The heating oil spike - government hearings on heating oil price rise

National Review, March 5, 1990 by Peter Samuel

WASHINGTON, D.C.-where was that greenhouse effect when we needed it? December, the U.S. Weather Service calculated, was the coldest month in about seventy years on the East Coast. The 12 million Americans who warm their homes with heating oil found their furnaces were using about half again as much as their normal gallonage-and when the price roughly doubled, many saw their bills tripling.

Fortunately the Arctic December was followed by an unseasonably warm January. Heating-oil consumption for the whole winter may not be far above normal, and prices have dropped sharply. However, the price spike gave politicians the occasion for some extraordinary demagoguery.

Two hearings on Capitol Hill were the setting for the worst of the rhetoric-cries of price gouging and market manipulation by Big Oil, charges that speculation was the cause of the price rise, and strident demands for antitrust investigations, government-ordered price rollbacks, and establishment of emergency stockpiles for the future. Our elected representatives, playing to the network cameras in their competition for the 15-second soundbite, demanded repeatedly to be told, "Who got the money?" despite explanations that there is a difference between gross margins and profits costs of things other than raw materials vary too), and that quarterly profit data take some months to compute and collate. Interestingly, a couple of Republicans outdid Democrats in their displays of populist indignation and their demands for government intervention. Congressman Toby Roth (R., Wisc.) appearing as a "witness" before the House Committee on Energy on January 9, said that one story after another had been "concocted by energy-company pr people to cover their tracks." They had made "every excuse in the book," but he added darkly, "We all know what is occurring . . . the big producers have made sure there aren't enough supplies on hand."

The weather as a factor? Not for Toby Roth. According to him December was "not unusual." Perhaps the U.S. Weather Service too was co-opted by Big Oil? Matthew Rinaldo (R., N.J.) insisted that supply and demand could not account for the December price rises and said consumers had been bilked" and "gouged" and accused oil companies of "predatory" behavior. The argument that the price spike was caused by the very cold weather "doesn't impress anyone," he said, adding, Mat is the government doing?"

Energy Committee Chairman Jim Cooper (D., Tenn.) assured us that everyone believes in a free market" but it had "not worked" in December. Edward Markey (D., Mass.) said the "facts speak for themselves" and that the oil companies were the "culprits" because their prices had gone up far more than the costs of their crude.

In Senate hearings Joseph Lieberman (D., Conn.) opined that as a "necessity" heating oil should not be allowed to be traded in commodities and futures markets like such presumably frivolous luxuries as wheat, meat, cotton, and gasoline. He demanded government regulation of heating oil, suggesting establishment of minimum inventory levels for each company and government emergency reserves. John Glenn (D., Ohio) saw collusion in the fact that all sellers raised their prices together. Never mind that Economics 101 describes that as evidence of competition, a point neatly made by one of the industry men, who said that anyone who tried to undersell the market in December would quickly have been out of product.

There is depressing irony that precisely when the whole Communist world is being convulsed by the realization that governments simply cannot plan and command a lively economy, and are grasping that free markets are the only productive way to go, apparently intelligent United States senators and representatives should be scraping the bottom of the Marxist garbage can for their villains.

By contrast, various consumers' groups are more realistic. Citizens Energy Corporation Chairman Michael Kennedy (of the political Kennedys) quietly deflated the demagogic rhetoric against Big Oil at the Senate hearing, saying, You must understand the reality of how oil prices are set. The international oil market is comprised of many different participants. It is not possible for the industry to be 'controlled' by a few oil companies ... we have seen from past experience that unregulated energy industries are generally more effective at meeting consumer needs over the long term than are regulated energy businesses. Unpredictable occurrences like December's cold should not prompt us to abandon sound business practice and good public policy, and we should not revert to the energy regulations of the 1970s."

Kennedy said the Federal Government should help the poor through its Low-Income Heating Assistance Program (LIHEAP), but another part of the remedy is encouraging heating-oil consumers to be smarter shoppers, comparing price and service more actively. The administrators of LIHEAP could negotiate fixed-price deliveries, or secure options on the futures market to offset any sharp price spikes, he suggested.