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How McCain and Crist Help Big Oil Change the Subject

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Here in Florida, there has been a bipartisan and historical agreement that oil drilling off our coasts is a very bad idea. Even our last Governor had told his brother president that lifting the drilling moratorium wouldn't sell in Florida. If it weren't for presidential politics, it would be hard to understand why John McCain, much less Charlie Crist, would u-turn down this road. But four-dollar gasoline has our attention, and people living in states without beaches are being told that more drilling will help them right now.

Many of the arguments against drilling off the Florida coast are obvious, and have been made. The risks of environmental disasters are real. There are already millions of acres under lease elsewhere that the oil companies haven't touched. And any minimal "relief" created by new drilling is at least a decade away.

But what's being lost in all of this is that John McCain and Charlie Crist aren't just trying to create new profit centers for the energy industry. They are also carrying the public relations water for big oil by arguing that gas prices are unnecessarily high not because of profiteering, but because of government regulation stifling the oil companies from boosting supply. According to the oil companies, our problems can be laid only at the feet of the oil producing nations, and our own government tying their hands behind their back, keeping us from being a real "oil producing nation". This, of course, is nonsense.

The truth is clear, and is reported every quarter in public reports by the oil companies. As the OPEC price for oil has climbed from less than $10 a barrel just 9 years ago, to nearly $150 a barrel now, the profits of the oil companies have increased dramatically. How can that be? If you are selling hamburgers, and the price of ground meat goes up, you would expect your profits would shrink. Unless, of course, you raised the price of your burgers. But to make your profits actually grow while your cost of beef goes up, you would have to raise the price more than the additional cost of the beef. If you did this too much, your customers would just go across the street to the hamburger guy who wasn't profiteering off the rising prices. If you and the guy across the street both did it, your customers would go down the street to the deli.

So why isn't this happening at the gas station? Unlike the hamburger scenario, when Exxon increases its profit margin and raises prices more than it can really justify, we drivers go across the street and find that Chevron and BP are doing the same thing. And there's no deli further down the street. Our cars only run on ground chuck, not turkey and swiss. The truth is that over the last decade there has been a dramatic consolidation of market power over all areas of oil competition -- exploration and production, refining and marketing. The few remaining players in the industry just wink and make more money. And they basically admit it.

Two years ago, Red Cavaney, the President of the American Petroleum Institute, gave his "State of the U.S. and Natural Gas Industry 2006" address. He claimed, as the industry often does, that "contrary to a widely held perception, the industry's earnings are very much in line with other industries". He said that for the previous five years, the oil and natural gas industry's earnings averaged "5.8 cents per dollar of sales", and that for the third quarter of 2005, the industry averaged "8.2 cents for every dollar of sales", and that other industries earned more "per dollar of sales".

A few weeks ago on the Today Show, the CEO of Exxon made the "profit per dollar of sales number" argument to Matt Lauer, but said that the profit number was now about ten cents "per dollar". It still might sound reasonable until you really think about what these fellows are saying. They're not talking about cents per gallon. They're talking about cents per dollar. So, using the industry's own figures, one can see the profiteering. A few years ago, when gas was selling at about two dollars a gallon, Exxon and its "competitors" were making about 11 cents for delivering to you a gallon of gasoline. (5.8 cents times two dollars), or about $1.65 for your 15 gallon fillup. Now, for delivering that same gallon of gasoline to you at $4.20 per gallon, Exxon and its "competitors" are making about 42 cents per gallon, (10 cents times four dollars) or about $6.30 for your 15 gallon fill-up. Repeat this a few million times a day and you begin to understand how Exxon had over $30 billion in annual profits. They can do this because there's no one around to undercut them.

The oil companies don't want us to focus on this math, so they change the subject. They tell us the problem is with supply. "If we only had more oil to drill, it would be cheaper!", they tell us. Sometimes, they tell us, the problems are with the drilling and refining capacity. You may remember that in the third quarter of 2005, the oil companies warned us that Hurricane Katrina would impact supply because of damage to rigs and refineries along the Gulf Coast. The result? Capacity went temporarily went down, but as old Red Cavaney told us, industry profits that quarter increased from about six cents "per dollar" to over eight.

In fact, Big Oil has increased its power to manipulate prices at the production and refining level, because it has used the last few years to consolidate both vertically and horizontally. By controlling the production and refining, the major oil companies control the spigot, and they make it harder for the off-brand companies to underprice them at the pump, because those little guys now have to buy their gas directly from the big boys.

I'm certain that the oil companies will tell us that this analysis doesn't tell the whole story and that it's much more complicated than this, but it isn't. Back in 1999, when Exxon and Mobil first announced its plans to merge, William J. Baer, then Director of the FTC's Bureau of Competition, expressed concerns about the impact of a loss of competition in refining. Pointing to a fire in one California refinery which led to a 30 percent price increase, Mr. Baer noted that "even a small reduction in supply in a concentrated market can cause substantial price increases", and that "even small price increases can have a direct and lasting effect on the entire economy."

Notwithstanding these concerns, the Exxon/Mobil merger was approved, and there has been even more concentration of market power in the oil industry, more apparent manipulation of supply, and more profiteering in the absence of real competition. To be sure, the OPEC cartel is even more culpable than the oil company cartel. But the oil companies are clearly piling on, and the debate about drilling off our beaches is just an attempt to change the subject. We shouldn't be so distracted.