Everyone seems to be searching for someone to blame for the so-called “gas crisis”. So, I’m going to look at some of the culprits in a series of posts over the next week. Let’s start with the most obvious: those evil, greedy, short sighted corporations that can’t seem to get their act together. Their transgressions are so great, Congress wants to levy a windfall profits tax on them in order to do the “right thing”–have the government invest in appropriate alternative technologies (e.g. ethanol or wind). But, how short-sighted are the oil & gas companies? In truth, it’s Congress that is short-sighted and opportunistic, not the oil companies. Oil companies have simply learned a few economic lessons–the hard way. The oil industry has experienced more ups and downs over the last 30 years than the world’s longest roller coaster (which, btw, is the Beast at Kings Island in Ohio). Let’s take a look at the price of gas. Here’s the price of unleaded regular gas at key benchmark dates according to the Energy Information Administration at the US Dept of Energy: 1976: $0.61 1980: $1.24 1985: $1.20 1990: $1.16 1995: $1.15 2000: $1.51 2005: $2.29 2008: $3.44 (April) These are nominal dollars. Factoring in inflation, the real price of gasoline at the pump fell until the middle part of this decade. Note that the nominal value of gasoline also fell in the 1990s. Throughout this period, the spot price of crude oil remained steady, ranged from $13 to $20 per barrel. The spot price didn’t increase to over $20 per barrel consistently until after September 1999. Even during this period, the price dipped below $20 during late 2001 and early 2002. Crude oil prices didn’t jump to more than $30 per barrel until after March 2004. Why did prices tank? Because we were getting plenty of oil to meet our needs from the rest of the world–most notably Saudi Arabia and other Middle Eastern countires–and the BRIC countries (Brazil, Russia, India, and China) had not yet taken off. This is hardly a robust economic environment for the gas companies. The idea that companies should be investing in new capacity is simply unsupportable based on history and the data. We can see the industry’s fortunes flag in domestic employment. I like to use Wyoming as a benchmark for the health of the domestic oil industry because this is a small state that depends on natural resources for a good chunk of its economy. Moreover, it reflects the change in the marginal value of extracting oil from more difficult sources. Here’s Wyoming’s record for employment in “oil & gas extraction” over the last few decades: 1975: 10,300 1981: 22,700 (peak) 1990: 8,900 2000: 9,400 2005: 3,800 2007: 4,300 Not surprisingly, employment tanked in the 1980s and 1990s, reflecting the declining fortunes (and prices) of the industry itself. Employment hasn’t ticked up by much, but given the declines and uncertainties of the previous decades, it’s not hard to figure out why. Only sustained increases in prices over several years would justify a substantial increase in capacity. Given that US oil companies control only 1.6% of the world’s reserves and about 7% of world production, the real capacity to meet rising world demand is going to have to come from elsewhere. Thus, blaming the domestic US oil industry for not investing in reserves simply ignores the uncertainty and economic reality of the global energy market. Taxing their profits now also ignores the hard times of previous decades where oil companies were struggling to make money as crude oil prices languished and, and time, seemed to be in a free fall. To argue that the oil companies should have foreseen the spike in crude oil prices we’ve experienced over the past few years simply belies the hard, cold experience of the past several decades. Moreover, it’s not at all clear that oil prices won’t fall dramatically again, just as they did after the OPEC oil market interventions of the 1970s. Personally, I doubt they will fall to those levels. Moreover, innovation in the energy sector may have finally brought the costs of using alternative technologies far enough to create a broad-based market that will make the energy sector even more competitive. Toyota, afterall, sold its one millionth Prius this year, and production is approaching (if not exceeding) mass market levels. Honda has also launched a zero emissions plug in 4-door sedan, the FCX Clarity. So, times they are a changing, and the trends don’t bode well for domestic oil companies over the long run.
Samuel R. Staley, Ph.D. is a senior research fellow at Reason Foundation and managing director of the DeVoe L. Moore Center at Florida State University in Tallahassee where he teaches graduate and undergraduate courses in urban planning, regulation, and urban economics. Prior to joining Florida State, Staley was director of urban growth and land-use policy for Reason Foundation where he helped establish its urban policy program in 1997.