Over the past year, gasoline prices have soared, rising from an average of $1.03 per gallon in January 1999 to almost $1.60 in July 2000.1 For several weeks, some areas of the Midwest saw gasoline cost more than $2.00 per gallon.
Angry consumers demanding answers received an all-too-predictable excuse from the administration. For the past two months President Clinton, Vice President Gore, and Environmental Protection Agency (EPA) Administrator Carol Browner have told Americans that anti-competitive behavior by petroleum companies was to blame for the price spike. Gore in particular accused what he called “Big Oil” of “collusion, antitrust violations, and price gouging.”2
Shifting blame. In reality, the rise in oil prices has been driven by economic forces with which any college student should be familiar. The most basic economic laws, those of supply and demand, played the primary role. Another truism of economics – that government interference in competitive markets tends to raise prices – is the other part of the equation.
“I urge you to explain why you and the rest of the Administration ignored DOE’s findings and misled Midwestern Members of Congress, the news media, and most importantly, the American people.” — House Speaker J. Dennis Hastert in a letter to EPA Administrator Carol Browner
Denouncing petroleum companies was simply an attempt to shift blame. In light of the laws of economics, the administration’s energy policy could have led to no other result than higher gas prices. Unfortunately for the White House, a memo by the Department of Energy (DOE) has blown the cover off the Clinton-Gore spin campaign.
Conspiracy exposed. The June 5th DOE memo reaffirms that the laws of supply and demand are to blame for soaring oil prices. According to the memo, “high consumer demand and low inventories have caused higher prices for all gasoline types….”3 The memo also points out the role government regulation, in this case Phase II reformulated gasoline (RFG) rules, played in the price spike. “The Milwaukee (and Chicago area) supply situation is further affected by [among other factors] an RFG formulation specific to the area that is more difficult to produce.”4
Reaction was swift, particularly since Browner had told Congress ten days after the memo had been written that oil industry practices — not RFG regulations and supply problems — were to blame for gasoline prices. In a letter to Browner, House Speaker J. Dennis Hastert wrote, “Nowhere does this document indicate, or imply, that price gouging was a factor; nor has any other federal study or investigation. Yet, you continued to point the finger at anyone other than where the responsibility truly lies. … I urge you to explain why you and the rest of the Administration ignored DOE’s findings and misled Midwestern Members of Congress, the news media, and most importantly, the American people.”5
Additional evidence. The memo aside, other federal agencies had already discredited claims of price gouging. A June 16th report by the Congressional Research Service (CRS) found compelling explanations for rising gasoline prices. These included higher crude oil prices caused primarily by OPEC cutbacks, difficulty complying with RFG regulations, delivery problems caused by pipeline breakdowns, and exceptionally low U.S. crude oil inventories.6
The Federal Trade Commission (FTC), which as part of the administration’s spin campaign is conducting an ongoing investigation of petroleum producers, has offered similar conclusions. During July 13th testimony before Congress on its initial findings, the FTC debunked the price gouging theory, stating, “it does not appear, at the outset, that any single oil company has sufficient market power to raise prices unilaterally.”7 Going further, the FTC noted, “The Commission must show more than parallel behavior among market participants to prove collusion.”8 In other words, rising prices do not mean that the market has been rigged.
Anti-consumer energy policy. Although the spike in gas prices is a recent occurrence, the Clinton-Gore administration’s entire approach to energy policy could have led to no other result. New gas taxes, restrictions on domestic exploration and drilling, higher royalty fees for oil production on public land, and regulations such as RFG and low-sulfur fuels, have played a part in driving up costs and driving down the domestic supply of crude oil — leaving the United States vulnerable to OPEC’s supply fluctuations.
Federal gas taxes alone now cost 18.4 cents per gallon. Since the start of the Clinton administration, U.S. crude production has fallen by 17 percent, and since 1990, the number of working oil rigs has fallen by 75 percent.9 In 1974, during the midst of the Arab oil embargo, U.S. imports accounted for 35 percent of consumption.10 Net imports now account for 60 percent of U.S. consumption, the highest percentage ever.11 Reliance on imports — and the cost of gasoline — would be even greater if other Clinton-Gore regulatory initiatives, such as the Btu tax or the Kyoto Protocol, had become law.
The real culprits. Collusion, price-fixing, and other manipulation of the oil market is nothing new. Rather than “Big Oil,” however, the guilty party is invariably government. Despite the disingenuous protestations from Clinton, Gore, and Browner, they have no one to blame but themselves for the pain Americans are feeling at the pump.
1 Lawrence Kumins, “Midwest Gasoline Price Increases,” Congressional Research Service, June 16, 2000; U.S. Energy Information Agency Web site, July 17, 2000.
2 Associated Press, June 19, 2000.
3 Memo by Melanie Kenderdine, Acting Director, Office of Policy, U.S. Department of Energy, June 5, 2000.
5 Letter from Speaker J. Dennis Hastert to EPA Administrator Carol Browner, July 14, 2000.
6 Lawrence Kumins, “Midwest Gasoline Price Increases,” Congressional Research Service, June 16, 2000.
7 Testimony of Richard G. Parker, Director, Bureau of Competition, Federal Trade Commission, July 13, 2000.
9 Sen. Frank Murkowski (R-Alaska) op-ed, The Los Angeles Times, February 17, 2000.
10 Statement of John Cook, Director, Petroleum Division, U.S. Energy Information Administration, March 9, 2000.
11 Ibid.; Environment & Energy Daily, July 18, 2000.