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Witch Hunt Targets the Oil Companies
President Biden has issued firm instructions to FTC Chair Lina Khan to investigate whether big oil should be held legally accountable for the recent runup in oil prices. The fact of some price increase seems beyond dispute. The average monthly Brent crude price dropped as low as $18.38 in April 2020, at the onset of the COVID crisis, but had risen to $83.54 in October 2020. But look just a little bit further and matters are not so simple, for by November 19, 2021, that price had dropped to $78.60. Indeed, this nineteen-month period witnessed wide fluctuations in price. Nonetheless, without referring to any price data, Biden broadly claimed that the “mounting evidence of anti-consumer behavior by oil and gas companies” should trigger an investigation into potential collusive behavior.
Given that “gasoline prices at the pump remain high, even though oil and gas companies’ costs are declining,” such alleged behavior, Biden assumes, has allowed big oil companies to double their profits since 2019, thereby allowing for stock buybacks and dividends in the coming year. “Hard-working Americans”—a tried and true appeal to populist instincts—should not be “paying more for gas because of anti-competitive or otherwise potentially illegal conduct,” he said, which is why he has urged the FTC to bring “tools to bear” to ferret out and punish any possible wrongdoing.
It should be apparent that it does not take much in Biden’s eyes to instigate a lengthy and hostile investigation. Rising profits are no antitrust violation when they generate dividends, many of which end up in the pension funds of those hard-working Americans. And buybacks and dividends free up capital for either consumption or further investment. Unfortunately, in Lina Khan’s new age of antitrust enforcement, it appears unnecessary to allege anything that would make the price-fixing claim credible, for just how are the oil companies able to conspire to keep prices artificially high? OPEC finds that task difficult even with its formal agreements and enforcement powers. But the number of potential participants for any effective covert oil and gas price-fixing scheme must be few in order to deter individual companies from deviating from the cartel price by offering hidden concessions to its preferred customers. That does not seem possible when the roster of the ten largest oil companies reads as follows:
The oil and gas market is global—good luck with any effort to investigate the three largest companies, all state owned, on the list. In any event, a market with at least ten major players is not a ripe target for any price-fixing behavior—this entire exercise looks like a political stunt by a president languishing in the polls. In order to make any credible case for price fixing, the FTC will have to point to some coordinated behavior by the targeted companies, which neither the White House nor any independent source has to date found. To be sure, it may be possible in some limited settings to infer coordination of prices from parallel behavior in select product markets. Nonetheless, even the most aggressive version of this theory is restricted to examining prices of a single product in a limited geographical area.
Thus, in the Petroleum Products Antitrust Litigation of 1990, Ninth Circuit Judge Dorothy Nelson allowed a price-fixing case to go forward solely on circumstantial evidence of variations in observed retail “pricing patterns.” Judge Nelson accepted the theory that companies could control their dealer gasoline prices in the retail market by varying the discount from the so-called “dealer tankwagon” benchmark price at which they sold gasoline to dealers in four Western states: Arizona, California, Oregon, and Washington.
In contrast, it is wholly impossible to apply the same theory to a scenario with multiple producers in a global market, relying on a supposed connection between sales of “unfinished gasoline” of different types and the price at the pump—especially when the current US government predictions call for an easing of prices in 2022. This connection becomes even more tenuous in light of simpler explanations for the price fluctuations, such as the resurgence of demand for crude oil after the huge slowdown in demand in 2020. At this point, the rise in total demand will lead to an increase in the price of gasoline even if the costs remain constant. And the same result could easily occur when the upward movement in the demand curve is larger than any reduction in the costs of production.
To make matters still more complicated, total American daily output at about 11.4 million barrels today is about 12 percent below the pre-COVID highs of about 13.0 billion gallons, when a limited supply points to higher prices. It is also well understood that the price of gasoline at the pump is only imperfectly correlated with the price of crude oil at the wellhead, and that deviations between the two sets of prices are common occurrences, happening on an annual basis in both good times and bad. Total transportation costs could have easily spiked given the well-documented supply chain difficulties. In addition, crude oil needs additives to become gasoline, which offers yet another wedge between prices at the wellhead and those at the pump. Hence, it is highly likely that this particular investigation will draw a blank, just like previous ones by both parties attempting to detect price-rigging in this market, including the 2006 efforts of the George W. Bush administration to go after price gouging in the gasoline market.
But when the FTC proves unable to identify “any anti-competitive” behavior that leads to a decline in consumer welfare, Biden’s further reference to “otherwise potentially illegal conduct” leaves enough wiggle room for Khan and her fellow Neo-Brandeisians to concoct some novel charge against big oil, without proving any impact on either prices or quantities of oil and gas sold.
Instead of going up this dead end, the proper course of action for the FTC is to look at the other side of the problem and to ask, as the American Petroleum Institute insists, about the constraints that the Biden administration has placed on production and distribution of crude oil in the United States. On the former, the Biden administration has taken a consistent anti-fracking stance with respect to leases of federal lands as part of its campaign to reduce American dependence on fossil fuels. Yet at the same time, it has begged OPEC to substantially increase its output in order to reduce the shortages at home, stemming from Biden’s fixation with global warming, which has led him to champion extensive limits on the domestic production of fossil fuels. But of course, any harm from greenhouse gases released by foreign oil and gas is every bit as great as that from American sources.
Moreover, the Biden decision plays into the hands of Vladimir Putin by giving his Gazprom operations a chokehold position over the sales of natural gas to Western Europe. Hence, the Biden policies produce no net reduction in global warming while also compromising American power in foreign relations. What is needed now is a firm commitment to spur American production of oil and gas for the export market to counterbalance, even belatedly, the Russian geopolitical advantage.
But far from taking this view, Biden has done the exact opposite. His decision to pull the plug on the Keystone XL Pipeline the day he assumed office signaled his misconceived priorities: preferring wind and solar to fossil fuels, even when they cannot do the job. He is now seeking to double down on his efforts to strangle the production and use of fossil fuels by taking seriously the shutting down of existing pipelines. Thus, the prolonged battle over the possible closure of the Enbridge Line 5 pipeline near the Straits of Mackinac again reveals the high cost of indecision. Shutting it down would distort energy markets throughout the state. But a decision to engage in prompt repair, improvements, or even reconstruction could avert that prospect while minimizing the risk of spillage.
A similar battle is going on with respect to the operating $3.8 billion Dakota Access Pipeline, which runs about 1,172 miles from the Bakken fields in North Dakota to Patoka, Illinois, and which currently ships some 570,000 barrels of oil. It is a sign of the skewed energy policy that there continue to be intensive efforts to shut down the pipeline even after it has been in operation for over three years without any incident, because the Standing Rock Sioux Tribe insists that its treaty rights to the “undisturbed use and occupation” of its territory gives the tribe the right to shut down the entire pipeline to prevent a highly remote probability of damage.
Removing barriers to shipment of fossil fuels is a double winner. The expanded supply of fossil fuels will reduce the pressure on prices while eliminating the greater environmental risks from shipping crude oil by truck and rail. The Biden administration should not seek to persecute the oil and gas industry with its ill-advised witch hunt. Instead, it should employ its investigative powers to review its own destructive energy policies.
© 2021 by the Board of Trustees of Leland Stanford Junior University.
Published in Economics, Law
Part of a pattern. They’re pretty frank about their intent to bankrupt petro suppliers. They attack the cost end by limiting the best supply, forcing substitution to less attractive options– those cost more or need more, which is still cost by the time you see it at the pump. They push costs up. Then they attack the revenue end with rhetoric about the evils of passing costs to consumers, and now with a vague investigation. Price controls cannot be far behind. That will work out as well as it did for Californian electricity, and more recently, Chinese electricity. Watch for price control trial balloons to start rising.
Also worth noting that most gas stations are *not* owned by the oil majors, whatever it says on their signs.
This is part of the overarching strategy of attacking anything that works, anything that makes you comfortable or gives you joy. Big cars, big houses, appliances that work well, you name it they hate it. Not satisfied to just hate under their breath, they must outlaw that which they disapprove of. Just once I’d like to see a lib run on his actual policies. Wait, I guess Beto did…
And meanwhile, “activist investor” groups buy some stock in oil companies, then demand that they behave as something other than the oil companies they are, “reducing their carbon footprint”, and other ridiculous concepts. I want to see a CEO of any big oil company put out a statement like:
XYZ Company is an Oil and Gas Company. We were started to search for, find, produce, and market Oil and Gas Products. We cannot, we will not, attempt to be any other type of company. Activist Investors do not run this company, and we will make our best efforts in making sure they never do. Thank you.
The only interest served in this are Chinese. Otherwise it’s just insane.
You know those Brandon gas-pump stickers? This is his attempt to deflect.
Points to Mr. Biden and his fellow useful idiots for retaining enough memory to recognize that his current assignment involves enforcing some laws.
Which laws? It is true that in his confused state, he has come to believe that there is a law forbidding any person or firm in his jurisdiction to offer to exchange his/its property for money at one rate of exchange (units of property given per unit of money received) one day, and a lower rate the next.
But at least at this stage of his decline, he still remembers that there is some law he is responsible to enforce.
Mr. Epstein, I was much more alarmed by your response to Mr Biden’s demented comment than I was by the comment itself.
“The fact of some price increase seems beyond dispute.”
Kind of like, “I’ve read the statement by the inmate, and given that he is actually Napoleon, we must to admit that his judgement of Wellington’s troop deployments during the war are factual, and that the nurse must undo his restraints and discharge him from the institute so that he can take care of the situation.”
While it is true that “some price increase seems beyond dispute”, it is a bizarre response to Biden’s delusions.
@markcamp and others, OP etc:
It reminds me of Obama promising to go after “speculators” when the price of oil (somehow!) rose on Obama’s watch (an inside job). I posted about that.
A few years back when Democrats were screaming about the obscene profits that big oil was making, someone ran the numbers on how much profit Exxon made on gasoline sales and how many gallons they sold. Exxon’s profit per gallon was substantially less than the amount of federal tax per gallon. The station owners are often accused of getting rich on the backs of Joe Six-pack, too, when the price of gas goes up. But most gas stations make something like less than a dime a gallon. They couldn’t survive if they didn’t also sell snacks and stuff.
The big question as always when Democrats talk about economic principles is, “Are they really that stupid or are they just pretending to be, because they know many of their voters are?”
The whole oil and gas hikes, in my non-professional opinion, is manufactured, like the supply chain crisis. Read my lips says Biden “Build Back Better”. It’s not original – it’s the mantra of the World Economic Forum – the un-elected mob bosses of world policy. Going green does not include petroleum. It does not include eating meat, but mainly plants. Wow – did you say Bill Gates is getting into farming – plants and fake meat? What a coincidence!
It takes petroleum to make many things – everyday products and make trains, planes and even rockets go……..Going all electric also requires massive power grids, Massive power grids require rare minerals, which requires mining……..
These multiple hardships and crises that we did not have under the last administration are all orchestrated to force we the cattle into the corrals.
Us the cattle. But other than that trivial grammatical correction, I agree.
I know you saw what she did there. :)
I feel like I’m back in grammar school…….
I just assumed you were making a deliberate play on We the People.
I did too. I think everyone would.
I was saying that other than the insignificant error in that play (the correct play on We the People, when it is an object not a subject, is Us the People) I agree with what he said.
I never have the experience that Front Seat Cat did, when someone disagrees with my grammar on Ricochet, of feeling like I was in grammar school.
My grammar school felt different. In the grammar school I went to, the teacher never said, “other than your grammar, I agree with what you said”. She never said she disagreed with my grammar at all, in fact. She would, instead, say, “your grammar is WRONG. I don’t care a rat’s 50% polyester hand-crocheted afghan WHAT you were saying,” or words to that effect.
Ricochet is a lot more fun than my grammar school was. No one cares about anyone’s grammar here, as long as the idea was expressed clearly. The only time grammar even comes up is when someone is agreeing with the bit that matters–the idea expressed–and wants to make clear that he agrees 100% with that idea, but not with the grammar. To fail to add that qualification would be imprecise, and there’s a small minority of us who are never imprecise, even on Ricochet. We got that way back in grammar school, and it stuck.
Yes, but I think rather than to say “…are all orchestrated to force we the cattle into the corrals” it would have been better to say “…are all orchestrated as corrals into which We the Cattle will be forced.”
Other than that I approve of the form in which you have written your comment.
1. The whole point of a play on words is that you are allowed to play.
2. Our grammar teachers gave us rules to remember appropriate for our level of study. It’s more complicated and less clear than all of that.
3. I urge pedantry to boldy get bent.
I take second place to no one in my opposition to pedantry.
And what does no one do when they get it?
As long as no one remains in our secure Ricochet redoubt, no one is safe from all pedantry. Outside, no one is on his own.