Blame Washington for High Fuel Prices

It's no secret that speculators are the real reason behind high gas prices. The surprise is that Washington is making no effort to stop them, writes Ed Wallace

By Ed Wallace

"It should be obvious to you all that the [gasoline] demand is outstripping supply, which causes prices to go up." —President George W. Bush, Associated Press, Mar. 5, 2008

"I mean, I would suggest Americans understand how supply and demand works. And if you restrict supplies of crude, the price of oil is going to go up and it affects gasoline."—Bush, ABC interview, Apr. 27

One thing about the former President and oil man: He's consistent about oil. Even years after leaving office, he manages to stay remarkably on-message when it comes to justifying the price of oil, even though he was wrong—and knew it—in 2008 and is still wrong today. For the record, oil and fuel demand had already started falling seven months before he made his March 2008 comment.

It's not just Bush who continues to blame oil supply and demand for causing higher prices this year. Politicians, the media, and Wall Street continue to make the same argument. The problem is that they are all wrong.

How wrong are they? Let's take a look. On Apr. 27, when our former President made his remarks, our nation's crude inventories were 30 million barrels higher than at the first of the year. Today, those inventories have risen by a further 10.7 million barrels. Despite continuous reports that world oil demand is skyrocketing while production has been constrained, the supply realities do not validate Bush's excuses for the price of oil.

Today we know, thanks to official documents released through WikiLeaks and covered by the McClatchy Washington bureau, that while the price ran up to $147 a barrel in 2008, the Bush Administration was leaning hard on the Saudis to pump more crude. The Kingdom agreed, warning it might have problems finding buyers. One of the official dispatches quoted Saudi Oil Minister Ali al Naimi as saying: "Saudi Arabia can't just put crude out on the market … speculators bore significant responsibility for the sharp increases in oil prices in the last few years." That message was delivered to then-President Bush in at least one diplomatic meeting.

No Buyers for Additional Saudi Oil

More recently, Saudi Arabia offered plenty of oil to real crude buyers in March. No one wanted the additional production, so Saudi Aramco pumped 800,000 fewer barrels per day in March than it had in February. What does that tell you about worldwide demand?

In April a quite-credible executive, Exxon Mobil (XOM) Chief Executive Officer Rex Tillerson, spoke with the Financial Times on energy issues. About the Saudi decision, Tillerson noted: "The Saudis did make available additional crude; what they found … [is] nobody was buying it." Tillerson also told Congress on May 12 that, based on the laws of supply and demand, oil should be selling in the range of $60 to $70 a barrel.

O.K., if it's not supply, what's behind high gas prices? Could it be that there's not enough gas being refined? Maybe. Gasoline supplies have been falling during the course of this year. According to data from the U.S. Energy Information Administration, for the first 20 weeks of 2011, our average refinery utilization was only 83.03 percent. Compare that number to the first 20 weeks of 2005, when our refineries were running at 91.54 percent utilization. Even before BP's (BP) Texas City refinery explosion in March 2005, the utilization rate was 91.2 percent, compared to this year's 83 percent.

What about China, then? Aren't the Chinese hoovering up oil faster than it can be sucked out of the ground? True, the Wall Street Journal ran a column on Apr. 28 in which it pointed out that "China guzzled 874,000 more barrels of oil in March than it did a year earlier—a 10.6 percent increase, despite high oil prices, notes Barclays Capital." But what the Journal neglected to mention is that much of that oil came from China's own oil industry; China's importation of oil from world markets, year-to-date through April, is running just 5 percent higher than it was a year ago.