Business/Finance

Who’s really behind $5 gasoline?

I began my career as an engineer in a large Illinois manufacturing plant. Chuck, the only African-American engineer in the company, was comically paranoid—he rarely spoke above a whisper, refused to say anything over the phone, and before every meeting would check outside his door to see if anyone was lurking in the hallway. When Chuck was passed over for a promotion, he left the company. A year later I heard the head of engineering explain why Chuck had not gotten the job, “Reinhardt (the plant manager) was never going to promote a n…..r.” The moral of the story, obviously enough, is that Chuck’s paranoia was justified.

Gas prices are predicted to go up to $5 in the summer. The timing smells. I may be paranoid, but that doesn’t mean I am wrong.

The secret to solving murders, they say, is to answer three questions: Motive, Means, and Opportunity. Who stands to gain from a run-up in gas prices, who has enough power to pull it off, and who is positioned to do it now?

Strictly speaking, the most obvious short-term winners from a run-up in gasoline prices are those involved in the production-refining-distribution chain. Since gasoline is a relatively inelastic good (economist-speak to explain something that people still buy the same amount of even if prices rise) anyone who produces oil or sells it could profit, including those who own the oil wells, tankers, refineries, gas stations and the various governments that tax gasoline to pay for roads, etc.

The oil companies could also run up prices as part of a longer term objective. They are philosophically opposed to the current administration on several critical issues—climate change due to greenhouse gasses, tax reform, and environmental regulation. They’d love to see the current administration replaced with a more compliant one, and $5 gasoline could influence the coming election.

There’s another reason as well. The oil companies are notoriously clannish. All these guys work together at some point in their careers at one of a handful of oilfields around the world. One of their own, BP, is getting pounded. Even as we speak, BP is about to get hit with a $52 billion dollar bill (according to the AP) equivalent to three years of profits or 1/3 of their market cap. It would be convenient for BP if the problem, i.e., the Democratic administration pushing the settlement, were just to go away. Do a solid for a sister. (The big oil companies are known as the sisters.)

However, running up gasoline prices is a dangerous game. It creates all sorts of public heat, ranging from Congressional hearings to investigations by the DOJ. For the most part, big public corporations neither want that sort of publicity or, even worse, the litigation that follows. Anyway, there are tremendous incentives for the oil and gas industry to not indulge in a little opportunistic gouging. If they make too much money, there’s always the threat of another windfall profits tax, especially when the government is desperate for revenues.

You’d have to be a privately held company, really bold and half-crazy to try such a thing, which brings us to the second suspect. The Obama administration recently killed the Keystone Pipeline, a pet project of Koch Industries of Wichita, Kansas.

Koch Industries has significant investments in refineries and the gasoline supply chain.Yes, that Koch Industries—one of the top (and least repentant) polluters in the U.S. and outspoken opponent of environmental regulation and climate change science. The same Koch Industries that got caught bribing foreign officials to get contracts, and fired their own Ethics Compliance Officer who led the internal investigation. The same Koch Industries that has spent $100 million on political causes that benefit its business interests. The same Koch Industries owned by the Koch brothers, who funded the rise of the Tea Party. (It’s hard to believe how creepy and twisted this pair is, but read Jane Mayer’s piece on them in the New Yorker. These guys make Goldfinger look like Regis Philbin.)

Industry experts argue that the rising price of gas is due to a variety of factors— primarily increasing demand (over the next decade China will add a highway system half the size of the current U.S. interstate system) and declining supply (Iran, North Sea). Maybe, but it’s a presidential election year. The Republicans have a crappy slate of candidates and are facing an economy staggering its way back to health. They could be looking at a November of Goldwater-like proportions, where they not only fail to regain the presidency but see carnage down the ballot. $5 gasoline could be providential. It would not only derail the economic recovery, but it would also inflame consumers. Mitt can’t beat Barack, but $5 gasoline just might.

Now the bigger question is: Do either of these suspects have means or opportunity? And the answer is maybe. The oil and gas industry has a long and well established history of price fixing. Remember, most anti-trust legislation was written for that industry alone. And it’s still at it.  Is it as simple as it used to be, i.e., simply turning a few valves in the Gulf of Mexico to increase natural gas prices? Or would it require something more—taking a refinery out of service (BP had a refinery go out of service last week because of a fire), a new contract with China, manipulation of the futures markets? It might require considerable collusion, but this is an industry where collusion is not unknown.

I know, I know, I am being paranoid. Right, Chuck?

9 replies »

  1. Again its all about the U.S. dollar! Oil trades in U.S. bucks when world faith is lost in Uncle Sam the quick result is much higher energy prices.

  2. That’s right, it isn’t instability in the Middle East, nor increased demand from China and India…it’s the Koch Brothers!!! Good God! I think I lost IQ points just by reading this drivel! Here is a clue…the world reached right around peak oil production back in 2004 or close to it, at 74 million barrels of oil a day. China in 1995 needed 3.4 million barrels of oil a day, today it needs 9 million. By 2015, some of the oil forecasters are saying they will be around 15 million barrels a day! Unless we produce more oil, increasing demand vs static supply will mean rising oil prices! But no, go back to your conspiracy theories, sounds far more plausible than simple supply and demand.

    • And yet, “according to the Energy Information Administration, the supply of oil and gasoline is higher today than it was three years ago, when the national average for a gallon of gasoline was just $1.90. Meanwhile, the demand for oil in the U.S. is at its lowest level since April of 1997.”

      Hmmm…

  3. How about talking about the speculative market? That is also part of what has been going on. According to the Rolling Stone: “Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.” Part is trying to profit from it, many people are also just looking for a safe haven for their money to not lose the value of what they have.

    • Good point. From the same article: “A decade ago, speculators controlled only about 30% of the oil futures market. Today, Wall Street speculators control nearly 80% of this market.”

  4. Tom–certainly a possibility. Bernie Sanders said so today. It’s a complex market and it could be many things. But even though my post is supposed to be tongue in cheek, as the picture or Auric Goldfinger might imply, today administration figures also suggested the Koch Brothers are behind it and they were dead serious. Interference by the Koch’s is completely congruent with the idea of malicious speculation by the way. As a rule I dont pander to conspiracy theories, but then again, that story about Chuck is very sadly real. Just because you’re paranoid, doesnt mean they’re not out to get you.

    • What is all this talk about “conspiracy theories”? When did we stop believing that people will act in pursuit of what they perceive to be their best interests? If you’re rich and powerful, you will likely behave in ways that protect and preserve your position in the food chain.

      This isn’t a conspiracy theory, folks. It’s Adam Smith.

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