The Oil-Price Story: A Botched Job
Now that the shouting about oil prices has subsided, the time is right for seriously examining why prices at the gasoline pump rose so sharply this spring. It turns out that the facts support a most undramatic conclusion: Just about everything that could go wrong did - and at the same time.
In the inevitable search for villains, I conclude that there is more than enough blame to go around. That covers Mother Nature as well as the oil companies, the government, and especially us motorists. Politicians in both parties did not help either, as they tried to exploit the issue for political gain.
Nor did journalists experience their finest hour. With few exceptions, they failed to connect the phenomenon of rising oil prices with the specific factors at work. It was much easier to add to public hysteria than to provide solid information on what was happening. In a nutshell, petroleum supply was down when demand was up. As any student of Economics 101 knows, the result was higher prices.
Let us try to translate that bit of economic jargon into specifics. First of all, lower supplies of petroleum came on the market because of a host of factors, mainly natural mishaps. Bad weather, combined with operational delays, reduced production in the North Sea oil fields. Stormy weather also disrupted supplies from Canada, Mexico, and Australia. A fire caused the shutdown of a major Shell Oil facility in California. Simultaneously, operational problems reduced the production of diesel fuel at an ARCO refinery in the same state. Moreover, expected supplies of Iraqi oil did not come on the market because the ultimately successful talks between Iraq and the United Nations temporarily broke down.
All this was compounded by an earlier decision of US oil companies to reduce the amount of working capital invested in inventories. Tough enforcement of EPA rules encouraged minimizing petroleum storage facilities. Moreover, expecting oil prices to drop (when the embargo on Iraq was lifted), the companies did not want to be stuck with a lot of high-priced inventories. At the time, the decision to cut inventories made good economic sense. Hindsight, however, suggests that this action exacerbated the volatility of gasoline prices.
Winter also hit petroleum users hard on the demand side. Bitter cold in the central and eastern United States and Europe depleted inventories of gasoline and crude oil. Moreover, repealing the 55-mile-per-hour speed limit cut fuel economy. Also, motorists are driving more and buying more gas-guzzling sport utility vehicles.
It is hardly surprising that a spurt in demand coupled with a shortfall in supply pushed prices up. What is disappointing is that the public was not reminded that gasoline prices are notoriously volatile - on the downside as well as the upside. Just about a year ago, an upward spurt in prices at the pump made news. Nevertheless, for 1995 as a whole, gasoline prices in real terms hit the lowest point in decades. When we adjust gasoline prices for general inflation (that's what putting the numbers in real terms means), we find that most Americans are paying less for gasoline than they did five or 10 years ago.
The most discouraging aspect of all this has nothing to do with the oil industry. Most fundamentally, what kind of television and newspaper coverage can we expect when a really serious and complicated economic story comes along?
* Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University in St. Louis.