Consumers vs. Big Government, Big Environmentalism, & “Really Big Oil”

This week’s “Daily Journal” guest columnist is Dr. Roy Cordato, Vice President for Research and Resident Scholar at the John Locke Foundation.

Who is big oil? Is it Exxon or Texaco? No. The fact is that these companies are nothing more than a drop in the barrel when compared to “really big oil,” the Organization of Petroleum Exporting Countries (OPEC), which claims a market share of more than 40 percent of world oil production.

Over the last 25 years, under pressure from “big environmentalism” (the Audubon Society, the Sierra Club, Environmental Defense, and other groups), the U.S. government has done everything it could to empower this oil cartel that openly conspires to restrict output and raise oil prices.

The most dangerous threat to a cartel’s success is competition. This is why in a truly free market, where new investment is not restricted by regulations or outright prohibitions, cartel conspiracies always fail. The high profits that come with monopoly pricing attract new companies to the cartelized industry, driving prices down.

Historically, the successful cartel’s best friend has been government power used to keep competition out of the market. This was the case in the airline industry prior to the deregulation of 1980. For more than 30 years, there was a very effective cartel among passenger airlines that was held together by entry restrictions enforced by the Civil Aeronautics Board.

It was also the case in the oil industry during the 1970s, when OPEC was empowered by price controls and regulations that led to the elimination of nearly all U.S. domestic exploration. When the U.S. oil industry was deregulated in 1981, OPEC fell apart as an effective manipulator of world oil prices.

But throughout the 1970s and 1980s, OPEC’s witting or unwitting allies in the environmental movement were steadily gaining in influence and power. Their first big win came in 1980 when the Carter Administration decided that oil exploration in the Alaska National Wildlife Refuge (ANWR) could proceed only with the explicit consent of Congress.

In 1981 a ban was placed on oil and natural gas exploration in most of the United States’ territorial waters. At the time these bans had little market impact. The world was entering a period of increased supplies from other sources, in large part due to oil deregulation in the United States and decreasing demand brought about by recession.

The mid 1980s featured a period of “oil glut.” OPEC’s monopoly power sunk rapidly from its peak in the 1970s. But as world demand has grown with the freeing of markets around the world, especially in China, new oil supplies have been needed to keep prices down. This is the perfect scenario for any cartel: legal restrictions on new supply in the face of increasing demand.

During the1990s and into the 2000s, OPEC has secured all the cartel protection it needs from Washington. Throughout the 1990s, the Clinton/Gore administration enhanced OPEC’s power in world oil markets and made Americans increasingly vulnerable to high prices. It did this by putting in place new regulations or continuing older regulations that have kept competition out of the market.

In 1995 President Clinton vetoed legislation that would have opened up ANWR to exploration, fulfilling promises that he made to environmental pressure groups. At the time the Clinton administration’s own Department of Energy estimated that production from ANWR could be as much as 850 million barrels of oil per year.

Since 2001 the Bush administration has been willing to sign such legislation, but Congress has been the stumbling block. Knuckling under to pressure from groups like the Audubon Society, Congress has turned down every proposal to allow drilling in ANWR and off the coasts.

It is not only restrictions on oil and gas exploration that have empowered “really big oil” and contributed to higher prices. Other forms of energy compete with oil, particularly for heating and electricity generation. For decades, regulations, again backed by big environmentalism, have prevented the construction of new nuclear power plants for electricity generation.

Furthermore, one of America’s greatest assets has been coal. To the extent that the U.S. can substitute coal for oil, market power is transferred from OPEC to consumers. In 1996 the Clinton Administration once again came down on the side of really big oil, as usual, in the guise of protecting the environment. Certain large tracts of land in the western U.S. were declared “national monuments,” prohibiting the extraction of any of the vast deposits of cleaner, low-sulfur coal that these lands contain.

When it comes to protecting and enhancing its market power, over the past 25 years “really big oil” has had no greater friend in the world than American environmental advocacy groups and their allies in both the White House and Congress. Not since the Nixon/Carter price controls of the 1970s has OPEC enjoyed such market protections.

While many in Congress and their allies in the environmental movement have been quick to blame large domestic oil companies for high gasoline prices, it is, in fact, their own policies that have been responsible for keeping oil supplies down and prices up. Those who continue to oppose oil and natural gas exploration off our coasts and in ANWR, the expansion of nuclear power, and the mining of low sulfur coal are, in reality, not defending the environment but standing squarely behind high energy prices and standing against American consumers.