Breaking The Oil Cartel's Grip

Who's responsible? When it comes to finding fault for the jump in oil prices, from $10 a barrel in 1998 to the current $30, there's plenty of blame to throw around. But not, perhaps, in the obvious places.

The International Energy Agency says that as of December, world oil stocks were at their lowest yearend level in a decade. Today, world demand exceeds supply by about a million barrels a day, pushing prices higher. With the approach of the summer driving season, oil could hit $35 a barrel and gasoline $2 a gallon in the U.S.

Despite its reputation for energy profligacy, the U.S. is using energy more efficiently. In 1981, U.S. oil expenditures were 8.5% of gross domestic product. Today, they're down to only 3%, not much higher than Europe and Japan. Even the gasoholic SUVs get better mileage than cars did in the '70s.

What's really troubling is the growing industry concentration that may, in part, be driving the surge in oil prices. The recent merger wave in energy has contributed to capacity cutbacks and "just-in-time" inventory strategies designed to cut costs. With a smaller amount of oil in the pipeline and fewer companies left to compete, the industry has been less able to deal with any unexpected runup. Prices for home heating oil doubled for millions in the Northeast this winter, with de facto rationing occurring in some areas. The Federal Trade Commission is finally signaling a tougher antitrust stance with its rejection of the BP Amoco-ARCO merger. But it is very little and very late.

The OPEC cartel is equally troubling. In an open, competitive global economy, it simply has no legitimate place. OPEC was tolerated by the West as a geopolitical tool during the cold war. Saudi Arabia and the Gulf states warded off communism and guaranteed a steady flow of oil to the U.S., albeit at a high price at times. Today, they whisper about keeping Islamic radicalism under control. Perhaps. But communism is gone, and the geopolitical incentive to tolerate a cartel is over.

Washington should work to break the cartel and allow the free market to operate in oil. One step would be to change the Strategic Petroleum Reserve from a reservoir used only in a national security emergency to one that can be actively managed to counteract OPEC. Make it bigger and use it. Until the requisite law is changed, the Energy Dept. should enter into swaps with oil companies to bring another million barrels into the market and help push prices down. The U.S. should also lean on Mexico to boost production and stop colluding with OPEC. The FTC, for its part, should revisit recent oil mergers to see if concentration has gone too far. Cartels and monopolies have no role in a 21st century global economy. Period.

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