Probe into gas gouging may educate Americans about pressures on oil supply

Madison, Wis. -- I can't say whether Big Oil, the mom-and-pop gas station on Main Street or an unholy combination gouged consumers in the aftermath of Hurricane Katrina, but I'm looking forward to the Federal Trade Commission investigation that proposes to find out.

My enthusiasm is only partially based on what the commission may learn about illegal price increases. Mostly, I'm looking forward to what the probe might teach Americans about supply-and-demand economics and the energy-hungry world in which we live.

Responding to pressure from attorneys general in five Midwestern states, including Wisconsin, the FTC said last week it will "scrutinize whether unlawful conduct affecting refinery capacity or other forms of illegal behavior have provided a foundation for price manipulation." While everyone understands Katrina whacked the U.S. oil coast and played havoc with refineries and distributors, the attorneys general are paid to be suspicious - and they suspect prices rose faster and higher than necessary.

They may be right, but hurricanes in Louisiana are really the least of our long-term troubles when it comes to oil. The bigger storm lies within the market itself.

For a mix of supply and demand reasons that range from China's booming economy to strained refinery capacity at home, consumers in the United States must assume high gasoline prices are permanent. The price of oil has tripled since September 2001, hovering around $65 per barrel today, and much of that increase appears to be here to stay. Check out www.Oil-price.net, for example, and you'll read that crude oil price will hit $92.50 per barrel in January 2006 "if the ongoing trend persists." Most analysts believe the trend will stick. Christopher Edmonds, director of research for Pritchard Capital Partners, was predicting a perfect storm of energy troubles even before Katrina and Rita hit. Here are factors often listed by Edmonds and others who track energy markets.

• The economic recovery is still under way, so demand is naturally up after a slack period tied to the economic recession.

• China and India are becoming big users of oil. Growing economies in both countries has sharply accelerated demand, putting pressures on prices as competition for oil grows. By 2025, some predict, China alone will be using as much oil as the rest of the world uses today.

• Production is meeting demand - but only barely. Global consumption is averaging 83 million barrels per day, which is within 1 percentage point of the world's production and refining capacity.

• The world is paying "a terror premium." That trend began with the Sept. 11, 2001, attacks on the United States and has continued through the Iraq war.

• Many oil-producing nations are subject to supply interruptions. Iraq, Iran, Nigeria, Russia and Venezuela are prone to political unrest, labor strikes or government clampdowns.

• There have been no major crude oil discoveries in more than a decade. Also, it's increasingly difficult to drill in areas where reserves are known to exist. Oil that lies within Alaska's Arctic National Wildlife Refuge could be safely pumped with the help of the latest technologies, but U.S. politicians won't stand up to environmentalists who have dramatically overstated the risk. Canada's Athabasca tar sands could be refined at some point, but only if prices remain high enough to justify the investment.

• Until Katrina changed the picture, President Bush was stockpiling oil. The federal government's Strategic Oil Reserves had swelled to nearly 700 million barrels, which is enough to meet the nation's complete needs for about five weeks at today's consumption rates. To fill the reserves, government purchases were competing with private reserves.

Finally, the hurricanes have driven home the need to invest in oil production, refining and transportation infrastructure. Edmonds said the worldwide bill for such investments is $568 billion per year between now and 2030 - and that was before Katrina and Rita.

Maybe the attorneys general are right, and they can all look like Eliot Spitzer. But I'm betting the bigger culprits are two characters named "supply" and "demand."


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