OIL AND ECONOMICS - MAY 2001
The headline reads, "Bush Says 'Economy Slipping',
Urges Quick Passage of Republican Tax Plan'.
Another headline warns of rolling electrical
blackouts in California, soaring energy prices,
and OPEC rate hikes.
As we look at our current economic situation,
we see Democrats and Republicans doing their
usual dance of blaming each other for the
slowdown. Most of us have come to accept that
politicians are far more concerned about scoring
points for their team than actually doing
the job they were elected to do. This is unfortunate
because at this moment it is more important
than ever that the government leaders try
to cut through the cloud of conflicting details
that surrounds the economic situation and
deal head-on with the problems underlying
It is my belief that a large part of America's
economic problems are caused by one very simple
thing: energy and oil costs. Last summer when
the U.S. economy was booming the OPEC oil
conglomerate decided they wanted a bigger
piece of the pie. As is always the case, western
oil companies were willing to play right along.
When oil and gas prices started skyrocketing,
I remember warning a friend that corporate
greed would kill the economy. A year later,
this warning came true.
This is certainly not a new principle to global
economics. In 1973 when the OPEC oil embargo
sent gas prices from 29 cents per gallon to
over $1.50 per gallon, the U.S. economy crashed
into almost a decade of recession. It is important
to note that during those years of recession
the American oil companies were posting all
time high profits. In the mid-eighties when
the economy began to boom, the oil companies
began facing harder times. In Texas, oil company
workers were being laid off and corporate
profit margins shrank.
Over the last 25 years, we have been on a
financial seesaw where either the overall
U.S. economy is good and the oil companies
bottom out, or the domestic situation sinks
and the oil companies take in exorbitant profits.
When we look closer at what is taking place
in the California energy crisis, we find another
interesting example of this. The problem began
when a law was passed forcing utilities to
sale off their power generation plants. After
this occurred, the utilities became middlemen
suppliers who bought energy from those that
they sold their power generating plants to,
and then distributed it to the customers.
To further complicate matters, regulations
were passed which limited the price suppliers
could charge customers, yet the power plants
could charge the suppliers whatever rate they
chose. This left the suppliers stuck in the
Soon the power plants raised their rates,
but the suppliers could not pass on the increase
to their customers. When the suppliers began
to lose money, the power plants would no longer
give the suppliers energy to deliver to the
customers and so the power outages began to
occur. The problem is not that the energy
supplies do not exist. It is that the suppliers
cannot afford to buy it from the generators
to distribute it to the customers.
Now an important point in this story is that
Texas oil companies have purchased many of
the power plants. So, when prices go up someone
has to be making money off the increase. In
this case, it is the oil companies. They are
the ones who purchased the power plants, and
are now making the money from the price increases
that triggered the crisis.
In New York we have a similar situation except
that prices have been passed on to the consumer
by way of a 50% increase in electricity bills
In California the rolling blackouts are not
only a cause for inconvenience, but also bring
industry to a halt. A single minute of power
failure causes millions in economic losses.
Plus, the money consumers are putting out
to pay high electricity bills, as well as
gas and heating oil prices, funnels money
out of the rest of the economy fueling the
overall economic downturn.
In order to truly understand the situation
we should keep the fact fixed in our minds
that when energy prices go up someone has
to be making profits from the price rise.
The money doesn't just disappear into thin
We should also be clear that when we hear
the words 'energy crisis' we understand that
it is a mistake to believe that we are dealing
with a lack of supply. Oil companies would
like you to believe that they just can't find
enough reserves to meet energy needs. That
is not and has never been the case. The crisis
is a fraud that the oil companies hide behind
as an excuse for price hikes.
During every 'energy crisis', the oil has
been there, but supplies have been withheld
to drive prices up. Those who watch the issue
closely know that the first step to driving
up prices is for the OPEC member countries
to agree to cut back production. Once the
prices rise, the American oil companies take
advantage of the situation to get their share
of the profits.
When we look at our relationship with the
Middle East oil producing nations over the
past 25 years we see major problems. Their
oil embargoes have devastated our economy
multiple times. We have fought a war with
Iraq over oil. We are constantly bogged down
in Middle Eastern conflicts because oil makes
every one of these countries a 'vital interest'
to U.S. foreign policy. And because of our
interest in Middle Eastern oil and politics,
we become the target of terrorist attacks
from political radicals. Radicals who are
usually funded by oil money.
Although this may all seem bewilderingly complex,
I believe there is a simple approach to solving
the problem in the long term. It seems obvious
to me that we must find a way to end our dependence
on Middle Eastern oil once and for all. If
we were to achieve this goal it would not
only end OPEC's ability to bring our economy
to its knees, it will also free us from living
in constant fear of the political chaos of
Middle Eastern conflicts. Usually I am one
who believes we should not look to the government
to solve our problems. In this case, however,
only the government can do what needs to be
done to solve this problem.
What I propose is needed is large-scale funding
for research to develop and support alternative
energy sources. The technology to do so is
within scientific capabilities if we have
the funding and incentive to make it happen.
It does not appear anything will happen if
left to the private sector because the costs
of research are too great. Furthermore, we
must consider a goal proposed by Vice President
Al Gore: a goal to find a replacement for
the internal combustion engine.
When Gore made this proposal Republicans laughed
at him. But people who laugh at bold approaches
are not those that create new inventions,
dream new ideas, or move the world forward.
Breakthroughs cannot be made until someone
defines the need for a new invention.
Given the amazing scientific and technological
progress humankind has made since the invention
of the internal combustion engine, I believe
our best minds could do better. But first,
we must dare to exhort them to think outside
the box. They must be inspired to consider
the possibilities which lesser minds think
impossible. To those of you that agree with
my ideas on this issue you may think we should
immediately look to the current administration
to do what seems obvious. Unfortunately, we
must remember that Mr. Bush is now our president.
Mr. Bush is formerly of the oil elite, his
friends and family oil aristocracy, and his
political campaign was financed by oil money,
so I would not expect this president to do
anything that the oil companies would not
Already President Bush has used the economic
downturn as an excuse to move ahead with policies
that will benefit the oil companies. Besides
using the downturn to push through corporate
tax cuts, he is also attempting to undo environmental
laws to allow oil drilling in Alaskan nature
preserves and has also went back on pledges
to cut carbon dioxide emissions. When the
political weight of the oil corporations is
factored in, the reticence of political leaders
to take action that will lead to long-term
benefits at the price of short-term sacrifice
It seems that the only way action will be
taken on this is if it becomes an issue that
takes center stage in the media, and pressure
is created forcing the politicians to take
action. These are the times when, as a nation
and as the human species, we must ask whether
we are capable of taking control of our long
term destinies, or are we merely looking out
for our immediate interests at whatever cost
to the future.
OIL AND ECONOMICS GAS PRICES an article by author Caeser Pink
on the relationship between oil prices and the economy.