Against the Laws

Oil Price Off the Rails

By Richard Martin, 5-02-08

The convergence of record high gas prices ($3.60 a gallon average across the U.S.), a presidential campaign, obscenely high earnings reports from Big Oil, and the prospect of $4 gas during the summer driving season has led to some rampant silliness, including the proposed “gas-tax holiday” being backed by candidates Hillary Clinton and John McCain. Congress plans to get into the act, pledging to bring forth legislation to offer low-income Americans relief from high prices at the pump – legislation that President Bush will almost certainly veto.

The price surge is also leading to an alarming question: has the oil industry jumped the rails of basic economic laws?

According to economics, soaring prices would, in normal times, lead to increased output of oil, reduced demand and a subsequent reduction (or at least a flattening) in prices. Indeed, in a little-noted development, U.S. demand for gas has actually slackened: “Gasoline consumption has been declining for at least six months,” reports the federal Energy Information Administration.

But prices haven’t followed suit. “According to normal economic theory, and the history of oil, rising prices have two major effects,” Fatih Birol, the chief economist at the International Energy Agency in Paris, tells The New York Times. “They reduce demand and they induce oil supplies. Not this time.”

In part, that’s because non-OPEC alternative producers, such as Mexico, Russia, and Norway, are not increasing supplies despite the clear economic incentives.

In fact, gas prices in this country could actually be higher, if not for what Geoffrey Styles, on his “Energy Outlook” blog, calls “unusual doldrums” in oil refining margins – in other words, U.S. refineries are making less profit than they normally would, in part because of the slower demand mentioned above.

The other effect of record gas prices and oil-company margins you might hope for is increased investment, from all those extra billions laying around, in alternative energy sources. Again, not so fast. Royal Dutch Shell, which this week reported a 25-percent jump in first-quarter earnings, just announced its exiting the $4 billion “London Array,” slated to be one of the world’s largest wind farms. Shell has recently curtailed its solar investments, in favor of more resources going into developing oil sands in Canada and shale oil deposits on the Western Slope.

In other energy news:

-- Finding itself squeezed between protecting the environment and protecting consumers, Xcel Energy is discovering opposition to its plans to begin exiting the coal generation business. “Citing a likely surge in natural-gas prices, the Colorado Office of Consumer Counsel said Tuesday that Xcel Energy should defer plans to close two coal-fired plants and replace the generation with natural-gas- fired power,” The Denver Post reports. Trying to meet the requirements of Gov. Bill Ritter’s climate-saving plan, which calls for 20 percent reductions in carbon-dioxide emissions by 2020, Xcel has said it will shutter the Arapahoe Generating Station in Denver and the Cameo Generating Station, near Grand Junction

-- Now that the state Oil and Gas Conservation Commission has promulgated new draft regulations for the energy production industry, Colorado’s Wildlife Commission gets to weigh in on protecting sensitive wildlife areas and honing requirements for post-drilling remediation. “House Bill 1298 requires the oil and gas commission to balance energy development with wildlife conservation and to consult with the wildlife commission on ways to minimize the affect of development on wildlife,” reports the Grand Junction Sentinel. The Wildlife Commission this week sent a resolution to the O&G agency.

-- Bowing to demands from the oil and gas industry, the Colorado Department of Natural Resources “has agreed to study the economic ramifications of the state’s ongoing overhaul of its oil and gas regulations,” the Sentinel reports. Republican lawmakers have pressured the state to come up with some data that will explain the possible consequences of new, tighter regulations on drilling permits and procedures in the Western Slopes ongoing energy boom.

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