Curb Your Conspiracy Theories on Gas Prices
STEVE INSKEEP, host:
When we reported the other day on falling gas prices, we got a letter from Jeff Devins(ph) of Hawaii. That letter was brief.
He wrote: There's a surprise to a drop in gas prices? This is an election year.
Plenty of people have wondered if there could be a link in gas prices and politics, so we put the question to Vijay Vaitheeswaran. He's a correspondent for The Economist. Welcome to the program.
Mr. VIJAY VAITHEESWARAN (Correspondent, The Economist): Good to be here.
INSKEEP: Could the timing of this dramatic drop really be a coincidence?
Mr. VAITHEESWARAN: The right way to ask the question is, does the administration or the powers that be have the power to manipulate the world oil markets, to micromanage the exact time of a gasoline price drop to be at just before an election? The answer is no.
The U.S. gasoline market is determined by many factors, most importantly the world oil markets.
INSKEEP: Although, wait a minute. We're talking about the price of gasoline, which is a little different than the price of crude oil. Oil companies have assured us over the last couple of years that the price of crude oil doesn't have a lot to do with it. It has to do with their refinery capacity and a lot of other things that are beyond their control which would keep driving prices upward. What's happening that would suddenly drive them down now?
Mr. VAITHEESWARAN: In fact, the single biggest determinant of gasoline prices is the price of crude oil, the main product that goes into making gasoline. At the margin, refining capacity, local demand, these sorts of things matter from day to day.
But in fact if you're talking about longer term trends, if you're talking about over the space of weeks and months, it really is the world crude markets. And that's where actually you know, this conspiracy theory sounds a little bit like Wag the Dog. You know, sort of a politically motivated manipulation of events.
In fact, the explanation for the drop in gasoline prices is more like the dog that didn't bark. I'll tell you what I mean by that. The reason oil prices had been quite tight and gasoline prices had gone up earlier this year was there was a fear of a difficult hurricane season. Things in Iran looked like they were about to come to a real head. Lebanon was going crazy and the U.S. was entering what's called the summer driving season.
Well, what happened? We didn't have a crisis. And so market conditions are exerting themselves and that external shock that could always happen in oil, the dog that could bark, it hasn't been barking of late.
INSKEEP: Does a major oil company or an oil-producing nation have the power to move the oil price a little bit up or down depending on how they trade, how they sell, how they buy?
Mr. VAITHEESWARAN: There's almost only one country that can fill that role sometimes and that is Saudi Arabia. No other country can even come close. They have a quarter of the world's proven reserves of oil. They produce, by far, the largest output of oil - ten million barrels a day or so. They can bully their neighbors, their friends in OPEC, into having something like a discipline.
OPEC is very concerned that there might be a price collapse. So I think you might see the Saudis actually cut their own oil production in coming weeks and that would of course help prop up prices.
INSKEEP: Weren't there reports that BP was under investigation for manipulating energy prices?
Mr. VAITHEESWARAN: The report's that BP's trading arm tried to manipulate one part of the futures markets. But even BP, which is one of the world's biggest companies, is actually a small pygmy compared to the real giants of oil.
I mean we think of Exxon, the biggest Fortune 500 company, as a colossus. Exxon is one-twentieth the size of Saudi Aramco, which is a Saudi oil company. Most of the world's oil, almost 90 percent, is in the hands of the government companies, not Exxon, not BP, not Chevron.
INSKEEP: So you mentioned one factor behind the change in oil prices, that there was anxiety earlier in the year that drove them up and now that anxiety is abated somewhat so the prices go back down. Has anything fundamental, though, changed about the oil market that has pushed oil prices to such high levels over the last couple of years?
Mr. VAITHEESWARAN: The main difference has been the emergence of China as an important consumer of oil as well as of course the U.S. continuing to use energy much more inefficiently than Europe or Japan. Our fleet economy is at a 20-year low. In fact, Henry Ford's Model T a hundred years ago got 25 miles to the gallon, which is better fuel economy than the average new car today.
At the same time, OPEC did not continue to invest in bringing new fields online. There's plenty of oil left in Saudi Arabia and the Middle East countries. They have not invested enough to keep pace with this astonishing rise in demand.
So it's that mismatch that explains the oil price rises over the last five years and I think the market will remain tight. We're in a much more volatile and dangerous world when it comes to oil and we don't have a safety net.
INSKEEP: Vijay Vaitheeswaran of The Economist, author of Power to the People. Thanks very much.
Mr. VAITHEESWARAN: It's a great pleasure.