New view on oil

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The recent exchange between Ted Vaill and Lester Saft reminds me of blind men describing the elephant. There is truth in both positions, but they miss the true cause. Ted is right that speculators are driving up the price we pay at the pump but he misses why this can happen.

Lester is correct that oil comes from a cabal of tyrants and the resulting instability creates a premium on future oil prices.

Both miss the point. Here’s why.

Since the early 1970s environmentalists have halted new oil refineries (and nuclear power plants) in the United States. Initially the impact was negligible since there was still considerable excess capacity in refining and many small oil companies competed in the marketplace. By the mid-eighties, big oil realized that these limitations on refining capacity reduced downward competitive pressure on prices. OPEC, the type of cartel outlawed under United States antitrust law, tried its best to limit supply and therefore competition, but “cheating” on quotas caused prices to fluctuate and further discouraged domestic production.

Today there are still no new refineries in the United States and essentially new drilling is banned. Because refineries here are running at full capacity and world production has been effectively limited by OPEC, there is no downward pressure on prices.

Thus oil companies can charge monopoly prices and offer every opportunity for speculators to manipulate prices and ravage the American economy. Politicians of both parties talk about change but lack the commitment to develop the new technology needed, which would result in the United States achieving technological leadership and ridding ourselves of oil imports and the terrorist those payments support.

Scott Dittrich