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Subscribe to Portfolio magazineThe cover of a recent BusinessWeek about the runup in oil and gasoline prices framed the question of what's causing it nicely: "Speculation or Manipulation?" But the story was maddeningly evenhanded. By dodging its own question, the magazine raised another.
When it comes to the cost of gasoline, who should we believe? Here are some nominees and their viewpoints:
1. The oil companies: It's supply and demand at its most basic, just like your professor outlined in your freshman economics course.
2. The petro-toadies in Congress: All we have to do is open up the Arctic National Wildlife Refuge and the waters off Florida and California.
3. The Department of Energy: OPEC has to pump more, and we've got to allow more refineries by rolling back environmental restrictions.
4. King Abdullah: OPEC pumps plenty of crude but "despicable" oil-futures speculators in the West are driving up the prices due to their "selfishness."
5. Senator John McCain: Exxon Mobil has done such a good job of demonstrating the magic of the marketplace that it deserves another $1.2 billion in tax breaks.
6. Senator Barack Obama: Impose a windfall-profits tax to remind American oil executives that price gouging can backfire politically.
7. About 90 percent of the print and TV reporters in America: See No. 1. It really is that ol’ devil supply and demand.
8. The White House: Never mind. Nobody’s home.
For my money, a sounder answer as to whom to believe is Don Barlett and Jim Steele, the investigative reporting team that has won two Pulitzers and two National Magazine Awards for exposing government theft and corporate greed. Their 2003 series for Time magazine on oil economics remains required reading for anyone who wants a better understanding of how gas at $4 to $5 a gallon represents a carefully arranged screwing of consumers.
"The bottom line for the oil people is, 'How much can I make while spending the least I can get by with on refineries, synthetic fuels, and for exploration and drilling on the vast, unused acreage in existing oil leases?'" Barlett says. He notes that Canada has become the United States' No. 1 oil supplier by funding joint government- industry exploration of the tar-sand fields of Alberta. "The most chilling statistic is Exxon Mobil's. It spent twice as much last year to buy back stock as it did on exploration."
As for shallow journalism that helps Big Oil, Steele makes the point that the newsrooms that were once staffed by the redistributionist children of the New Deal and the A.F.L.-C.I.O. are now populated with the children of Reaganomics: "Younger reporters come out of a mind-set that the market rules, taxes are evil, and government ought to let these people in the oil industry go about their business."
As journalism has passed from a hungry to an elite profession, there's no shock value in the fact that Exxon Mobil paid only $5 billion in U.S. income taxes last year while it paid $25 billion to foreign governments. Even with Exxon Mobil making $76,000 a minute, the last thing that occurs to many assignment editors and reporters is to investigate whether a windfall-profits tax would drive Exxon Mobil, BP, and other oil companies to invest in the alternative-energy strategies they boast about in their television commercials.
Then there's the problem of letting general-assignment reporters, rather than energy specialists, cover gasoline prices mainly as a story of consumer suffering. About 40 percent of U.S. oil is produced domestically, and Washington has declined to regulate auto fuel as an essential commodity. That's where the vertical integration of a giant like Exxon Mobil creates market leverage. It owns oil fields, processing plants, and retail outlets, creating some monopoly-like advantages in controlling supply and fixing prices in the U.S. market. Then there is the remarkable job that the oil companies have done in persuading network-TV anchors and correspondents to depict them as they want to be seen: powerless victims of a supply-and-demand cycle that is as immutable as gravity and as random as lightning. Congress, responding to demands for tougher laws on oil speculation, would prefer to blame environmental regulations. Much of the context-free reporting about what the executives say, in Congress and on television, is marked by breathtaking gullibility.
Speaking of television, no one of any age can doubt that the industry's star performer in the public relations battle over gasoline prices is Rex Tillerson, chairman and C.E.O. of Exxon Mobil. His appearances on the Today show have become five-minute promos for price escalation, with Matt Lauer cast as the surrogate for a nation of consumers who don't fully understand their role—helpless and sacrificial—while the company maximizes shareholder value, "our reason for being."
This is a "demand-driven price run-up, no question about it," Tillerson drawls, fingers intertwined and as fidget-free as Chance the Gardener. Lauer gamely zeroes in on Exxon Mobil's dirty secret—that it spends only 5.3 percent of revenue on exploration at a time of record revenue. "If you're making $400 billion a year, should consumers expect you to pay or spend even more on exploration?" Lauer asks.
The unflappable Tillerson describes this modest expenditure as "very, very robust." He adds, with apparent conviction, "We would do more if we could gain access to more areas." In other words, give us ANWR, then we can talk price at the pump. In fact, no unbiased expert claims that exploiting the fields in the Alaskan wilderness would cause more than a bump in world supply or prices in the U.S. By the way, Tillerson observes, the industry needs more refineries too.
Lauer, charmingly outpointed at every turn, finally blurts, "Mr. Tillerson, you're always nice with your time."
"My pleasure, Matt," the oil king rumbles, not a hair out of place on his salt-and-pepper corporate coif.
And it was, no doubt, a pleasure for him to slip out of Rockefeller Center, built with Standard Oil dollars accrued in an earlier era of rapacious pricing, without addressing the oil-company claims that are most easily disproved by that old-fashioned journalistic method called reporting. The plain truth is that the record profits cited by Lauer—$10.9 billion in the first quarter of this year for Exxon Mobil—reflect an industrywide decision to flow revenue directly to the bottom line rather than to capital expenditure. To buy Tillerson's story, you'd have to believe that profit is an accident, when it is, irrefutably, the result of a company strategy tailored to this unique moment of opportunity.
Oil executives generally believe in an updated version of the peak-oil theory, introduced in 1956 by geologist M. King Hubbert. It posits that because of oil-field depletion and the expense of production, American-oil-industry output will reach a maximum level and then start to decline. An updated version of Hubbert's bell curve—which factors in the number of wells being drilled and refinery capacity—sets the year that the peak will be reached at 2020. If you're getting a prime price for a product that will be harder to acquire in a few years and less valuable due to competition from other fuels, the smart play, obviously, is to divert every penny into profit while the Black Gold Casino is still open. To confuse the press and public, you set up several straw men to take the blame for the supply shortage that you’ve seen coming for a half-century: refinery capacity, environmental legislation, and the imaginary supply potential in undrilled portions of the continental shelf and ANWR.
But let's look at the Cheneyesque fantasy that drilling in ANWR is a major national-security priority that would make us less dependent on foreign oil. The fact is, the Trans-Alaska pipeline that is supposed to bring us that new ANWR oil probably couldn't handle it right now because lack of maintenance has left it in bad shape. (Business Journalism 101: You can reinvest revenue in infrastructure or pull the money out as profit.) Plus, there's not enough Alaskan oil to affect price. It would be gone in a few months if we could pump it at maximum capacity. From a national-security standpoint, the smart thing would be to leave it in the ground for use in case of some future civilization-threatening cataclysm.
Oil-friendly members of Congress like to blame environmental regulation for the lack of refinery capacity. But the oil companies themselves choked supply by closing more than half of their 300 U.S. refineries in the past 25 years. (Business Journalism 201: You can reinvest in manufacturing capacity or ride the demand curve to higher profits.) Studies by Cambridge Energy Research Associates, a respected, oil-friendly consulting firm, indicate that even if all environmental regulations were removed from refinery construction, few would probably be built right away because of a 75 percent rise in construction costs since 2000, largely driven by the increased fuel cost of transporting building materials.
I don't mean to imply that when it comes to cutting through industry and congressional malarkey, Barlett and Steele are the only game in town. The Chicago Tribune, the Wall Street Journal, Texas Monthly, and other publications have all done credible oil series during the past few years. The problem is that headlines on today's pump prices trump the revelations of yesterday's in-depth reporting. The digital-news era is good at letting us know what happens now. But it's lousy at reminding us of what's happening again. Take the richly symbolic case of ANWR. Oil executives know that they haven't explored 80 percent of their existing leases in the continental U.S., according to Barlett. But they also know that if they can crack the wildlife refuge, Congress will lack the political will to keep them away from the other government land and the ocean floor they covet. In that sense, ANWR fits a historical leitmotif. For more than a century, oil companies have been gaming the federal oil-leasing system to receive bargain prices on the raw materials under public ownership.
Oil companies have always depended on the transfer of unpumped oil from public to private ownership. In the Teapot Dome scandal of the early 1920s, oilmen bribed officials at the Interior Department to gain ownership of an oil field owned by the U.S. Navy. With ANWR and the offshore leases, everything will look aboveboard if Congress and consumers can be whipped into a demand-driven frenzy. Oil companies will blame the Arabs and environmentalists for a supply shortage they've maintained as a matter of policy since the days when the Texas Railroad Commission set quotas on how much oil could be pumped out of the ground.
Decade after decade, the oil companies claim that they would pump more if only they were allowed to. Barlett calls it playing the short-supply card. "Every freaking reporter out there falls for it," he says. "And if I'm the P.R. guy for an oil company, I’m going to play that sucker for all it’s worth."
Supply and demand? Sure, but as John Lee, a business journalist at the Wall Street Journal and the New York Times for many years, reminds me, supply and demand in oil are not just "two pie charts—where it comes from, where it goes, measured maybe five years ago." There are more complex reasons for pain at the pump. "American gasoline prices have always reflected the latest spot price, namely what you have to pay to buy bulk gasoline on the open market. This is last-in pricing, rather than pricing based on inventory costs."
Now, let's say you're an oil company selling bulk gasoline, and suppose your inventory contains some gasoline made from $140-a-barrel oil and some that was purchased for $75 a barrel. That leaves a lot of room for price manipulation. But please, whatever you do, don't think for a minute that's what Tillerson and Exxon Mobil are up to. Just like you and me, they are powerless slaves in the fields of supply and demand. Now tote that barge, lift that barrel.
1925: John Scopes, an unassuming high school biology teacher and part-time football coach, is found guilty of teaching evolution in schools, in violation of Tennessee law.
Scopes agreed, after some persuading by the American Civil Liberties Union and others, to serve as the guinea pig in an attempt to challenge the law on constitutional grounds.
Famed attorney Clarence Darrow led Scopes’ defense team in what the press quickly dubbed the Monkey Trial. William Jennings Bryan, three-time Democratic nominee for president and a paradoxical blend of progressive conservatism, represented both the state and the fundamentalists who opposed Darwin’s theories.
The trial took eight days in the sweltering Tennessee summer. National newspapers covered it in detail, including dramatic confrontations between Darrow and Bryan both in and out of the courtroom.
Whether Scopes actually taught evolution to his biology class remains unclear. Although he told the court he had done it and would do it again, he later admitted to a newspaper reporter that while he used a textbook that included a chapter on evolution, he skipped the chapter.
Darrow expected a guilty verdict and stood ready to appeal the decision to a higher court. The jury did not disappoint him. Scopes was found guilty and fined $100 (about $1,200 in today's money). The Tennessee Supreme Court later upheld the constitutionality of the statute but overturned Scopes’ conviction on a technicality.
Bryan, meanwhile, died only five days after the conclusion of the Monkey Trial.
The Butler Act, as the anti-evolution law was known, remained on the books in Tennessee until its repeal by the state legislature in 1967.
Source: University of Missouri-Kansas City School of Law
: Although Love’s environment was created by an army of one — Swedish coder Eskil Steenberg, armed with an algorithm called procedural generation — about 100 players will be able to explore this virtual world together, establish towns, and fight monsters.
: Steenberg has a rare gift for both the art and the science of creating modern videogames. The most obvious strengths of his design are the astounding, impressionistic visuals. The world is dusky and smoky, or bright and watery, all within the same mysterious abstract scheme.
: By creating landscapes mathematically, Steenberg avoids spending the vast man-hours that are normally sunken into creating immersive game worlds. This means he can get on with tweaking the gameplay.
: Steenberg's experience in creating tools software has allowed him to create his own general toolset, which he's using for the creation of Love. One of his main concerns? Making accessible, easy-to-use tools that will work for geeks and artists alike.
: Steenberg's 3-D modeling tools allow for playful manipulation of multi-dimensional objects. The clickable interface makes modeling, deforming, and reworking 3-D aesthetics remarkably easy, which ties into Steenberg's personal philosophy: The more fun the tools are to use, the more productive the user will be.
: Players will be expected to work together to build and defend small towns, as well as explore the larger world around them. The feel of the play is expected to be as freeform as the look of the game. The story will seamlessly unfold through the choices players make as they interact with the monsters and in-game items.
: Love players will be able to carve out caves, build stairways up mountainsides, and generally interact with their world on a “physical” level.
: How Love will develop once the game begins will all depend on the players’ actions. Steenberg is eager to see what they come up with.
: Steenberg's auto-generated game world looks more like a Monet painting than one of the heavily hand-crafted worlds gamers are accustomed to.
: Steenberg's work is entirely open source and will be available to be downloaded from his site (quelsolaar.com).