A Government Standard
For years, when there was a spike in energy prices, industry spokesmen were trotted out to claim that, after adjusting for inflation, it wasn't really all that bad.
Well, fellas, you can toss that talking point into the circular file -- next to the ones about how there's no collusion on energy trading desks and no credible evidence of global warming. If all goes according to plan this Memorial Day weekend, inflation-adjusted gasoline prices will blow past the 1981 record.
Allow me to suggest that we dispense with the usual Kabuki theater, with news interviews of angry drivers at the pump, members of Congress vowing to outlaw price gouging and the White House asking the Federal Trade Commission to do yet another study that will conclude, nine months later, that it was all about supply and demand.
Instead, I lay on the table a modest proposal: Put the government into the oil business.
This is not as radical as it might sound -- in fact, just about every other major oil-producing country is organized around state ownership. In our case, however, the government-owned company would not have a monopoly, but would operate within a vibrant, private-sector dominated market.
The first step would be for the government to charter this company which, for purposes of historical irony, we'll call Standard Oil. The charter would require the company to operate at only a modest profit, while doing everything in its power to expand supply, smooth prices and expose collusive behavior.
Although government owned, Standard Oil would be exempt from all civil service and government contracting requirements, free to hire the best people in the industry, with generous incentives, to operate in the public interest. While it would follow all federal environmental regulations, Standard Oil would receive expedited review for its projects. Its federal tax rate would be set annually, based on the effective worldwide tax rate of its five largest competitors (in other words, pretty low). It would be exempt from all state and local regulation.
To capitalize Standard Oil, I propose raising the federal gasoline tax by a penny or two. I won't try here to lay out the economic arguments, but trust me, the burden of this tax would fall mostly on refiners, not consumers.
Of course, Standard Oil can't be a serious oil company if it doesn't have proven reserves. No problem there. The federal government owns plenty of oil and gas, offshore and on federal lands, and its charter could give Standard the right of first refusal on any it chooses to sell.
Standard's first order of business would be to expand refining capacity in the face of the industry's disciplined efforts to keep supply always a bit behind demand. It's rather telling that, after complaining for years about the difficulties of siting and permitting, not a single company has taken up President Bush's offer to site a new refinery on federal land and expedite the approval process. And if you look at the investment the industry is making in its refineries these days, much of it is focused on upgrades that will allow refiners to use less expensive, lower-grade crude oil -- changes that will increase refining margins but add not a drop to total supply.
In fact, rather than responding to high prices and tight supplies by investing in new capacity, refiners have actually slowed their pace of capital spending, using the recent gusher of profits to buy back their own stock. Valero, the largest refiner, recently announced it would spend $6 billion on share repurchase. Meanwhile, its total budget for all capital expenditures this year is $3.5 billion.
Standard could help consumers by building a small number of efficient new refineries to expand capacity in the regions with the highest prices, starting with the Midwest. In other regions, the company might build facilities to store inventory when gasoline prices are low, and release it into the market when supply is tight and prices are high. Standard could also build terminals to facilitate importation of natural gas and finance construction of new gas pipelines from Alaska and Canada.
Another target of opportunity would be Standard's trading desk, which could be used to keep a careful watch on market manipulation, sniff out collusion and dampen the impact that speculative trading has had in increasing the cost of nearly all forms of energy. Wall Street investment banks and hedge funds might be less willing to take on these big speculative risks if they knew a government-owned oil company, with big money and real supply behind it, were pursuing trading strategies expressly designed to foil their own.
The industry, of course, will vigorously oppose this modest plan, arguing that it would be unfair to force it to compete against a government-sponsored enterprise that doesn't have to play by the same rules. But how should we respond to complaints about market fairness from an industry that has earned windfall profits for three decades by free-riding on the activities of an international price-fixing cartel? And if the government is really as stupid and inept as industry executives have always claimed, why should they worry?
Of course, if Standard Oil does begin to take unfair advantage, remedies would be available. Exxon and BP could demand that Congress hold hearings on the manipulative practices of Standard Oil, and pass legislation outlawing hyper-competitive pricing. Fox News could send reporters to Conoco's annual meeting to interview shareholders angry that their dividends were cut because of Standard Oil's competitive practices. And Valero and Sunoco could demand an investigation by the Federal Trade Commission, which would conclude, nine months later, that it was really all about supply and demand.