Knots in the Pipeline

The big oil companies and big refiners would have you believe that the current high price of gasoline American drivers are dealing with is simply the result of market conditions. "Tight supplies and increasing global demand," they will tell you.

But the truth is that big oil is restraining production, both in the fields where the raw material is extracted, and at the refineries where the final product is readied for the gas pumps.

A chapter in Greg Palast's new book, "Armed Madhouse," describes how the oil corporations, led by Shell Oil USA's former CEO Philip Carroll, blocked the Pentagon's initial plan to sell off the Iraqi oil fields to private developers on the open market -- the administration's original plan for financing the Iraq War. Neocon policy planners also hoped that implementing the sell-off scheme would destroy OPEC "through massive increases in production above OPEC quotas," according to a 2005 article by Palast.

But Carroll, who took control of Iraqi oil production for the U.S. government a month after the invasion, stalled the sell-off plan and managed to have it replaced by another secret scheme favored by the oil industry. The new plan, deatails of which were obtained from the State Department by and published by Harper's Magazine under the US Freedom of Information Act, called for creation of a state-owned oil company favored by the US oil industry. It was cemented in place by Carroll's successor, a Conoco executive.

Under the oil companies' plan, Iraq will remain a member of OPEC, and its production of crude oil will be limited to whatever quota the cartel sets for it. The oil giants fear that unrestrained Iraqi production would both drive down the currently record-high price of oil, and undercut Saudi Arabia's primacy as the world's leading producer, straining Saudi-American relations.

Iraq is the final big question mark in determining the total amount of global oil reserves. It has proven reserves of 112 billion barrels, second only to Saudi Arabia. But unlike Saudi Arabia, its oil wealth has remained largely unexploited and has not even been completely evaluated. It may be the last place on earth where there are very large, completely unexploited reserves.

As Palast's book makes clear, industry suppression of Iraqi oil production capacity in the interests of keeping prices elevated has a long history, dating back to the 1920's. And today, of Iraq's 74 known large oil fields, only 15 are in production. Thus we can expect OPEC to keep Iraqi production restrained to the two-million-barrel per day limit imposed by the U.N. under the oil-for-food regime.

Possibly even more pertinent to the current price crisis at the gas pump is the deliberate damping down of the supply of refined gasoline, in support of high profits and restraint of trade, by big American refiners, detailed by James Surowiecki in an article in the June 12, 2006 New Yorker.

The last American oil refinery to be built came on line in 1976, and existing capacity has not kept pace with demand. Recently the Department of Energy has been urging oil companies to build new refineries, and Congress is offering to ease environmental regulations that would add to the expense of doing so.

"Unfortunately," Surowiecki points out, "the lack of capacity that Washington sees as a crisis looks like an ideal business model to oil refiners," for only in recent years has refining become a wildly lucrative business. "Last year, refiners' profits jumped thirty-nine percent," and this increase, which represents billions of dollars, "has gone straight into refiners' pockets."

In addition, over the past fifteen years the larger refiners have been buying out the smaller ones, and this cannibalization has led to the formation of a tightly consolidated industry, whose main players are easily able to combine in restraint of trade.

"In 1993," Surowiecki reports, "the five biggest refiners...controlled thirty-five per cent of the market. By 2004 they controlled fifty-six per cent...(and) in California, ninety-five per cent of the refining market (is) in the hands of just seven companies.

The bottom line is that America desperately needs more oil refining capacity, but the refiners have no need for it at all. When the disastrous hurricanes of 2005 shut down two Marathon Oil refineries, the price spike that resulted meant that Marathon made more money than it would have if all its facilities had been running.

The refiners are very much aware that less production capacity they have, the higher prices will go, which means by limiting production they will enjoy both higher gross income and lower overhead expenses, and hence greater net profits. They are also hesitant to build expensive refineries to process what is ultimately sure to be a declining resource, for while oil production and refining might be suppressed today, by the mid- to late twenty-first century, it won't have to be. Global supply will be in serious decline.

There is no conspiracy among oil producers and refiners. They don't have to conspire to know what conditions are required for them to increase their profits and power. Their moving in concert reflects economic realities rather than secret conspiracies. However, the drive for greater profits also necessitates the concentration of decision-making powers into fewer and fewer hands.

As Surowiecki's article concludes, "High gas prices usually provoke one of two explanations: either they're evidence of a conspiracy or they're just the result of the free market at work. The good news is that there's no conspiracy. The bad news is that there's also no free market."