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Commentary By Max Schulz

Pumping Fact & Fiction

The run-up in gasoline prices to $3 per gallon has coupled with ExxonMobil’s quarterly profit announcement to touch off a nationwide frenzy. Nowhere has the reaction been more hysterical than on Capitol Hill and among the news media. Calls for punitive taxation, prosecution of everyone from oil executives to filling station owners, and even the breakup of industry titans have dominated the headlines. Rooted in economic misinformation, these calls by politicians and the press have been like pouring, well, gasoline on a fire.

In an effort to dampen the flames, it would help to look a little closer at the major myths dominating the gasoline price debate and to separate fact from fiction.

Fiction: The major oil companies and their profits are the cause of high gasoline prices The headline in the Dayton Daily News after ExxonMobil posted first-quarter profits of $8.4 billion perfectly captures the tenor of most coverage of this issue: “Gas Prices=Exxon Profits.”

Fact: This has it somewhat backward. Profitable companies like Exxon and Chevron are not the reason for high prices; they are the beneficiary of high prices. Oil prices, that is. Gasoline prices have spiked because the price of crude oil on the world market has spiked. It averaged $28 per barrel in 2003. Today it is near $75 per barrel. That price is dictated largely by supply and demand. Demand is growing in China, India, and the U.S. Global production is having a hard time keeping up.

The oil companies in today’s crosshairs are in no position to dictate world oil prices. Compared to government-owned oil companies like Saudi Aramco, “Big Oil” are small players. As the American Petroleum Institute’s Red Caveney said, “Nearly 80 percent of the world’s reserves are owned by these national oil companies and a mere 6 percent are controlled by investor-owned companies.” Exxon and Chevron are big. But the industry in which they operate is truly gargantuan.

Fiction: The Bush administration is responsible for high gasoline prices. “We have two oilmen in the White House,” said House Minority Leader Nancy Pelosi. “The logical follow-up from that is $3-a-gallon gasoline. There is no accident. It is a cause and effect.”

Fact: Yes, gasoline prices have increased during the Bush presidency, but not because of it. The rise is a function of climbing global oil prices. Economic growth in the developing world is not the president’s (nor anyone’s) fault; indeed, it is a positive thing. Bush may be “to blame” in just one way: U.S. demand for oil was dampened by a recession he inherited. The economy is doing better now under his watch. Ergo, demand is up. So sue him.

Fiction: Oil-industry profits are out of line. Bill O’Reilly calls them “unconscionable.” Sen. Carl Levin deems them “absolutely obscene.”

Fact: Oil majors’ profits are indeed huge, but that is because the global oil industry is so giant. Exxon’s $8.4 billion profits came on $89 billion in revenue. A profit margin of less than 10 percent is middle-of-the-pack for major industries. Banks make an average of 18 cents per dollar of sales.

What is obscene might be federal and state governments’ take in taxes. According to the Tax Foundation, since 1977 governments have collected “more than $1.34 trillion, after adjusting for inflation, in gasoline tax revenues—more than twice the amount of domestic profits earned by major U.S. oil companies during the same period.”

Fiction: Big Oil was gifted with billions in dollars in undeserved tax breaks in the 2005 Energy Policy Act.

Fact: As the chief executives of the major oil companies explained during their congressional inquisition last fall, they never lobbied for the tax breaks in the bill and didn’t want them. It turns out that the breaks were designed to help small, independent petroleum producers and wildcatters—in other words, “Little Oil.”

Fiction: ANWR isn’t worth it. According to House Minority Whip Steny Hoyer, drilling in ANWR “will produce no oil for a decade and do nothing to end our addiction to oil.”

Fact: Yes, it may take a decade for ANWR oil production to get going. But keep in mind that President Clinton’s veto of ANWR in 1995 was upheld thanks to Hoyer and his colleagues. Had that veto been overridden, we could now be seeing an additional one million barrels of oil a day flow into a world market with virtually no excess capacity. Those million barrels would help ease prices.

This piece originally appeared in National Review Online

This piece originally appeared in National Review Online