High Prices of Oil Have Surprising Winners and Losers

GROUP SINGING:

Oil, oil, oil oh petroleum…

PAUL SOLMAN:

The "Oh Petroleum" ballad, from a film about the birth of oil industry 145 years ago in of all places, western Pennsylvania.

With the price of oil fluctuating near historic highs, the story of oil in Pennsylvania, it turns out, has a key and surprising lesson to teach about who wins and who loses when that price suddenly explodes.

Prices exploding, then crashing: A familiar cycle ever since Colonel Edwin Drake, played here by Vincent Price, first struck black gold in 1859.

VINCENT PRICE:

I want you to get picks and shovels and dig. We are going to dig a hole and go down until we find that oil.

ACTOR:

You know what I think of you now? I think you're crazy.

PAUL SOLMAN:

Crazy may be a less apt term for the colonel than prices in the oil industry, which has seen periods of boom and bust from the get-go.

VINCENT PRICE:

I knew it could be done.

PAUL SOLMAN:

When Drake first struck pay dirt, the price of oil was sky high, as it is again today. So who wins and who loses?

We went back to western Pennsylvania and produced two stories to answer the question. This first one focuses on the losers. Now, the obvious losers are oil consumers, squeezed by high prices.

We caught up with Mike Johnston, who is constantly commuting between his home, his job at a chemical plant and the college he attends.

MIKE JOHNSTON:

When I got my license, gas was about $1.20. And now it's nearly doubled.

PAUL SOLMAN:

When gas prices started to climb, Johnston unloaded his American gas hog and got a Honda Civic. When prices kept climbing, he made other accommodations, like when he filled up at this gas station in nearby Zelienople, a cheap meal.

PAUL SOLMAN:

A cheap meal, meaning what?

MIKE JOHNSTON:

Four hot dogs, $2.

PAUL SOLMAN:

Four hot dogs, two dollars. And was that caused by the rising price of gas?

MIKE JOHNSTON:

Yeah. After a while, they're not bad.

PAUL SOLMAN:

Johnston's not desperate yet, but every extra dollar per barrel for oil drives prices up 2.5 cents a gallon at the pump.

That penalizes everyone who drives, but especially the less well-off, because the less you make, the bigger a portion of your income the oil increase burns. The same is true with even greater consequences for folks struggling to heat their homes this winter.

SPOKESPERSON:

This energy crisis is reducing us all to working poor.

PAUL SOLMAN:

So a first set of obvious losers: Economically squeezed individuals dependent on oil. And pretty much in the same boat, economically squeezed companies that depend on the stuff.

Like the airlines. The rise in jet fuel has pushed their total costs up by more than 5 percent. That's roughly their entire profit margin in the best of times, which, in the wake of 9/11, these aren't.

Railroads, trucking companies and overnight parcel firms have all been able to pass their increased costs on to customers says Pittsburgh money manager William Lauer. The airlines, with a glut of seats, have actually started to cut prices.

WILLIAM LAUER:

They have no pricing power. There is too much capacity in the air. As a consequence, the low-cost provider is able to set a ceiling on airfares and everyone else participating in the business is pretty much compelled to follow suit.

PAUL SOLMAN:

In other words, you can't charge more than the efficient carriers like Southwest or JetBlue. If you're a Delta or US Airways, say, headquartered here in western Pennsylvania, you have got higher costs than the newcomers, who aren't stuck with pricey pension plans, for example, or expensive fleets of older planes which guzzle jet fuel.

Meanwhile, a profitable discounter such as Southwest, like a well-heeled individual, could not only afford the higher oil prices, but could and did protect itself by buying lots of oil for future delivery last year when prices were much lower but already rising. That was insurance against a price rise, which has now paid off, but it cost money.

WILLIAM LAUER:

That's money that only the wealthier and more prosperous carriers have available for a purpose like this. The rich are getting richer. The poor are getting poorer.

PAUL SOLMAN:

Other energy-intensive industries like aluminum and steel are also losers, since the price of natural gas which they rely on, so closely tracks that of oil.

LESTER LAVE:

We have all sorts of companies that have simply shut down.

PAUL SOLMAN:

Economist Lester Lave of Pittsburgh's Carnegie Mellon University.

LESTER LAVE:

For example, we have a lot of companies that make fertilizer from natural gas. At today's prices, they can't afford do that. And a lot of people who built natural gas electricity plants now find that they can't afford to operate their plants anymore.

PAUL SOLMAN:

There's one more class of obvious losers: Oil- importing countries as a whole, like Japan, a country that's long had a modern economy but has to import virtually all of its oil.

Here's footage I've never forgotten. When oil prices surged in the 1970s, Tokyo literally turned off the lights. The U.S. and Europe, meanwhile, experienced their deepest recessions since World War II.

The immediate winners back then, you may recall, were the oil producers– the Saudis, the big oil companies. But this time, there's a curious twist.

Those you might think the biggest winners from the high price for fossil fuels, oil and gas producers, could actually be the biggest losers, because of a familiar pattern in the oil industry– the cycle of boom and bust.

LESTER LAVE:

The biggest losers, surprisingly, I think is OPEC, because in the two previous times when oil prices have skyrocketed, they've induced depressions around the world, recessions around the world, and they've gotten all sorts of oil substitutes to come in, with result that when the immediate effects were over, prices dropped down below average and OPEC was then worse off for having done that.

PAUL SOLMAN:

Given the current oil price run-up of 50 percent in about a year then, it is remarkable the U.S. economy hasn't stalled, or at least not yet, or shifted away from fossil fuels.

But if you want a glimpse of the future, you might take a look at the long-term effects of boom and bust in the oil city area itself. Judy Edsel of the local daily, "The Derrick."

JUDY EDSEL:

This is the oldest continuously operating oil well in the world.

PAUL SOLMAN:

This well started pumping in 1861, and oil, as a substitute for kerosene and whale oil, was such a phenomenon prices quickly shot up to the equivalent of $100 to $200 a barrel in today's money.

The price then plummeted, rose again, fell again. It's the cycle of boom and bust that, along with wells running dry, has reduced this area to a shadow of its former self.

PAUL SOLMAN:

What is that over there?

JUDY EDSEL:

That is the last remnant of the refinery that covered this entire valley. Those are storage tanks. Those will soon be taken down by the welders and there will really be nothing left in the valleys.

PAUL SOLMAN:

Trains don't come through here anymore. Nearby, the boomtown of Pithole City, where oil was discovered in early 1865.

NEWSREEL ANNOUNCER:

There were two banks, two telegraph offices and two churches were under construction. The main street was jammed with houses, with hotels, with saloons, gambling houses, boarding houses– about one-tenth of which were really boarding houses.

PAUL SOLMAN:

Museum director Barbara Zolli.

BARBARA ZOLLI:

First Street was a lively street with saloons and houses of ill repute where the soiled doves worked.

PAUL SOLMAN:

Ah, the soiled doves. And what happened to Pithole? This is it?

BARBARA ZOLLI:

This is all that's left of Pithole City.

PAUL SOLMAN:

For 145 years, the boom/bust cycle has been affecting producers large and not so large, like Bill Huber of Plummer, who travels a road not even paved with good intentions to get to his remaining pots of black gold. At the end of the road, vintage oil wells, circa 1900.

BILL HUBER:

We've got 17 right here although I've got 40 more on individual jacks in here. There's a well out on… at the end of each rod.

PAUL SOLMAN:

At $40 a barrel, or something close to it, for years to come, is it fair to say you'd be a fairly rich man?

BILL HUBER:

Fairly rich man. Yeah. But they've always said I've been a fairly rich man, but I've had some real good times. But it seems like it didn't take long for it to go when it goes the other way.

PAUL SOLMAN:

The point is, if high oil prices stay high for years, as the oil markets are currently suggesting, then history suggests they will lead to another bust, in which case producers who seem to be winning now will, in the long run, be perhaps the biggest losers of all.

It's why Bill Huber hasn't upgraded his hardware, why OPEC has tried for years to keep prices below $30 a barrel, to keep the world economy humming, keep oil usage up.

Because too high prices make for some surprising losers and for some surprising winners, too, as we'll show you in our next look at the effects of the high price of oil.