Daniel J. Weiss, Jackie Weidman: Is Big Oil rigging gasoline prices?

  Cable news may be distracted by the latest presidential candidate gaffe or celebrity gossip, but gasoline prices are at the top of many Americans’ minds. To better understand their concerns, the Center for American Progress Action Fund commissioned a poll by Hart Research Associates in March 2012. It found that 59 percent of Americans experience financial hardship because of high gas prices, with large majorities of the public assigning a significant share of the blame to the major oil companies and Wall Street speculators.

  Gasoline prices have increased by 63 cents per gallon—or 19 percent—since the beginning of the year, hitting the highest price ever recorded in any March. The factors driving prices, however, are much less clear. The fact is that domestic production is at an eight-year high, domestic demand for oil and oil products is down, and yet gas prices continue to rise.

  Worldwide trends don’t offer much of a clue, either. The Energy Information Administration reports that worldwide consumption in the first quarter of 2012 is essentially unchanged from the fourth quarter of 2011, though it is about 1 percent higher than a year ago. Yet the April 10 price of West Texas Intermediate, or WTI, crude oil—sold in the United States—was $101 per barrel. Brent oil on the European market is $120 per barrel—or 5 percent higher than last year.

  There have been some relatively minor supply disruptions in Syria, South Sudan, and Yemen according to a February 2012 report by the EIA.1 On the other hand, Libyan production is at 81 percent of its pre-civil war capacity. And Saudi Arabia—the world’s largest oil producer—has raised its output by about 600,000 barrels per day more than in 2011. Despite great tensions with Iran over its nuclear weapons program, there has not yet been a supply disruption in the Persian Gulf.

  Canada is seeing unexplained high gasoline prices, too. The Edmonton Journal, on March 30, reported that:

     Canadians are paying some of the highest prices they ever have for gasoline, even though the amount that fuel makers pay for the crude oil that goes into making it has been in decline for months.

     Data from Statistics Canada on Thursday showed the price processors pay for crude oil fell 2.4 per cent in February from January, but the cost of gasoline from refiners rose 3.9 per cent. It was third straight month crude oil prices have declined and second straight month gasoline prices have increased.

  What is going on? We know that oil markets don’t follow normal supply-and-demand rules partly because there are few substitutes for it, and the Organization of Petroleum Exporting Countries cartel can set prices. We also know that there are other factors that contribute to oil prices in a world market such as concerns about potential supply disruptions due to natural disasters or political turmoil in the Persian Gulf. But even when we take all the normal factors into account, it doesn’t add up.

  Some leading oil experts even express bewilderment about high oil prices. Reuters just reported that oil specialists found that high oil prices are inconsistent with current levels of supply and demand:

     “The reality today is that the market is well oversupplied. OPEC production has been rising consistently since September and will probably continue rising further,” said Colin Smith, energy strategist at VTB Capital.

  Similarly, on April 2, The Wall Street Journal determined that:

     There is no shortage of crude oil in the global markets and current prices aren’t justified by demand-supply fundamentals, Qatar’s energy and industry minister said Monday, easing concerns over supply constraints.

     “Oil producers are committed to supplying. When you look at demand-supply, there is no evidence of a shortage of oil anywhere in the world,” Mohammed Bin Saleh Al Sada told reporters.

     “When it comes to price … there are so many elements--not necessarily part of fundamentals of supply and demand--but other factors.”

  Many Americans believe Big Oil companies are responsible for these “other factors” and suspect these giant corporations have rigged gasoline prices in their favor. Could they be on to something?

  Tony Kost of Leesburg, Florida, commutes 80 miles round trip a day for work. He paid $3.91 the last time he filled up and blames the seasonal price spikes on “oil industry price fixing.” Says Kost, “The oil industry has inflated the price of gasoline.”

  Certainly oil companies have an incentive to support high gasoline prices. A March 1, 2012, report by the Congressional Research Service determined that higher gasoline costs:

     … yield a windfall for crude oil producers because the rise in gasoline prices is driven primarily by higher crude oil prices.

  Further, a Center for American Progress analysis compared five years of gasoline price data with quarterly Big Oil profits and found that a 1 cent increase in gasoline prices led to $200 million in profits for the largest oil companies (on a quarterly basis).

  To be sure, there is no smoking barrel that demonstrates Big Oil is rigging the game to raise gasoline prices. But many of the actions they’ve taken suspiciously have the effect of boosting prices. The following factors suggest that Big Oil companies, with help from Wall Street speculators, are taking steps that tilt the gasoline-price playing field in their favor, which in turn increases costs for middle-class families:

-The five biggest oil companies made record profits in 2011 as average annual nationwide gasoline prices hit a 36-year high. Yet these companies also produced less oil.

-Every 1 cent increase in gasoline price yields $200 million in profit (on a quarterly basis) for the largest oil companies.

-U.S. exports of refined petroleum products doubled in the last five years.

-Oil companies are holding thousands of unexplored or undeveloped leases in federal lands and waters.

-Oil companies are also closing refineries, threatening to slash fuel supplies.

-Big Oil companies will receive $40 billion in unnecessary tax breaks over the next decade.

-Wall Street speculators are trading twice as many oil futures as commercial end users.

  In this brief we will look at each of these to see their impact on high gasoline prices. We will also offer recommendations for reducing our dependence on oil and making us less vulnerable to gas price spikes.

Download the full issue brief (PDF)

  About the authors: Daniel J. Weiss is a Senior Fellow and Director of Climate Strategy and Jackie Weidman is the Special Assistant for Energy Policy at the Center for American Progress.

  This article was published by the Center for American Progress.