Taxing, Suing Big Oil Won’t Reduce Gasoline Prices

Published May 20, 2011

The Obama administration and its congressional enablers have announced two main strategies to curb rising gasoline prices in this country: “Tax, baby, tax” and “Sue, baby, sue.” Both are likely to result in higher, not lower, prices at the pump.

Raising taxes on Big Oil obviously won’t lower gas prices. Senate Majority Leader Harry Reid (D-Nevada) wants the Senate to vote soon to repeal federal laws giving oil companies about $21 billion in tax breaks. He has not explained how taking more money from oil companies will reduce gasoline prices. Perhaps because it won’t. It may look like a way of punishing oil companies, but all the additional tax money will ultimately have to come from ordinary people who buy gas at the pump.

The “Sue, baby, sue” strategy is more sinister, though it too is unlikely to reduce gasoline prices.

The president blames “speculators” who he says may be involved in “fraud and manipulation” in oil and gas markets. He recently formed the Oil and Gas Price Fraud Working Group within the U.S. Department of Justice, headed by Attorney General Eric Holder, to detect federal law violations.

This is an outstanding sound bite obviously intended to fuel the illusion the administration is doing something. But it is nothing new and thus essentially meaningless. The Federal Trade Commission (FTC) has been dedicated to detection of “fraud and manipulation” in the oil and gas markets for years. The task force adds nothing and in fact substantially detracts from the FTC’s existing efforts.

Adam Sieminski, chief energy economist in commodities research at Deutsche Bank AG, recently discussed rising gasoline prices at a conference held in Washington by the federal Energy Information Administration. Sieminski noted gasoline and oil markets are global, which raises the threshold question of whether U.S. prosecutors can do anything about any violations of U.S. law they might uncover.

For example, OPEC countries are widely considered to be violating U.S. antitrust laws when they conspire to suppress oil supplies and thus essentially fix prices. Some legal analysts, including Independence Institute research director David Kopel, argue OPEC can be sued for violating U.S. antitrust laws. But he also notes it’s not worth bothering about, because other measures, such as increasing oil supplies on our own (a policy of “Drill, baby, drill!”), would have a more direct impact on lowering on gas prices.

Second, contrary to what the president suggests, “speculation” is not necessarily a dirty word, nor an illegal activity. A speculator, Sieminski says and most market analysts agree, is someone who invests money in a particular transaction knowing the risks involved are high but hoping for potentially high rewards through higher prices for the commodity involved. Speculators are just investors willing to take higher risks.

Third, the global oil and gasoline markets consist of various segments and are layered and complex. These elements include, Sieminski points out, global exploration, production, refining, distribution, and, ultimately, consumption. Other factors lawfully influencing gasoline prices, he notes, include crude oil characteristics (Libyan oil differs from Saudi oil, for example), global refining capacity, and worldwide demand. Taxes and lawsuits won’t change this.

Fourth, Obama’s claim of “fraud and manipulation” is a serious charge and shouldn’t be made without evidence. Illegal, fraudulent conduct under U.S. marketplace laws usually involves corporate officials making false and misleading statements of fact to the investing public or failing to disclose relevant information to them. Obama has not alleged any such instances, and Holder admits there are perfectly legal reasons why gas prices may be rising.

“Manipulation” is much more subtle and ambiguous. There is no ironclad legal definition of illegal manipulation of markets. It involves otherwise-legal activity—such as buying or selling a particular stock—which is part of an intentional, broader scheme to drive prices higher or lower. Try to delve into traders’ minds and prove that.

It is important to detect “fraud” and “manipulation” in the oil and gas marketplace. That is exactly what the FTC has been doing for many years. The FTC should be left to its important work without any interference from a federal “task force.”

Instead, the president appears to be grandstanding. The mere announcement by the Obama administration that it has convened a federal task force insinuates “fraud and manipulation” in the market is driving higher gasoline prices, with utterly no proof.

Craig Pirrong, a finance professor at the University of Houston who specializes in commodity prices, reminds us of what President Obama told bankers two years ago: “My administration is the only thing standing between you and the pitchforks.” The mob, as Professor Pirrong notes.

The Obama administration’s implied threat of litigation against oil companies cannot have any good effect on gasoline prices. The formation of the task force will simply make oil companies hire even more lawyers than they already have on board. Costs will rise.

What we need is not a federal task force. What we need is: “Drill, baby, drill!”