THIS TIME, NO PRICE FREEZE

Three cheers for failure to repeat a mistake.

Jul 21st, 2000

Three cheers for failure to repeat a mistake.

The oil and gas industry has endured heavy criticism during this year's spike in oil-product prices. It has nevertheless avoided a public-relations swamp into which it strayed under comparable circumstances a decade ago.

After the Iraqi invasion of Kuwait in August 1990, many major oil companies announced caps on the prices of gasoline. Their motives were good. And they were properly looking ahead to political trouble, having reported solid profits just before the invasion removed 4.5 million b/d of oil from the market.

What is more, they had reason to be cautious. There had not been a comparable supply jolt since 1979, when revolution slashed exports by Iran. In the intervening decade the market became much more flexible and transparent than it had been before. The industry in 1990 had not yet experienced the modern market's ability to adjust to a major interruption in supply.

But adjust it did to loss of Iraqi and Kuwaiti oil-and quickly. Prices spurted on news of the Iraqi invasion. Demand sagged. Supply jumped. Within a few weeks, prices were falling.

So the price ceilings with which companies had hoped to preempt public relations problems became price floors-quickly and very quietly dismantled.

On the surface, the public-relations effect was probably positive. The announced price freezes looked like what they were: gestures of good will. They simply turned out to have been unnecessary.

Below the surface, however, the moves hurt the industry. They nurtured the strong popular suspicion that gasoline prices at the pump move at the discretion of a handful of oil and gas companies.

The industry is suffering from that misperception now. Gasoline prices have been high, and a presidential campaign is under way in the US. Candidates inclined to heavy-handed governance eagerly exploit this lingering weak spot in the industry's relationship with its customers.

Despite the political assault, complete with ridiculous allegations of price collusion, the subject of voluntary price freezes hasn't come up this time. The industry has largely and wisely suggested that government officials and aspirants to high office just let the market work.

The inevitable adjustment is, in fact, under way. According to Oil & Gas Journal estimates, demand for key oil products in the US, including gasoline, has slipped below year-earlier levels. Supply bottlenecks have loosened. And, although inventory levels remain a source of worry, gasoline prices have begun to retreat.

This time, therefore, with the industry properly pointing to market dynamics as the best cure for what ails oil consumers, it will be interventionist politicians who wind up looking like the wrong medicine for yesterday's flu. Oil and gas companies, having been in that position before and suffered for it, should not hesitate to say so.

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