Episode 580: The Other Side Of The Pump : Planet Money Gas prices have been falling since early summer, but not everyone is happy about it. Today, stories about the people who get the oil out of the ground.
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Episode 580: The Other Side Of The Pump

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Episode 580: The Other Side Of The Pump

Episode 580: The Other Side Of The Pump

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  • Transcript

DAVID KESTENBAUM, HOST:

If you drive a car, what I'm about to say is not news for you - you can get a gallon of gas in this country for less than $3 right now. The price has been falling since early summer. Local TV news reporters are out at gas stations asking people, how happy do you feel? Today on the show, we have two stories from the other side of the pump, stories about the people who get the oil out of the ground. We meet a producer who you just never, ever hear from. And we tell the story of an organization so powerful it ruled the global economy - or at least people thought it did.

(SOUNDBITE OF SONG, "I'M NOT PART OF ME")

CLOUD NOTHINGS: (Singing) It starts right now, there's a way I was before. But I can't recall how I was those days anymore. I'm learning how.

KESTENBAUM: First up, the producer you never hear from. So if you look up a list of the world's largest oil companies, here's what you'll find. Number one, Saudi Aramco; number two, Gazprom, Russia; number three, National Iranian Oil Company; number four, ExxonMobil. The list goes on. But you'd have to go a long way down to find Jason Bruns. He lives here in the United States in a state not exactly known for oil - Kansas. I reached him by phone at his office. The connection wasn't very good.

JASON BRUNS: I'm out on Oil Field Road and they never have had great phone lines out here.

KESTENBAUM: It's called Oil Field Road?

BRUNS: Yeah. Yeah.

KESTENBAUM: How many oil wells do you own?

BRUNS: Oh, let's see, two, four, six - 10.

KESTENBAUM: The first well he got from his grandpa. It's called the Markley, probably after the farmer who originally owned the land. They all have names like that - the Horsch, the McCutchen, the Hackler. They look like those oil wells you may have seen in old photos, a giant seesaw going up and down. Some of these are over 50 years old now. They're not gushers, not anymore. Take that one his grandpa gave him.

BRUNS: Oh, just about two barrels a day.

KESTENBAUM: Two barrels a day?

BRUNS: Yeah.

KESTENBAUM: Just to compare, like, Saudi Arabia gets 10 million barrels a day.

BRUNS: Right. Right.

KESTENBAUM: So you're smaller.

BRUNS: Oh, a little bit smaller, I'd say (laughter).

KESTENBAUM: Think a kitchen faucet that's barely turned on, about a teacup of oil a minute. These wells are called stripper wells, and there are hundreds of thousands of them in the United States, old wells long past their initial rush but still producing.

BRUNS: No, they produce wells in Kansas that only make a barrel or a half a barrel a day, some of them.

KESTENBAUM: Some stripper wells are owned by good-sized companies and some by guys like Jason. If you're Saudi Arabia and the price of oil drops, you've got options. You can decide to pump less, to try to push the price of oil up. Jason can't do that. The global oil market doesn't care if he takes one of his two-barrel-a-day wells offline. Jason is what economists call a price taker, not a price maker. There's another way he could cope with lower prices. He could decide to store the oil and hold it, hoping the price goes up again. Some larger producers can do that, but Jason says it doesn't really make sense for him. The oil comes out of the ground, it goes into this small tank. When it's full, some guy in a truck picks it up. Besides, he needs the money. He spent a bunch to get these wells. They require maintenance and upkeep. After expenses, the wells altogether can earn him $40,000 a year.

BRUNS: That's what feeds my family (laughter). That's my job. I - that's what I do. We produce oil.

KESTENBAUM: If you're on Jason's side of the oil market, it's like everything's backwards. He's seeing everything from the other side. His neighbors stop at the gas station, fill up their car, and they're happy the price of gas has dropped. Sometimes they bring it up at church.

BRUNS: I've had people thank the Lord that the - for the price of gas has gone down. And - but, you know, then the pastor always looks at me me and kind of grins because he knows what I'm thinking (laughter). So that's just the truth of it. But hey, you know, we love them, God love them, and we'll see what the price does.

KESTENBAUM: When Jason goes to the gas station and sees that sign showing the price for a gallon, that number is a reminder that his livelihood is dependent on huge global forces - demand for oil in Europe and China, the decisions of sheikhs in the Middle East. So when he fills up his tank and the price of a gallon has dropped below $3, he gets an uneasy feeling.

BRUNS: I usually know before it's going to drop, but how I feel is - I don't feel good about it. That's the answer to your question, in short.

KESTENBAUM: Do you feel a little bit good because at least filling up your tank, it's going to cost you a little less?

BRUNS: Maybe a little (laughter). But I really had to search hard to find that little (laughter).

KESTENBAUM: After we talked, the price of oil dropped again.

(SOUNDBITE OF SONG, "I'M NOT PART OF ME")

CLOUD NOTHINGS: (Singing) I'm not telling you all I'm going through. I'm not telling you all I'm going through. I feel fine...

KESTENBAUM: Jason is probably the smallest oil producer there is. He has no control over the price of oil. But there is an organization whose purpose really is to control the price of oil - OPEC, the Organization of Petroleum Countries. Why is OPEC letting the price of oil get so low? This is an organization, remember, that for years had the power to strike fear into the hearts of American presidents, create shortages, huge lines at gas stations here. And news stories, news stories destined to be replayed years later, like this one from 1974. If you've been listening to NPR for a while, I'll tell you the people here. You're going hear Susan Stamberg at the very beginning, and the reporter is Ira Flatow, who went on to be the host of Science Friday.

(SOUNDBITE OF ARCHIVED BROADCAST)

SUSAN STAMBERG, BYLINE: Meanwhile, the lines continue at the gasoline stations.

IRA FLATOW, BYLINE: How long have you been waiting in line?

UNIDENTIFIED MAN: About five minutes. I just cut in front of a whole bunch of people.

UNIDENTIFIED WOMAN #1: Did that guy behind you tell you that he cut into the line? Twice I got out and talked to him. And he's just so obnoxious. He's so blatant about it. You know, there are people waiting two blocks down M Street for this line, but he couldn't go around the block and start over.

FLATOW: You're around the block and you're not even in sight of the gas station yet. How does that make you feel?

UNIDENTIFIED WOMAN #2: Well, there's really not too much I can do about it at this stage of the game. It's an unfortunate situation, I think. I mean, you need gas. I mean, this monster has to have gas to run.

KESTENBAUM: What was going on was that some of the OPEC countries were upset at the U.S. for supporting Israel. So they issued

KESTENBAUM: an embargo saying, United States, we're not going to sell oil to you. Also, we're going to start cutting production, drilling a little less oil. Jeff Colgan has studied OPEC's history. He's at the Watson Institute at Brown University.

How high up did prices go?

JEFF COLGAN: At the beginning of 1973, the world price of oil was something around a $1.70 a barrel. And by the end of the year, it was $12.50 a barrel. So something like a five-fold increase by the end of the year.

KESTENBAUM: Wow.

COLGAN: A big, big change.

KESTENBAUM: We'd never seen oil prices like that.

COLGAN: That's right. For 20 years prior to 1973, oil prices had been not only low but very stable. So it was a real shock to the West to experience an embargo like that.

KESTENBAUM: It became known as the Oil Weapon, and it terrified the Western world. Here was this all-powerful cartel that, with the equivalent of a little press release, had caused this massive disruption. Little historical side note here - where did the cartel learn its tricks? From us. Dan Yergin wrote about this in his book, "The Prize." In the early oil days, he says, in the 1930s, producers here in the United States were trying to find a way to keep oil prices up because there was this glut. People were drilling wells in east Texas and finding oil everywhere.

DAN YERGIN: The oil price, it had dropped so low it was like 10 cents a barrel. And if you pulled into a gasoline station, as a premium in the 1930s, they would give you a chicken or something like that to try and lure you to buy gasoline. And so the Texas...

KESTENBAUM: ...A chicken? A chicken?

YERGIN: Yeah, a chicken. That was the premium that you got. It was not, you know, like, a coaster or a cup or something. You got a chicken.

KESTENBAUM: The state of Texas, with the help of the U.S. government, stepped in and gave an organization called the Texas Railroad Commission the authority to set limits for how much oil people were allowed to produce. It worked - kept the price up.

YERGIN: One of the founders of OPEC had studied in the United States and had really studied the Texas Railroad Commission. And that's kind of the model that they had in their head when they set up OPEC.

KESTENBAUM: OPEC gets started in the 1960s, and it's all the big players in the Middle East. Collectively, they control an enormous amount of oil. And they start agreeing to actual quotas - Saudi Arabia will produce only this many barrels, Iran will produce that many. OPEC seemed unstoppable. So what is going on today with falling oil prices?

Well, there is a hard economic truth about cartels - they are very, very difficult to keep together because they're this odd situation. Collectively, everyone is better off if they stick together, but its hard to get everyone to stick together because there's also this incentive to cheat. Imagine you're, say, Algeria. You agree, along with everyone else, not to produce more than a certain amount of oil, but then you go home and you figure, well, let's let everyone else keep their promise. That'll keep the price up, and we'll pump a little more.

Jeff Colgan has gone back and studied OPEC's track record over the years to try to figure out how much cheating was going on. He looked at the oil quotas that OPEC members had agreed to, how much they said they would produce, and then he compared that to what they actually produced. I asked how we knew what they actually produced and he said, oh, the U.S. government puts out numbers. You can count oil tankers on the open ocean. What Jeff found is that over the years, there has been pretty constant cheating at OPEC, countries producing more than they said they would.

COLGAN: It varies from month to month, how much they're cheating. On average, it's around 1.8 million barrels a day, which is about the total amount of oil production from Libya prior to Gadhafi's fall.

KESTENBAUM: That doesn't help me (laughter).

COLGAN: OK, so, like, a medium-sized producer. And it's about, say, 10 percent of their total.

KESTENBAUM: Some people have argued, OK, so there's cheating. That doesn't mean the cartel is powerless. It's possible OPEC is acting kind of like a speed limit sign. You know, you put up a 25-mile-per-hour sign and lots of people cheat. They drive a bit faster. But still, it keeps the average speed down. Jeff doesn't buy this. He says from everything he sees, OPEC is a pretty lousy cartel. Maybe at one point they were united, but these days they seem like very different countries with very different motivations.

COLGAN: The main problem that OPEC faces is its internal cohesiveness - right? - that the members themselves don't have the political will to agree with each other. And it's not surprising when you look at - you know, Iraq and Iran fought a major war with each other. Saudi Arabia and Iran are - have a big religious divide. One's Sunni, one's Shia. And then Venezuela is often on its own. So while there was kind of an esprit de corps in the early years, that common bond has disappeared.

KESTENBAUM: The common bond has disappeared, and so has a common vision of what the price of oil should be. Dan Yergin, the author, says some OPEC countries want the price of oil to go up. Others may want it to go down. Venezuela, for instance, is right in the middle of a big budget crisis. It would probably like higher oil prices. Saudi Arabia, on the other hand, may not want a higher price. Higher prices encourage competitors to get into the oil drilling business, competitors who are not members of OPEC, like the United States.

YERGIN: The most important reason the price is down is because of this astonishing increase in U.S. oil production. Back in 2008, we were going to run out of oil. Since then, U.S. oil production has increased by 80 percent.

KESTENBAUM: The United States, he points out, is in the middle of a big oil boom. We're on our way to being the number one oil-producing country in the world, bigger even than Saudi Arabia.

(SOUNDBITE OF SONG, "I'M NOT PART OF ME")

CLOUD NOTHINGS: (Singing) It's over now, there's a way I was before.

KESTENBAUM: Dan Yergin's latest book is "The Quest: Energy, Security And The Remaking Of The Modern World." He's also vice chairman at IHS. Special thanks to Jess Jiang, who produced today's show. Send us email, planetmoney@npr.org. I'm David Kestenbaum. Thanks for listening.

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