TOPICS > Economy

Oil Price Hike

February 17, 2000 at 12:00 AM EDT
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GWEN IFILL: Americans have come to count on cheap oil. No longer. Energy prices are soaring. A gallon of gasoline, which cost an average of 92 cents a gallon a year ago, now goes for $1.35 a gallon and higher, up more than 30 percent.

CONSUMER: Well, there’s not too much you can do about it. You have to have the gas, so you have to pay the price.

GWEN IFILL: The cost of heating oil in the Northeast has doubled as well, driven in part by the cost of crude oil. The barrel of oil that cost just $11 only a year ago now costs about $30. The last time oil was this expensive was during the Persian Gulf crisis in 1991. The impact has been felt at gas pumps, in homes heated by oil and at airline ticket counters, where $20 fuel surcharges have been added to ticket prices. Federal

Reserve Chairman Alan Greenspan and other inflation watchers are taking notice, worried that energy costs could also drive up the prices of other goods. Particularly hard-hit is New England, where three-quarters of the homes are heated by oil. Some low-income residents say they have been forced to choose between paying for food or paying for oil to heat their homes. At a news conference Wednesday, President Clinton announced that he had released $125 million in federal funds to help poor families pay energy bills.

PRESIDENT CLINTON: In the Northeast the impact has been particularly harsh because from the mid-Atlantic states to New England, many families still rely on home heating oil– a source of heating no longer used in the rest of the country. These families have been especially hard-hit. That is a serious concern, especially because the winter months have been colder this year than in the past few years

GWEN IFILL: Energy Secretary Bill Richardson admitted today the spike in oil prices caught the administration off guard.

BILL RICHARDSON: Everybody was caught napping. Nobody predicted what would happen. But it’s not that we didn’t have a response. We have a response, but at the same time we don’t intervene, the government doesn’t intervene in fuel prices and in oil markets.

GWEN IFILL: President Clinton has dispatched Richardson to meet with the leaders of oil- producing nations Mexico, Saudi Arabia and Kuwait.

Joining us now are Phil Flynn, vice president and senior market analyst at Alaron.com, a brokerage house; Daniel Yergin, chairman of Cambridge Energy Research Associates a consulting and research firm; and Joseph Kennedy, chairman and president of Citizens Energy Corporation which provides low-cost heating oil to the poor and elderly in Massachusetts; he is a former member of Congress.

Mr. Flynn, as clearly as you can, can you explain to us why oil prices are so high?

PHIL FLYNN, Alaron.com: Very simply, OPEC– really a new OPEC– when OPEC had the pain of low oil prices back in December of ’98, when it fell to $10.35 a barrel, they were forced into a marriage of convenience with other OPEC members.

GWEN IFILL: OPEC being the oil cartel countries.

PHIL FLYNN: That’s correct. And the most historic part about the agreement was that they brought on non-OPEC members, as Mexico and Venezuela, to jump on board. And that’s the bottom line here, that’s why we’re moving higher.

GWEN IFILL: Daniel Yergin, do you agree with that? Is it some version of international price-fixing?

DANIEL YERGIN, Cambridge Energy Research Associates: I… Well, the OPEC countries were looking at a desperate situation, going bankrupt. They saw what had happened in Russia, which was devastated economically by low oil prices, and said, “we’ve got to pull ourselves together.” The other thing that’s happening is economic growth — recovery in Asia, demand is up, higher than people had expected, consumption is up. And here in the United States, the economic machine just barrels on, and you’re out there, you look out on the road, you see the sport utility vehicles. We’re using more gasoline and oil as well. And so that, combined with the change in supply situation, together created a very tight inventory situation, which is reflected in these prices.

GWEN IFILL: So, Joe Kennedy, we are as consumers entirely held hostage by the actions of an international oil cartel, or are there things which are happening here in our economy that’s also driving these prices up?

JOSEPH KENNEDY, Citizens Energy Corporation: Well, I think both the… Both Dan and I’m sorry, I don’t know your…

GWEN IFILL: Phil, Phil Flynn.

JOSEPH KENNEDY: Phil, all right. Have identified the root cause of the problem. But Gwen, when all’s said and done, that has very little to do with the actual heating oil crisis that’s taking place really from Boston and Maine down to Washington, DC at this time. There simply is just not enough heating oil being provided to the consumers in this region of our country. So we have an enormous price difference between what the world price for heating oil would be– which is about 74, 75 cents a gallon– versus what we’re paying here in Massachusetts, which is really around $1.75 to $2 a gallon.

GWEN IFILL: And Daniel Yergin, that translates into $30 a barrel for crude oil, roughly, which is a nine-year high. Is that price sustainable? Can that stand?

DANIEL YERGIN: I don’t think so. I think that the producers themselves are surprised by their own success, in terms of stabilizing or bringing the market back to this level. And you can see the pressure mounting over the last week or two. The words have gotten louder from Washington, from Boston, from other cities, from other countries. And I think the OPEC countries and non-OPEC are going to be looking to how to ease oil back into the market, because they can see the impact economic problems in the United States would have on them. Take the case of Mexico. Mexico’s economy is very tightly integrated in the United States, and Mexico has no interest in seeing U.S. economic growth slow down, or inflation raise its head again.

GWEN IFILL: So Phil Flynn, Secretary of Energy Richardson is on his way to the OPEC countries, basically to make a tour of them and say to each and every one… To jawbone them: Please bring prices down. Is that something that will work?

PHIL FLYNN: I definitely think it’s going to have an impact. The key thing here is you have to remember is, OPEC has been successful with bringing the price of oil up, which was a desperate measure. But Mr. Richardson, though he has to be very careful to please the constituency in the United States of America, also has to be very careful not to upset the applecart, and get OPEC countries mad at us.

We have to remember, there have been some positive things that have come out of this. We have a more moderate Iran. We have a new leadership in Venezuela. So we have an OPEC that we can work with. So Mr. Richardson has a very tough situation. He has to go to OPEC, but he can’t come into the OPEC countries like the ugly American, saying, you know, “America says you have to raise production.” He has to walk a very even keel.

DANIEL YERGIN: Yeah. Can I come in on that? It’s true. Because I think it’s very important what he’s saying, because it also applies to Mexico. Forty percent of the Mexican government’s national budget comes from oil. It’s very important to them. And I think what Phil says about other countries applies there. You know, we’re not the only country with a presidential election. So is Mexico. And if they suddenly see the Yankee to the North swinging too heavy a club, there’s inevitably going to be a reaction.

GWEN IFILL: And Joe Kennedy, to what extent can we begin to point to things which are happening internally? One of the questions that has been raised to Secretary Richardson and others is that perhaps oil companies are engaged in some sort of price gouging, especially in the Northeastern states.

JOSEPH KENNEDY: Well, that’s a very, I think, accurate concern. Although, I think, really, as I mentioned a minute ago, this isn’t just about OPEC. I mean, OPEC, before they had a price increase, the price of heating oil in Boston was something around 50 cents a gallon– a little bit more, maybe 51 or 52 cents a gallon.

The OPEC price of heating oil is probably reflected at around 74, 75 cents a gallon today. But the big, huge, whopping price increases that the American consumer has had to deal with are re

ally as a result of the lack of planning and the lack of diligence by the industry itself. We control… in electricity, we actually have a federal agency which sets standards that that industry has to meet. We do the same thing in natural gas. The only industry that has no basic regulatory structure that is overseen by the government is oil.

So we let the free market operate, and as a result, if there is, in fact, a shortage, whether it’s, whether it’s created by OPEC, whether it’s created by the oil companies or whether it’s created by weather, it doesn’t really matter. They’ve got an obligation to make sure that there’s enough product, whether it’s heating oil, diesel fuel, or gasoline.

DANIEL YERGIN: I’d like to correct something that you said. The price of gasoline very closely tracks what happens to the price of crude oil. Last year when oil prices collapsed, Americans, when you adjust for inflation, were paying the lowest price they had paid for gasoline since the Great Depression. Now they’re paying that are back now to the level of 1996, and they’re probably going to go higher.

They could go another dime or 20 cents higher, but this is tracking what happens with crude oil. What’s driving the market is not, you know, what companies are doing, or machinations, but it is the fact that the supply- demand balance that is governed by the availability of supply coming out of these countries, and what happens to economic growth, whether it’s low or it’s high. And that’s, you know, it’s market fundamentals that are the real driver here.

JOSEPH KENNEDY: But, Gwen, you know it isn’t– just to follow up on Dan’s point– it isn’t just these sort of macro policies. What I’m saying is that the reason why we’re probably on this show is because there is an acute crisis, where millions of very poor and vulnerable Americans, middle income people, just simply can’t afford to stay warm this winter.

GWEN IFILL: So let’s talk for a moment about how you begin to find the solution. Do you find the solution after the fact, by saying, as the President has done, which is to release more money for low- income programs like yours? Like yours, Joe Kennedy? Or Phil Flynn, do you find the way to fix this on the front end of this?

PHIL FLYNN: I believe that the best thing to do… Of course you have to start with the problem first. Part of the problem that we had with the East was partly because there was not a lot of profit in it for the oil companies when they were $30 — or when they were $10 a barrel, they were having a hard time making a profit creating heating oil. So you had a real problem there, and that… their main concern at that point was survival. And that’s why we saw so many mergers in the oil industry. Right now, obviously we have a concern of a shortage. And it was a combination of many factors that brought us to that point, and I think that what we have to do is learn from this, and look to the future for some solutions.

But the bottom line is right now, when it comes to the heating oil situation, when you basically squeeze supplies so tight, it doesn’t take that much to upset the applecart, and that’s what we’ve seen on the East Coast. We’ve lost a refinery here, we’ve had some problems there. We had a cold front. You put it all together, and that’s the recipe for disaster, and that’s what we’ve seen.

GWEN IFILL: But you do have– excuse me– we do have a strategic petroleum reserve– basically oil that’s stashed away in caves in Texas and Louisiana– that Secretary Richardson has said he’s not inclined to tap in to, but the president has suggested that he hasn’t ruled it out. Would that help at all, if we were to tap into that reserve?

DANIEL YERGIN: I think that… I mean, the existence of the strategic petroleum reserve is really to protect our national security, if there’s a major disruption in say the Middle East or in other countries, and our security and the basic health of our economy. It’s a kind of slippery slope if you start saying, “well, the price has reached this level, we should take a little out, at that level we should take a little out,” and it turns into the kind of, government trying to, kind of to manage the price of oil.

On the other hand, it does sit there, it is a deterrent, and I suspect what the President’s remarks are meant to do is to send a message. But it’s only a finite volume, and once you use it up, then you don’t have a strategic petroleum reserve to protect you against disaster.

JOSEPH KENNEDY: Gwen, in my opinion, we don’t need to tap the strategic petroleum reserve. The fact of the matter is that if we did, you’d have to take the crude oil out, you’d have to run it into a refinery, you’d have to break it down from everything from gasoline to Vaseline.

DANIEL YERGIN: And Joe, what does that take? That takes six to eight weeks?

JOSEPH KENNEDY: I mean, everybody’s going to be frozen by the time that stuff happens. What we really need to do is just… It’s a very simple to answer to this problem, which is that the government should just set minimum inventory standards. Right now in Massachusetts and throughout New England, you have the lowest levels of inventory that have ever existed since they started recording it. So if you don’t have oil in the tank… I mean obviously, at some point, in New England, you’re going to have a cold snap in the wintertime.

And the industry kind of likes that, because the price skyrockets, and it goes up very, very quickly, and it comes down very, very slowly. So all I’m saying is look, if you had in fact kept in place…

You look at the amount of money in Massachusetts alone that consumers have had to pay for the last month, it’s probably risen by something like $150 million to $250 million. That’s on top of their base load of about $250 million. So there’s about $150 million to $250 million worth of excess costs that they’ve had to incur.

GWEN IFILL: Phil Flynn, a final word: Do you agree with that or is there another way?

PHIL FLYNN: Yeah, well, I definitely agree that you can’t… the strategic oil reserve, or the petroleum reserve, if you tap into that, it’s like trying to shoot a mosquito with a .357 magnum. It’s not the right thing to do in this situation. Obviously, I think it’s very important that we have adequate supplies for the east in times of winter, and I definitely think that has to be addressed.

GWEN IFILL: Phil Flynn, Daniel Yergin, Joe Kennedy, thanks all very much.