TERRY GROSS, host:
This is Fresh Air. I'm Terry Gross. Many of us don't understand why the price of oil has been so volatile. The pricing and politics of oil is the subject of the new book "The Tyranny of Oil," by my guest, Antonia Juhasz. Her book is an attempt to penetrate what she describes as the secrecy and lack of transparency that big oil thrives on. Juhasz is a fellow with Oil Change International and the Institute for Policy Studies. Antonia Juhasz, welcome to Fresh Air.
One of the big questions everyone has about oil is, how are prices determined, and the answer to that relates to one of the biggest questions of the moment, which is who is responsible for the financial meltdown? Both questions can be answered in part by an obscure piece of legislation that is getting more famous every day, and I'm referring to the Commodity Futures Modernization Act. In terms of the financial meltdown, this is the act that allowed those toxic assets like credit default swaps to go unregulated. What did that act do for big oil?
Ms. ANTONIA JUHASZ (Author; Fellow, Oil Change International): Well, it did a lot for big oil. Essentially what the oil companies and the banks sought was to get certain trades that they made among themselves and then also entire exchanges on which those trades would take place removed completely from the government's purview so that the government would say, well, yes, while we regulate one exchange, the NYMEX, the New York Mercantile Exchange, where crude oil futures are currently being traded, we're going to step back and remove ourselves completely from the trades that you do among yourselves and any new exchanges that you decide to set up.
GROSS: So, most of us don't really understand what futures trading is in the first place. But the point you're making is that, because of this Commodity Futures Modernization Act, the oil companies were allowed to trade futures out of the sight of government regulation.
Ms. JUHASZ: Yeah, essentially, Phil Gramm slipped in what has forever since been known as the Enron loophole into the Commodity Futures Modernization Act, and he added this loophole at the very last minute, snuck it in then to the Omnibus Appropriations Bill, which was then passed at the very end of a lame duck presidency, a lame duck session of Congress, just before - or just after Bush was appointed the presidency by the Supreme Court and shortly before he took office. And this loophole is known as the Enron loophole because Enron was one of the lead lobbyists trying to get it passed, and then because Enron was one of the most immediate beneficiaries of the loophole.
And for someone like myself who lives in California who felt the immediate impact of the loophole, it was that Enron had already set up its own exchange, the aptly named Enron online, where it then shifted its own electricity trades and conducted those trades outside of government regulation, intentionally then manipulated energy prices across the West Coast, reduced supply of electricity, caused the price of electricity to skyrocket, caused the first rolling blackouts in California since World War Two, and help set our state into bankruptcy, then caused itself to implode through its own financial malfeasants. And that's one of the many ways that Enron became infamous, both for the manipulation of its own electricity markets and for its own collapse. And it's the perfect example, if we need one, of what deregulation of energy markets entails and what the potential outcome of that deregulation is.
GROSS: So the Commodity Futures Modernization Act, which among other things deregulated energy futures trading, was cosponsored by Phil Gramm. He was the chief economic adviser to the McCain campaign earlier on in the campaign. The bill was signed into law by President Clinton. So, do you see Democrats and Republicans as being equally responsible for the deregulation of energy futures trading?
Ms. JUHASZ: President Clinton signed the Omnibus Appropriations Bill, to which the Commodity Futures Modernization Act was belatedly and suddenly attached by Phil Gramm. That doesn't let the president off the hook, President Clinton off the hook. That doesn't let Democrats off the hook for letting it happen. But I think it would be wrong to characterize the Commodity Futures Modernization Act as a Democratic initiative. It was spearheaded by Phil Gramm. It was the work of Republicans, and I would say it's very fair to say that it was very much resisted. Once, for example, the Enron loophole was realized, there was a great deal of fight back among key Democratic leaders.
However, both parties are to blame, most certainly, for allowing the continuation of deregulation, for allowing the deregulation to stand, for not fighting hard enough to stop this deregulation from taking hold. That said, there has been a tremendous amount of resistance primarily led, for example, by Senator Levin, a tremendous amount of resistance, particularly over the last eight years, as the impact of the Commodity Futures Trading Act have been felt, to try and re-regulate these industries, I would argue, led by Democrats. Both parties are to blame for letting this continue and letting it happen. But I would definitely say that the greatest initiative, the greatest effort for the deregulatory push has been led by Republicans in the House and the Senate.
GROSS: If the price of oil is now being determined by futures, by trading futures, how is that affecting what we pay for oil?
Mr. JUHASZ: The market became the primary determinant of the price of oil intentionally. For a period of time, OPEC controlled the majority of the world's oil and controlled price. And there was a very strong feeling, particularly among many people within the United States and also primarily between our largest oil companies, that it was not desirable to have OPEC setting the price.
And there were several methods set out to try and break OPEC's price setting ability. One was to, actually, a massive campaign across the United States and the world begun in the early '80s to reduce consumption of oil products. Another was to look for more oil outside of OPEC countries and to increase our exploration outside of OPEC countries. The third was to add crude oil to futures trading so that the market could start determining the price of oil. That began in 1983, when the New York Mercantile Exchange introduced crude oil onto futures markets. Slowly but surely, those markets became the larger determinant of price.
The price of oil began its current skyrocket in 2000. That is the same year that oil trading was deregulated through the Commodity Futures Modernization Act. When oil was deregulated, a slow progression began of shifting more and more oil from oil trades, from regulated exchanges where the government was monitoring the day to day trades, onto unregulated exchanges where the government was not monitoring the trades. As more and more oil trades started taking place on these unregulated exchanges, more players started participating in those trades. More and more of the price of oil was increasingly determined by those trades, and the price has gone up and up and up.
GROSS: So, you've described a little bit how the deregulation of energy futures has affected prices. Now, you say in your book that banks are playing a big role in energy trading, and that, in fact, banks are starting to look more and more like oil companies. In what way are banks starting to look like oil companies?
Ms. JUHASZ: Well, one of the ways that banks have tried to salvage their money-making capacity is to shift more and more into commodities, into crude oil in particular. And we're seeing the banks that have been most successful actually in surviving the latest crisis are those that moved more immediately and more quickly into crude futures trading.
In fact, the banks and oil companies that established the primary deregulated - or unregulated as far as US regulators are concerned - platform where crude oil futures are traded, the Intercontinental Exchange, known as ICE, were Goldman Sachs, Morgan Stanley, BP, Shell, Total. These are banks and oil companies that came together to form their own exchange on which to trade crude oil futures, utterly and completely unregulated by the US government, where now the majority of crude futures trading is happening, so that the ICE is the place to look really, as opposed to the regulated New York Mercantile Exchange.
But these banks, Goldman Sachs, Morgan Stanley, others, have also started moving not just into trading in futures, but into morphing into oil companies themselves, buying up oil fields, buying up pipelines, buying up tankers. There's a number of reasons to do this. One concern is that one of the reasons to do this is the potential for a form of insider trading to know, you know, what's happening within these markets, where they're trading more directly by actually owning the commodities.
The other is that, by owning oil and being direct participants in these trades, the banks get to qualify as commercial traders. Qualifying as commercial traders of the goods, of oil, allows them to slip into an even further and less regulated category of trader. They lose the nomenclature of speculator if they are commercial traders in the good, even if their trades are not intended to be physical trades but rather to be, well, speculative trades just to make money.
So there's a lot of really fundamental shifts in the nature of how crude oil is produced, is traded, is controlled that I think few people would be able to say that they can predict what the outcome of these changes are with our largest investment banks morphing into oil companies, orchestrating the platforms on which the oil is traded. Of course, oil companies and banks have a long history of interrelationship, of overlapping boards, of very similar, oftentimes political agendas, but this is a whole new terrain altogether, with the banks actually morphing into oil companies themselves.
GROSS: Now, you say in your book that the problem isn't just that we're paying a lot for gasoline, but that we as Americans aren't reaping the benefits of those prices to support alternative, greener modes of travel and other, you know, greener energy alternatives. So, I mean, are we supposed to be benefiting from those profits? These are private industries we're talking about.
Ms. JUHASZ: Well, what I argue in the book is that, one, the price of oil actually is not too high. I also argued that the price of gasoline is, in fact, not too high. The problem is that, one, we have allowed the price to increase so utterly rapidly, with such volatility that we haven't had the opportunity to make the appropriate transition, in either the U.S. economy or the global economy, to alternative modes of travel and alternative fuels, so that our economy was ready for this rapid run-up in price and this rapid change in price both in oil and in gasoline.
Also, we are not reaping the benefits, as you say in your question. So, for example, in Europe, gasoline is much higher, but it is - the price is much higher because it is taxed, and that tax is then used to make government investments in things like a far more sophisticated, far more available, far more affordable public transportation system.
Now, what I think is not that Exxon Mobil should be making direct investments in public transit. Rather, I think the U.S. government needs to be taxing Exxon both on its profits, both on its activities; we also need to be taxing its gasoline such that we can reap the benefits of the higher price through reinvestment of that tax into public transit, into alternative energy, into all the things we need to do so that we can transition more quickly, more affordably, more universally affordably away from oil as our primary mode of transportation, our primary fossil resource.
GROSS: In return for access to drill oil or gas on public lands, oil companies are supposed to pay the American people a royalty, but you say oil companies have been escaping many of those fees, especially since the Interior Department crippled the royalty collection system in 2006. What are you referring to there?
Ms. JUHASZ: Well, the - first there is simply a broad problem, which is that the Bush administration, one of the many things that it's done on behalf of the U.S. oil industry is to dramatically reduce enforcement of our existing laws. And one of those areas of enforcement that has been dramatically weakened is the enforcement of collecting of royalty fees. So if we allow oil companies to drill on public land, we allow them to drill on publicly-owned offshore waters, the companies are supposed to pay back a set royalty fee to the American public for the right to drill on our land and off our shores.
A loophole was slipped into a number of offshore drilling leases during the Clinton administration where no royalties were to be paid on those leases until oil reached a certain amount. At this time, it was - this was when the price of oil was much lower, so that the price was $34 a barrel, where the royalty fees were supposed to kick in. Essentially, that clause, the $34 clause, was left out of a number of offshore oil leases signed with major oil companies.
The glitch was discovered during the Bush administration but essentially allowed to go unrepaired. Future leases were fixed, but the existing leases were not, and when oil started topping 40, 60, 100 dollars a barrel is when the Congress and the American public started taking note. There has been a great deal of public attention at this point paid to these particular leases. And I think this problem is going to be addressed for those leases.
The broader problem, however, has been an overall lack of enforcement in collecting these fees and requiring these fees. And as the Bush administration has moved forward in granting, for example, access to shale production in the midwest United States, new leases granted with new free clauses, the leases given out for free. We are increasingly and continually subsidizing this industry, giving it freebies, giving it free access to our land, not requiring the payment of royalties, not requiring the payment of adequate taxation, such that the most profitable industry in the history of the world is still not even, I think, paying its due share right here for the resources that we are giving it in the United States.
GROSS: What would you say are the goals of big oil in the United States now? What do the oil companies ideally want?
Ms. JUHASZ: I think Sarah Palin has done the best job in summarizing what it is that the US oil industry wants in the United States, and that's to drill, baby, drill. The US oil industry wants as much access to as much oil within the United States as it can get. It wants the same thing throughout the world, access to as much oil as it can get, for one very simple reason. All of the hype aside that the oil industry wants us to believe, that they've seen the future and know that the world is running out of oil, they believe very strongly that they will and can remain oil companies well into the future. And the only way that they can achieve that goal, which is their goal, is to get their hands on every last drop of oil on the planet, and I would say, from their perspective, regardless of the environmental, the economic, the political, or the social cause of doing so.
GROSS: Sarah Palin keeps pointing out that we have oil reserves. We need more oil. We should drill. What's your objection to that?
Ms. JUHASZ: There are a number of problems with the drill here, drill now mantra. One of the problems is that we have been drilling here and drilling now. We are a massive producer of oil in the United States, one of the largest in the world. We have been producing enormous sums of oil in the United States.
But we've also been doing a couple other things. One is that the largest oil producers in the United States are, of course, the world's largest oil corporations, or among the world's largest oil corporations, and they operate on a world market. So while we have been increasing production in the United States, oil companies have also been increasing the export of their oil. So drilling here, drilling now in no way guarantees what Governor Palin promises us, as Senator McCain says, increased energy security in the United States means that oil drilled here would somehow stay here and protect our markets because that oil gets exported.
The other problem is that, as we have been drilling here and drilling now, oil companies have been hoarding that oil. U.S. stocks of oil have been increasing at the same time as the price of oil and the price of gasoline have been increasing. The oil companies have simply been choosing to refine less of that oil into gasoline so that they can keep the price high.
So drilling here, drilling now might lead to more oil being exported; it might lead to more oil being held in storage tanks in the United States, but it doesn't mean anything about increasing U.S. oil security, or I think, more importantly, what the promises are meant to make us believe, is that it would reduce the price of gasoline in the United States because that all depends on if the oil companies are going to favor us with more gasoline and lower prices. And today, that has certainly not been what the oil companies have been giving us. They have, rather, chosen to hold on to their profits, hold on to their oil, and keep the price of gasoline high.
GROSS: What I often hear people saying about, you know, drill here, drill now, drill, baby, drill is that, even if we did drilling, more drilling, it wouldn't significantly add to the amount of oil that we'd have access to. We'd still be dependent on foreign sources. Do you agree with that?
Ms. JUHASZ: Yes, the United States still gets the majority of its oil from abroad. Drill here, drill now implies that we would get oil right away from drilling, and, of course, the Bush administration itself has found that drilling offshore won't likely yield any significant amounts of new oil into the United States for about 10 years.
Also, very importantly, on a point that Governor Palin makes repeatedly, that we can have clean offshore drilling, it's very important to note that drilling at depths of greater than 500 feet, which is where more and more of the offshore drilling is moving, releases methane, which is a greenhouse gas 20 times more intensive than CO2. Meaning that it would contribute significantly greater to climate change, a phenomena that even Governor Palin admits is real.
So, the idea that we could have clean offshore drilling, and let's forget the pollution that's created simply by the act of the offshore drilling; let's forget the pollution that's created when offshore drilling rigs and pipes are ripped out of the ground when storms come through the Gulf; let's forget the harm caused to marine species and marine wildlife by the presence of the rigs. Simply the drilling itself is far more likely to increase the dramatic impacts of climate change and really, I believe, is something that we should be seriously questioning whether we want to pursue, given the state of the climate today.
GROSS: If you're just joining us, my guest is Antonia Juhasz. And her new book is called "The Tyranny of Oil."
Let's look at Iraq for a moment. The Iraqi congress has been trying to come up with legislation about how to handle the new Iraqi oil industry, the post American invasion Iraqi oil industry. And there was a draft legislation, but it hasn't passed. What do the American oil companies want out of this? What outcome would they like to see?
Ms. JUHASZ: It was very clear very early on that the plans for the invasion of Iraq would include a massive restructuring of the Iraqi oil system, to change Iraq from its current nationalized model, which is the model that most of the world uses, into a privatized model, where, essentially, large portions of Iraq's oil would be opened up to private oil companies. And the mechanism for doing this would be to get the Iraqis to pass a new law, the Iraq Oil Law, which would essentially turn over much of Iraq's oil to the private oil sector.
And the oil companies helped draft a model of what would become this new oil law, granting oil companies up to 35-year contracts for all but owning the oil under the ground, being able to make production decisions about the oil, really controlling the oil under the ground in Iraq. And this has been an objective of the Bush administration, an objective of the oil companies since before the invasion began. However, it's an objective that has been unsuccessful.
It's an objective, like many others in Iraq, that has been stymied through resistance in Iraq, resistance in Iraq's government, and popular resistance both among Iraq's people but also in people in Europe and in the United States who have not wanted to see their militaries used to advance the interest of the oil industry. And this is an example of an ongoing struggle on the part of the Bush administration and U.S. oil companies to, quote unquote, "win the war in Iraq" by getting Iraq to turn over its oil, but an objective that has, I think, successfully been stymied by popular resistance.
GROSS: But I thought one of the goals, as stated by the Bush administration when we invaded Iraq, was to make sure that the oil industry got rebuilt and that the profits from the industry went back to the Iraqi people and also helped to pay for the costs of the war.
Ms. JUHASZ: This was supposed to be one of the ways that the war was going to be funded, was that the Iraqi oil industry would get going right away. Now, it was always the plan, from the perspective of the Bush administration, that US oil companies would be part of that restructuring. US oil executives were on the ground immediately following the invasion, essentially all but taking over the oil industry in day-to-day practice in Iraq, trying to get things up and running. And, in fact, I would argue, fairly successfully did.
It wasn't too long after the invasion that oil production in Iraq began to fairly steadily meet pre-war levels, where it has stayed to this day. And, in fact, Iraq is now exporting even more oil than it was exporting before the war. But the Bush objective was that both the Iraqis would be capturing that wealth and using it for reconstruction but so, too, would the oil industry. And the oil industry would, in fact, even be gaining - US oil industry, a greater and greater hold over the oil. It has slowly come to pass that that production is yielding more and more money for the Iraqis. It has not come to pass that US oil companies have gotten the foothold that they have desired.
GROSS: Antonia Juhasz, thank you so much for talking with us.
Ms. JUHASZ: Thank you so much for having me. It was a pleasure.
GROSS: Antonia Juhasz is the author of "The Tyranny of Oil." She's a fellow with Oil Change International and the Institute for Policy Studies. You can read an excerpt of "The Tyranny of Oil" on our website, freshair.npr.org.
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