Editorial: The blame for oil prices

Dec. 3, 2001
The most valid insights about oil prices to emerge recently come not from the world's most important exporters, not from the world's single largest oil market, but from motorists in Europe.

The most valid insights about oil prices to emerge recently come not from the world's most important exporters, not from the world's single largest oil market, but from motorists in Europe.

Everyone everywhere wants to blame someone else for discomfort associated with the price of oil. Few get it right.

The urge to fix blame has infected the Organization of Petroleum Exporting Countries. The target is Russia. When crude oil prices were $30/bbl and above and OPEC was cutting output, Russian production rose by nearly 500,000 b/d.

Market Share

OPEC wants its market share back. It has made an announced 1.5 million b/d production cut-the fourth this year-contingent on output curbs totaling 500,000 b/d by nonmember exporters, especially Russia.

If health of the entire oil-producing industry were not at stake, this would be great fun to watch. Here's OPEC, which on a good day is lucky to muster 80% compliance with output quotas, proselytizing coordination of oil supply.

OPEC doesn't need to go through this to achieve extramural restraint. Production will decline outside its membership if current demand trends persist and the exporters' group doesn't take at least 1 million b/d off the market fairly soon. If that's not enough-and it probably isn't-production will decline elsewhere. But the reason will be price, not international coordination.

Until this latest swerve toward futility, OPEC was making coordination work. It seemed to have learned the importance of anticipation in the difficult practice of supply management on the oil market's hazy margin. It raised production enough to moderate a price surge when demand was strongly rising. And as demand fell, it cut production, and cut production, and cut production, and now wants help. Coordination of supply is much easier to manage in a strong market than it is in the other kind.

In the consuming world, blame-fixing has subsided since this year's first half. Until gasoline prices began to fall in May, US consumers and politicians were condemning oil companies with zeal.

It's custom. Whenever oil prices rise much above $1.50/gal-lower in some areas-US consumers assume that the reason is conspiracy among companies. So politicians hunt for collusion. They never find it.

In fact, they began the latest-now mostly forgotten-investigations just as the preceding round was producing the usual reports exonerating oil companies. Yet consumers' suspicion subsides only in times, such as the present, when petroleum marketers are practically giving product away.

European consumers are different. They have their quarrels with oil companies, to be sure. But gasoline prices aren't grand among them.

When gasoline and diesel prices leapt in the summer of 2000, European truckers and other product consumers protested with harmless but pointed incivility. Unlike Americans, however, they didn't throw automatic fits against oil companies-even those companies whose refineries they blockaded to make their point. They blamed governments, which in Europe tax petroleum without mercy.

Can it be that blame flows naturally to the larger of the public or private piece of the gasoline price? In the US, the public share usually stays below half nationwide, depending on market conditions. Most Americans probably don't even know that 40¢/gal of what they pay for gasoline goes to governments. It's the other, larger, price component that infuriates them when it pushes the total past comfort thresholds.

In Europe, taxes range from $2.25 to $3.10/ gal, typically accounting for between two thirds and three fourths of the price of gasoline. This gives European motorists their special insight into oil prices. When they're feeling cheated, they know whom to blame.

Fabric of blame

The next price increase will raise interesting wrinkles in this fabric woven of blame. OPEC will have fattened itself as a target for American suspicion about collusion, which might deflect political pressure away from oil companies. And European governments will be closer to raising taxes on oil out of fear about global warming. New chapters in the chronicles of petroleum politics, always a contest over wealth, soon will be written.

Through it all, oil prices will cycle through their ups and downs, driven as much by what consumers do as by anything else.