A Conspiracy by Big Oil to Raise Prices?

By Editors

The Center for American Progress, a liberal think tank in Washington, believes it has found the secret to high gas prices. Big oil companies make big profits when the price is high!

Nothing too controversial about that. They probably make smaller profits when the price is low as well. But that's not the end of it. The Center suggests - without much of anything to back it up - that the oil companies deliberately cut back on production in order to raise the price. In other words they engage in illegal price fixing, a violation of anti-trust law punishable by huge fines.

How do they conspire to limit production? By deliberately creating oil spills in the Gulf of Mexico so the federal government will stop issuing drill permits and rigs will start decamping for Africa?

Well, the Center doesn't go quite that far. Here's how they arrive at their conclusion.

Look at the above graph. It compares output of the Big Five with gas prices at the time. Notice how when production was low in 2008 prices were high.  And as production has declined again since 2009, prices have gone even hither.  Here 's the way the Center explains the situation:

"Perhaps (our emphasis) the big five companies are content to produce less oil when prices are high because higher gasoline prices enable them to profit from our pain at the pump."

But notice the center is presenting this is only as a suggestion. Cause-and-effect could work the other way. Oil production declines, therefore prices go up. This is simple supply-and-demand.

Why might they go up? Perhaps because less oil is being discovered or because the federal government is taking steps to limit access to supplies. This is definitely what has happened since the Obama administration took office in 2009. It is well documented that permits on federal land have declined to half of what they were in the Clinton Administration. There was also the moratorium on offshore drilling after the BP oil spill, which has been continued through slow permitting. All this would explain why production is lower and therefore prices are higher.

But notice that all this also contradicts the well-established claim of the Obama Administration that US oil production is now the highest it has been in a decade. Why does the graph show a decline?

Well, the answer seems to be that most of the new production is coming from the Bakken Shale, which is dominated by smaller companies and independent wildcatters operating on private land. The Big Five haven't had much to do with the Bakken.  They tend to concentrate their efforts on trying to pry oil out of the federal government either offshore or on federal land. This is why production among the Big Five has been decreasing.

So a much better headline for this graph might be "Big Oil Companies Fall Behind Trying to Deal With the Federal Government While Independents Spurt Ahead on Private Land.".  That would be a much better explanation of the current statistics and wouldn't involve charging that the Big Five are engaged in a criminal conspiracy to violate anti-trust laws.

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