The U. S. senators who recently held hearings to vilify oil company presidents about high oil prices don't so much oppose price manipulation as have a preference for its direction, namely down. But those same senators may soon be wishing that their favorite villains actually had the power to control prices. Such power would imply that considerable extra production capacity still exists.
It should come as no surprise that there is a basis for the senators' suspicion. From the early 1930s onward the Texas Railroad Commission limited supplies from Texas oilfields to keep prices high. Huge discoveries in East Texas during the Great Depression had caused oil prices to plummet below the cost of production--down to 10 cents a barrel at one point. The commission successfully obtained the power to allocate (read: restrict) production among all of Texas' wells, a process called proration. Federal intervention was eventually required to prevent so-called "hot oil," oil illegally pumped from the Texas fields, from moving across state lines. It was a system that had been initially resisted by Texas oilmen, but which they soon realized worked to their advantage. Thus, began the first formal government-run quota system for oil production.
That system allowed regulators to manage world oil prices because Texas alone had the world's largest excess production capacity. From the mid-1930s until 1970 regulators could flood the world market to bring down prices when they got too high or restrict production to keep prices from falling below the level necessary to encourage new drilling and investment.
In 1970 U. S. and world demand outstripped the ability of Texas to play the role of swing producer. The state's wells were allowed to run at 100 percent from that year to this. At the same time a new swing producer emerged, Saudi Arabia. Until recently the Saudi government, through its now government-owned oil company, Saudi Aramco, had been the price maker in the world oil markets. Its close relationship with the United States had resulted in favor after favor for the U. S. government and its allies. In both Gulf Wars, for example, the Saudis pumped extra crude to stabilize prices.
But something seems to have gone awry. Even as it appears there might have been some manipulation of gasoline prices made possible by strained refinery capacity in the United States, the price of crude oil remains stubbornly resistant to gravity. The Saudis have been saying for almost two years now that any day they will be swamping the world market with extra oil to moderate the price. The results so far: nothing.
Investment banker Matthew Simmons--now famous in peak oil circles--contends in his new book, "Twilight in the Desert," that Saudi Arabia recently reached the point that Texas reached some 35 years ago. The country has run out of excess production capacity. In other words, if everyone in the world is pumping at 100 percent, there is no extra oil left to be produced to increase supplies and bring down prices.
But, Simmons contends that the problem goes beyond infrastructure. He believes that Saudi and therefore world oil production are at or near their all-time peaks. Only time will tell.
Of course, none of the august senators who specialize in sniping at oil executives either seems to know about the idea of a peak or seems to care enough to ask about it. And none seems to understand that oil prices have been managed for decades by government as much as industry. (Beyond this, a peak in world oil production would, of course, get the oil companies off the hook since there would be nothing the companies could do about it. But that would ruin the senators' fun by forcing the Senate to address the real problem: oil depletion.)
Sen. Charles Grassley of Iowa seemed to sum up the ignorance of the Senate well when he told National Public Radio this in a recent interview:
You know, what makes our economy grow is energy. And, Americans are used to going to the gas tank and when they put that hose in their tank and when I do it, I wanna get gas out of it. And when I turn the light switch on, I want the lights to go on. And, I don't want somebody to tell me I've gotta change my way of living to satisfy them. Because this is America, and this is something we've worked our way into, and the American people are entitled to it. And, if we're going to improve our standard of living, you have to consume more energy.
Petroleum, however, is completely immune to the bad tempers of senators or the presumed entitlements of Americans. Petroleum sits indifferent and silent under the earth. As we scour the globe for the last remnants of it, it resists us more and more in its discovery and extraction. And, when we do find it, it comes to the surface not at rates determined by wishful thinking, but at those ordained by the laws of physics alone.