Who's Really to Blame for Pain at the Pump?

If you ask most people why oil prices are so high, their responses revolve around two distinct theories:

  • A greedy “Big Oil” cabal is driving prices to excessive levels through devious strategies of market manipulation. However, a host of investigations has yet to find any convincing culprits.
  • Prices would drop if only U.S. oil reserves were extracted faster. This is a common belief even though decades of experience have shown no correlation whatever between U.S. oil production (now at an eight-year high) and oil prices. U.S. oil production is the highest it's been in years -- but gas prices are still going up and it would take years before we'd see a drop from new drilling. What’s more, changes in U.S. oil production represent far too small a fraction of global supply to shift prices here or anywhere else, no matter how much of America’s territory is opened to drilling.

The “price manipulation” and “drill, baby, drill” fables ignore the realities of a world oil market dominated by entities of which most Americans are only dimly aware: giant monopolies controlled by unfriendly nations that “control nearly 90 percent of the world’s oil and reserves and . . . 73 percent of actual production,” according to David Victor, professor at the University of California’s School of International Relations and Pacific Studies and director of the School’s new Laboratory on International Law and Regulation.   

Three of the biggest monopolies are Aramco, NIOC and PDVSA, and although their names are mysterious, the countries that control them are better known: Saudi Arabia, Iran and Venezuela, respectively. If you want to know who profits the most from high oil prices, look no further than these three nations.

No matter how much anger or anguish there is in the United States over painfully high oil prices, it has little impact on those countries. America’s best strategy is to make sure we need -- and use -- less of the valuable commodity they mostly control, which is also why redoubled attention to fuel economy and sustainably produced biofuels is so important here at home.

Cutting our oil dependence matters for another widely unappreciated reason, which Professor Victor underscores in the conclusion of a recent assessment of oil markets. As he puts it, the fastest way to bring down prices is to “change expectations about the future value of oil.”

Oil markets today are gripped by fears of short-term supply disruption in the Middle East and long-term demand surges in developing economies like China and India. Implicit in these widely held perceptions is the assumption that the future will look pretty much like the past, except that more people and vehicles will need ever-increasing doses of oil. But what if efficiency improvements and biofuels accelerate to drive down global oil use, making a dirty and dangerous commodity increasingly irrelevant? Concrete progress there is the best possible way to disrupt the market’s expectations and push oil prices lower.

The U.S. is making an important start with a mix of fuel economy standards, biofuels procurement and extensive research and development. Our nation is now closest we've been in almost 20 years to achieving energy independence. For the first time in 13 years, America is importing less than half of the oil our nation uses, and domestic oil output is the highest in eight years. Our oil consumption in 2011 was down by almost thirteen percent from its 2005 peak; we’re now using about the same amount of oil as we did in 1973 while supporting an economy almost three times as large.

Oil still matters to the welfare of America and Americans, of course, but it is steadily becoming less important. Accelerating this trend is the very best antidote to pain at the pump. The search for villains within our own country, and all the accompanying political gamesmanship, will only result in a continuing false sense of dependence on oil and prop up its value. And who will profit the most from that?

That’s right – those very same distant monopolies in hostile places that don’t care how much pain Americans feel when they gas up their cars, fill their oil heating tanks or are forced to pay more of their hard-earned dollars for necessities like food and clothing due to ever-increasing oil prices.