3 Reasons to Stop Hectoring Big Oil

Exxon and BP aren't the reason gas prices are surging.


This is getting embarrassing.

Every time gas prices get uncomfortably high, Americans look for a villain and come up with the usual suspects: evil, invisible speculators trying to corner the market. Politicians opposed to more domestic drilling. China and India, which are suddenly buying up all the oil we're entitled to. And of course, the greedy CEOs of oil companies that make enviable profits when prices rise.

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Here's who we never blame: Ourselves. But we should. For decades, Americans have boisterously resisted any policy meant to reduce our dependence on foreign oil and vigorously defended our right to burn as much energy as we damn well please. We have the biggest, thirstiest cars in the world, but consider it a violation of our rights if there are new fuel-economy rules meant to bring our standards closer to those in Europe or Japan. Heads would roll if we ever raised the tax on gas to anywhere near what it is in Europe, even though that would help close the ruinous federal deficit and encourage automakers to build more alternatives to gas-powered cars. And it would be un-American to have an actual "energy policy" meant to convert our economy from an industrial-age monolith dependent on fossil fuels to a futuristic one that runs on something better.

With gas once again in the upper $3 range and ExxonMobil and the like reporting booming profits, motorists and politicians are reading from the same old script and complaining about it all. Here's what they should do instead:

Summon the Saudi oil minister to a Congressional hearing. The premise behind the predictable oil-company hearings in Washington involving top executives from firms like Exxon, BP, Chevron, Shell, and ConocoPhillips is that Big Oil is somehow colluding to limit supply, push prices up, and gouge consumers. Wrong witnesses. The world's supply of oil isn't controlled by publicly held firms such as Exxon. It's mostly controlled by national oil companies such as Saudi Aramco, the Kuwait Petroleum Corp., and PDVSA in Venezuela, each owned by the state it's based in and acting in that country's national interest.

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Most of those countries belong to OPEC, a collection of mostly undemocratic nations that probably would not be close allies of the United States if not for the oil they possess. OPEC nations don't always agree on how much oil to produce, but in general they favor levels of production that keep prices firm, to maximize profits without pushing them so high that there's an urgent worldwide effort to develop oil alternatives. Current prices—around $100 per barrel, which equates to U.S. pump prices of about $3.75 per gallon—feel about right, especially since OPEC knows that demand from China and other fast-growing nations will keep a floor on oil prices, no matter what happens in the United States or Europe.

There's no way around the fact that oil is simply a valuable commodity. If you're a net seller, you've got a competitive advantage, and if you're a net buyer—which we are in the United States—you're dependent on the sellers. Oil companies are mostly middlemen that benefit when prices rise, which is what's happening now. Exxon's most recent quarterly profits were a hefty $10.7 billion, which is a healthy but not exorbitant profit margin of almost 10 percent. It's worth pointing out that oil-company profits also fall when there's a glut or a recession, which happened in 2009, when Exxon's profit fell by 58 percent and its profit margin was a more pedestrian 6.4 percent.

It's also worth pointing out that the U.S. government has well-established procedures for investigating monopolies or oligopolies and busting them up if necessary. That hasn't happened, because there's robust competition in the oil and gas industry, at least among public multinationals. There are plenty of refiners, distributors, and retailers, with gas stations literally competing against each other on the same street corner all across America. It's always possible that a small number of huge players could collude to jack up prices or flood Washington with lobbyists able to forestall new regulation. But for now, there's no real evidence that an oil-industry oligopoly is responsible for price hikes. There's plenty of evidence, meanwhile, that unrest in the Middle East, supply-and-demand fundamentals, a low dollar, and America's own willing addiction to oil are the causes.

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Decide whether we prefer capitalism or socialism. Americans, in general, are unyielding supporters of free enterprise—until the free market inconveniences them. On one hand, we extol the virtues of companies able to establish American leadership in the most competitive corners of the global economy. We supposedly believe in the profit motive and in every American's birthright to get as rich as possible. But then we complain when it seems like those profits don't trickle down in some way, or if the system seems unfair. It's well-known that we have nothing like true free-market capitalism in America, since there are loads of regulations meant to prevent exploitation, protect consumers, guard against environmental damage, and so on. But it's also true that there's an element of unfairness in capitalism, because hard work alone doesn't guarantee success and whoever controls the capital gets to call the shots.

We can always work to make capitalism more fair, but if you put arbitrary limits on any company's profits or mandate special "windfall" taxes for a select industry, it's no longer capitalism; it's more like socialism. It's well worth asking whether certain corporate tax breaks—which benefit many companies, not just those in the oil business—are an appropriate use of government and taxpayer resources. But such principles need to apply across the board, not just to companies singled out because they're successful at what they do.

Copy China. We're so busy in America fighting to keep fossil fuels cheap that we're sitting by while China develops the world's most advanced solar panels, pours billions into the development of advanced batteries for electric cars, and uses the muscle of state capitalism to lunge for the lead on alternative energy. China is also mimicking the United States, going around the world trying to secure maximum access to fossil fuels and the many minerals its economy will depend on for decades. But China is placing bets all around, indicating greater awareness than we seem to have here about the need to move beyond oil.

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We probably do need to do more oil drilling in America, under careful monitoring, but it's a fallacy that this will generate the cheap gasoline that Americans crave. Saudi Arabia and its OPEC allies control so much oil that they can offset any marginal increase in global production by dialing back their own supply, keeping prices firm. And since global demand for oil will only keep rising, they may not even have to do that to keep their oil profits gushing. If we drill for more oil and do little else, we'll merely prolong our addiction, which is likely to get more and more painful over time. And make Big Oil richer and richer.

Twitter: @rickjnewman