an in-built expectation that even if we allow domestic drilling, it won’t have any affect on prices for a decade or two. That, too, will provide a convenient excuse for why prices are still high 10 years from now. I suspect their real interest in sources like ANWR and OCS is as a hedge in the event that supplies elsewhere really do become scarce. But then, because supplies are scarce, we’ll still see astronomically high prices.

So what can you do to gird yourself against the toll Big Oil is looking to exact from you? Not much. Big Oil is more powerful than nations, and it will get the concessions it wants; of this, I have no doubt. The way I see it, our only hope is that the laws of supply and demand still apply. Use less oil-based energy whenever possible. Your bank account will thank you and if there’s less demand for the stuff, the price will have to come down.