Aloha to the urban myths of high-priced oil

Posted: Sep 11, 2005 12:00 AM

Have you heard the rumor yet? Oil companies are destroying fuel — emptying, even, gallons and gallons into thirsty desert sands — so that they can keep prices high at the pump. And make tons more moolah.

A friend heard such a rumor the other day. Maybe you have, too, before hurricane Katrina dominated the news and almost every conversation. Such stories were as common as wet dirt back in the '70s, back when oil prices were not only soaring but supplies at the pump were plummeting. Those were the days when we had to queue up in long lines to pump gasoline into our guzzlers. And while in line we had to talk about something.

Trouble is, there's not a gallon — not even a pint — of truth to these tales.

It makes no sense to destroy your own supplies of oil. Portions of one's own stock can have little effect on price levels, so you have every incentive to sell, sell, sell, not burn, dump, and waste. That goes for even the biggest of oil companies. If some mid-level manager ordered good fuel to be wasted like the rumors said, he'd not merely have been fired, he'd likely have been sued — or charged with theft.

Back in the late '70s, people swore to me that they "knew" a friend of a friend whose uncle's cousin was a low-level flunky of some oil company, and that the refineries — or was it the raw oil merchants? or the gasoline delivery companies? — routinely did such things. He witnessed it. Honest to gosh!

Nonsense. These are urban myths . . . that fill a human need to blame somebody. They feed the conspiratorial view of history. If something bad happens, then a few somebodies must be to blame.

It's too hard for some people to wrap their heads around a few obvious truths. Take the current oil situation. People in business make money off our need for petroleum products year in and year out. No urban myths about that.

But a war comes along, the future becomes uncertain, supplies diminish — and then a hurricane wrecks a few refineries and supply lines, reducing U.S. production to the tune of nearly two million barrels per day — and for some reason a few people find the consequent price rises puzzling. All the sudden, the motives that led to supplying us petroleum products in normal times become suspect in troubling times.

This sort of panicked thought leads, all-too-naturally, to a demand: "We must do something."

And here of course is where a few people do some horribly bad things that make our lives a whole lot worse.

Pandering to the belief that "somehow" oil companies are "taking advantage" and "gouging" us with price increases, politicians hold hearings, and then "take action." What action? One word: regulation. Two words: price controls.

That's what politicians in Hawaii did the other day. They waded out into the desert of idiot economics and said "the water's fine!" And they gave their state price controls on petroleum.

Thinking themselves the greatest of sophisticates, they didn't cap gas prices at the pump, though. They capped the wholesale prices, which they'll renegotiate and fiddle with for a while. They ostensibly knew the harm that consumer price caps would cause. So they focused on the wholesale end.

I'm not an economist, so I should probably leave the economics of this well enough alone. But the whole thing stinks far worse than a vat of Texas Tea. Still, I've read their litany of complaints, and I understand that they blame the refineries. But so what if refineries are making more profits now? Their number has been artificially diminished for decades, what with the stringent environmental regulations placed on their, er, placement. (How about putting an oil refinery in your back yard!) So, a limited supply of refineries suggests to me increased prices for refinement.

But it turns out that I'd be nearly as wrong as the regulators. Actual figures from the industry tell a different story. Robert L. Bradley, Jr., president of the Institute for Energy Research, notes that though crude oil prices have increased above their historic average by a whopping 185 percent, gasoline prices have increased by only 25 percent. Increased efficiency in refining and transportation and marketing have actually decreased the margins for profits off of each barrel of oil. It looks like the increased profits of the oil refineries rest on that old principle of business: volume, volume, volume. Oh, and efficiency, too.

But those are mainland statistics. Are things different back on the distant island of Hawaii? Well, gasoline prices are higher, naturally. It's an outpost, so increased costs of transportation alone should lead to higher prices for consumers. Though the prices appear to be as natural as anything in society, Democratic politicians have been listening to the complainers. (I guess whining is natural, too.) And they've gone and done something. That's the biggest difference so far.

Scott Foster of Advocates for Consumer Rights, one of the groups that pushed the Hawaii oil cap bill, declares that his harebrained notion is "a grand experiment," and that his "hopes are very high." Looking to spread the gospel of regulation, he added, "If this bill works here, there are a lot of other states that are watching it and might do likewise."

It won't work there, of course. The real question is: will other states wait for the evidence to come in, or will they rush to consign us to long gas lines again, to suffer and fume (and breathe fumes) and tell stories that make no sense?