This article first appeared in the St.Louis Beacon: July 23, 2008 - Quotations by starkly different commentators offer starkly different assessments of the common wisdom. "Nobody ever went broke underestimating the intelligence of the American public" is a wry observation by the famously sardonic H.L. Mencken, the pre-eminent American journalist of the early 20th Century.
"The American people are plenty smart people..." was tendered by the least popular president in the history of U.S. polling to explain why further banking regulations were not necessary despite a financial crisis that threatened the collapse of mortgage giants Freddie Mac and Fannie Mae. I'm sure that a wise guy like Mencken would delight in the news that the chief executive with the worst public approval ratings on record is now arguing on behalf of the public's intelligence.
It's certainly not news that we "plenty smart" Americans are paying plenty for a gallon of gasoline -- close to 300 percent more than we did before Bush, Cheney and the Texas oil lobby seized control of the government. Various theories have been advanced to account for this precipitous rise. The most amusing of these are put forth by free market apologists who contend that it's all a matter of supply and demand.
According to this fable, emerging markets in India, China and elsewhere have placed increased demands on the world's finite oil supply. With more competitors vying for each barrel of crude produced, prices can only go up. Increased demand + constant supply = higher prices. A simple explanation straight out of Econ 101.
And simple explanations beget simple solutions: Screw the tree-huggers, start drilling in ANWR. If the caribou are too stupid to walk around an oil derrick, they weren't going to last long in the wild anyway. Lift the ban on further off-shore drilling. Pump as much domestic crude as possible, build more refineries to convert all that crude into gasoline and -- viola -- we're back to the days of 8-cylinder engines and monster truck rallies in no time.
The only shortcoming of this supply-side remedy is that it cures a problem that doesn't exist. No less an authority on the world oil market than Saudi oil minister Prince Salman bin Abdul-Aziz explains that current supply is more than adequate to meet demand and the recent price spikes can't possibly be explained by increased consumption.
If you doubt the prince's veracity, look around. When was the last time you tried to buy gas and couldn't find any? Heard of any plans to ration the precious commodity? If the Asians are so desperate for oil, why is one of the hottest selling cars in China the gas-guzzling Cadillac Escalade? If the oil industry is running out of the black gold that is its lifeline, shouldn't petroleum companies be going out of business rather than registering record profits?
On June 18 of this year, MSNBC anchor Keith Olbermann delivered a special report on the so-called "Enron loophole." This piece should be required viewing for high school civics students and adults who are registered to vote.
In 1992, Wendy Gramm, wife of then-Sen. Phil Gramm, R-Texas, chaired an obscure commission in Washington called the Commodities Futures Trading Commission (CFTC). During the dying days of the George H.W. Bush administration, she pushed through a policy change exempting energy future trades from CFTC regulation if they were conducted electronically.
This modification was made at the behest of Ken Lay, then-CEO of Enron. When Bill Clinton took office several weeks later, Wendy Gramm was appointed to the Enron Board of Directors.
Flash forward to 2000. In the chaotic aftermath of the Bush/Gore election, Sen. Phil Gramm added a provision to the Commodities Futures Modernization Act exempting not just individual trades but entire markets from CFTC regulation. It was now the wild west for electronic trading in energy futures.
How did unregulated free market speculation work out for consumers? Enron traders used Gramm's amendment to fabricate the 2001 California energy crisis in which electricity users in that state were bilked out of an estimated $40 billion and forced to endure 38 artificially induced rolling black-outs during a record heat wave. They also paid three times the former rate for their suddenly scarce kilowatts. The same deregulation scheme fuels oil speculation today. (Olbermann's complete report can be viewed on-line at msnbc.com)
Sen. Carl Levin, D-Michigan, sponsored a study of the oil market that concluded that today's stratospheric prices are "not the result of supply and demand. Speculators have taken over most of the futures market." Senate Commerce Committee hearings yielded estimates that 25-50 percent of current oil prices are the result of manipulation by unregulated speculators.
Oil prices experienced their steepest weekly drop ever during the week of July 14, falling from $147 per barrel of light, sweet crude to $128.88. It's difficult to explain this decline in terms of supply and demand, both of which remained essentially static during the period. It is at least coincidental that this happy attenuation of spiraling costs came on the heels of the fore-cited congressional hearings and attempts to change the law .
Meanwhile, unleaded regular is down a dime a gallon at my neighborhood filling station though still up over a dollar from where it was a year ago. We may be plenty smart, but nobody's going broke underestimating our intelligence...
M.W. Guzy, spokesman for the St. Louis sheriff's department, is a former city policeman who writes regularly for the Beacon.