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Gas Pump Politics


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GAS PUMP POLITICS

Prices should drop soon, but Dole and Clinton are still out to score points

Leave it to Bob Dole and Bill Clinton to give new meaning to the term "oil slick." In the grips of an election-year bout of one-upmanship, the Presidential rivals are jockeying over this spring's 17% runup in gasoline prices. Republicans say a White House-inspired tax increase is partly to blame. Democrats point at the greed of Big Oil.

Dole wants to repeal the 4.3 cents-per-gallon hike in the gas tax levied as part of President Clinton's 1993 deficitreduction plan. The Kansan--who has backed at least two gas tax hikes since 1982--hopes to ram the rollback through the Senate to underscore his credentials as a born-again tax-cutter. Clinton's response: Ponder the tax cut, dump 12 million barrels of federal oil on the market in a symbolic effort to push down prices, and investigate oil companies for possible price-gouging.

Is this a case of, Watch out Big Oil? Probably not. As often happens in Washington, the rhetoric is heating up just as the market is starting to solve the problem. While the spike has boosted profits for oil producers and squeezed both Sunday drivers and truckers, prices now may be stabilizing. And futures markets predict a sharp slide as summer wears on. Stiff competition is already keeping many producers from passing higher costs on to the rest of the economy, so there's little inflationary threat.

LITTLE GIFTS. Still, none of this will slow the politicking. Besides being comically predictable, the solutions offered by Dole and Clinton represent the newest fad in the Presidential campaign: small-scale pandering. The ongoing budget stalemate bars big giveaways such as a middle-class tax cut, so the candidates battle over little gifts for voters. And their allies are weighing in with implausible proposals of their own: Senator Phil Gramm (R-Tex.) gleefully suggests paying for the gas-tax cut by slashing welfare benefits, while Representative Edward J. Markey (D-Mass.) calls for a windfall profits tax on oil companies. And a sort of Greek chorus of congressional committees vows hearings to get to the bottom of the price hike.

Who will win in this skirmish? Dole's gambit hasn't exactly been a resounding success. Clinton trumped his rival by grabbing the headlines when he ordered the Justice and Energy Depts. to investigate the role of the oil companies in the price spike. And on Apr. 29, he announced he would sell oil from the federal Strategic Petroleum Reserve (box). That would do little more than knock down gas prices by perhaps 1 cents a gallon, but it left Dole sputtering that Clinton's action was rank politics. "Dole is floundering around looking for that old Reagan antitax message," says Democratic political consultant Brian Lunde.

BLAMING BIG OIL. The controversy could backfire on the oil industry, too. Motorists are irate over the runup, but many blame refiners more than the government. "It's highway robbery," fumes Los Angeles driver Ted Yee. "The oil companies, the dealers, everyone is making a profit. Even if taxes go down, it's only a small part of the price."

But consumers like Yee are only partly right. Oil company profits are booming: Amoco Corp. earned a record $728 million in the first quarter, while Texaco Inc. hiked its net by 30%, to $386 million. And according to the California Energy Commission, 77% of the 32.4 cents price rise in the Golden State went straight to refiner margins.

The producers insist, however, that they're not profiting any more than they should. California is a special case--its price hikes partly were caused by the need to make costlier, cleaner-burning gas required by state law. But the rest of the country was caught up in speculative price spiral. Why? Overwhelmed by winter heating-oil needs, refiners were slow to catch up with rising worldwide gasoline demand. North Sea production was lower than expected. And the industry was keeping inventories low in anticipation of Iraq's resumption of crude sales. "Refiners don't establish the price," insists William C. Rusnack, president of Arco Products Co. "People are competing to get a limited supply, and price is bid up."

There are lots of signs that prices have peaked already. "The whole event is pretty well played out," says Amoco Chief Economist Ted Eck. Diesel fuel, which topped $1.30 per gallon on Apr. 15, has fallen back about 2 cents since. And gasoline futures project a big price drop in coming months. For instance, on May 1, wholesale gasoline for June delivery was priced at 67.2 cents a gallon, while September prices were running only 58.2 cents.

Prices can't fall fast enough for many businesses. Sure, big integrated companies are getting quick profits from the runup in crude prices. But as consumers turn away from high-margin premium gas and look to no-name discounters, local dealers have watched profits tumble as pump prices rise. Frets Carroll Hansen, who owns Bel Air Shell in Los Angeles: "Our margins are really going down." And truckers are getting squeezed by the higher fuel prices. Michael Morgan, CEO of San Diego-based AFM Transportation Services, tried to hike his prices 4% on Apr. 30 but says his big customers won't pay: "Before, the average trucking company had a margin of 10 cents on the dollar. Now, the fuel price hikes have taken away 5 cents."

Auto makers, who have bet big on insatiable demand for gas-hungry trucks, say they're not worried that prices will chase away buyers. At Chrysler Corp., where trucks account for 64% of sales, the biggest problem is finding buyers for fuel-efficient compacts such as the Cirrus. Says Chrysler economist Van Bussmann. "We don't have any plans to drastically alter the mix of vehicles we make." Even if gasoline prices rise to $2 a gallon, buyers won't be trading in their minivans for Escorts, says Lincoln Merrihew, auto analyst for DRI/McGraw-Hill. Moving from a 20 mpg truck to a 25 mpg car would save only about $25 a month.

So Americans are angry about gas price hikes. Why not? They seem angry at just about everything these days. But don't look for any politician to stand up and remind voters that fuel is cheaper in the U.S. than anywhere else in the world and that prices are likely to fall soon without Washington's meddling. It's campaign season, and every problem needs a villain and an easy solution.By Howard Gleckman in Washington, with Gary McWilliams in Houston, Nanette Byrnes in Los Angeles, and Keith Naughton in DetroitReturn to top


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