by John M. Curtis
(310) 204-8700

Copyright November 13, 2005
All Rights Reserved.

alled on the carpet, the chief executives of the nation's largest oil companies defended their whopping profits in the wake of hurricane Katrina before the Senate Commerce Committee. Spiraling fuel prices have punished consumers, fanned inflation and pushed the Federal Reserve to continue hiking interest rates. Big Oil denies that it in any way gouged consumers, justifying record profits as a cyclical trend. There's a “growing suspicion that oil companies are taking unfair advantage,” said Sen. Pete Domenici (R-NM), demanding oil companies explain record profits. Oil companies raked in a record $32.8 billion in the third quarter, while the price of unleaded regular topped $3 per gallon. ExxonMobil's CEO Lee Raymond acknowledged high prices “have put a strain on Americans' household budgets” but warned against congress taking punitive action.

      Raymond insisted his industry's earnings “go up and down” quarter-to-quarter, avoiding the question whether the industry uses external events to artificially manipulate prices. While there's a link between global oil prices and pump prices, refiners and gasoline wholesalers set prices. Service station operators pass prices on to consumers but are at the mercy of gasoline wholesalers tied to refiners. “Punitive measures hastily crafted in response to short-term market fluctuations” would discourage the industry from research and development, said Raymond, warning congress to not impose new windfall profits taxes. When Raymond talks about “short-term market fluctuations,” he's not referring to global oil supplies, he's talking about wholesalers' arbitrary decision to hike prices. Today's oil companies don't explore and drill on their own, they buy oil it from wholesale distributors.

      After hurricane Katrina, gasoline prices jumped over $1 a gallon without apparent justification. Before oil-rig damage could be assessed, wholesale prices went through the roof, reflecting knee-jerk price gouging. Instead of freezing prices, oil executives allowed wholesalers to hike prices. “We had to respond to the market,” said Chevron-Texaco CEO David O'Reilly, answering Sen. Bill Nelson (D-Fla.) question about why oil companies avoided price controls. ExxonMobil's Raymond offered a new theory, explaining that rapid price increases were a calculated conservation tactic to avoid shortages. “If we kept prices too low we would quickly run out [of fuel] at the service stations,” explained Raymond, proving, if nothing else, that corporate CEOs are better at spin than career politicians. It's beyond outrageous to believe that price gouging is a deliberate conservation tool.

      Calling price gouging “a balancing act,” Raymond invites the congress to take protective action. If oil companies can't control their greed, then congress must put the breaks on antitrust actions that harm the economy. Energy prices are a key component to core inflation. It's ludicrous factoring out energy prices from core inflation because all goods and services depend on energy. When oil companies hike prices, it hurts the transportation industry, causing inflation in consumer goods. U.S. national security depends on a healthy airline industry, unduly burdened by their reliance on jet fuel. Irresponsible jet fuel pricing has put several major U.S. airlines in bankruptcy, unable to meet quarterly earnings. Harming the airline industry threatens national security by reducing access to air travel. Oil companies must get the bigger picture of how price gouging harms the economy.

      Senate Majority Leader Bill Frist (R-Tenn.) sees the need to enact price-gouging legislation. There's been virtually no support from the White House, agreeing with Big Oil that federal controls only lead to shortages and higher prices. “While no consumers like price increases, in fact, price increases lower demand and help make shortages shorter-lived than it otherwise would have been,” said Federal Trade Commission Chairwoman Deborah Platt Majoras, agreeing with the oil industry. It's not accidental that Majoras serves at the discretion of President George W. Bush, whose family has close ties to Big Oil. Instead of seeing Big Oil pitted against the U.S. economy, it's time to demand cooperation from industries responsible for national security. If Majoras can't see a constructive role for the FTC to stop price gouging, she needs to consider another type of job.

      Big Oil can't have it both ways: Denying price gouging while, at the same time, admitting to hiking energy prices for conservation. Lusting after big profits sounds far more honest than justifying price gouging to safeguard energy supplies. “That's an astonishing theory of consumer protection,” said Sen. Ron Wyden (D-Ore.), a member of the Commerce Committee, incredulous of Big Oil's excuse for hiking prices. It's unclear whether Big Oil shuts down refineries creating artificial shortages when they want to jump gasoline prices. The FTC hasn't completed its investigation into refinery shut downs following hurricane Katrina. “We do not consider it a windfall,” said ConocoPhillips Chairman James Mulva, reflecting his industry's cosmic entitlement at the expense of consumers and the economy. Before runaway energy prices tank the economy, congress must do its job.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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