Big Oil’s Bad Investment
Look what Bush and Cheney did to prices.

By Thomas W. Hazlett, Senior Fellow, Manhattan Institute
January 4, 2002, 8:00 a.m.

"He's a Texas oilman through and through and is joined at the hip with big oil."
— Doug Hattaway, Gore campaign spokesman on George W. Bush, June 2000

multi-billion dollar consumer fraud brings very little comment these days, but the wall of silence cannot obscure the ugly economic facts. The fortune that Big Oil paid to elect George Bush and Dick Cheney — two oilmen from Texas — was poured straight down the crank-shaft. Enron has gone bust, Haliburton is gasping, and oil prices have plummeted. The Republicans, puffing up as the party of family values, have succeeded in brutalizing their own Siamese twin.

With the economy slowing and the Russian oil flowing, pump prices have gone into free fall. Since George W. Bush was sworn in, wholesale prices have dropped from over $30 per barrel to just $20. A gallon of gas has now dipped to below $1 in parts of the country. Since about $0.45 a gallon tax is included, petrol for that SUV now costs a modest fraction of a comparable jug of Pepsi or Evian. Millions of American motorists are thrilled to see the bargain prices, but the vast majority of these consumers contributed not a dime to Bush-Cheney 2000. The energy capitalists who did are clearly getting hosed.

Even as the macro-economic indicators begin to signal a turnaround, oil company shares up-tick not. The Standard & Poor's Energy Index has declined 18% since the Texas Governor was elected president (index returns from the October 31, 2000 to December 11, 2001). Of course, the overall market has performed poorly during this period. Yet, those shares that were supposed to benefit the most from having a commander-in-chief in their pocket have met with disaster. Halliburton, Dick Cheney's former firm, has lost over 61% of its value since Election 2000. And Enron, whose CEO was tagged by the press as Pres. Bush's biggest and most generous supporter, is testing the hypothesis that 100% is the maximum share price decline. The firm's market cap has dropped $56.5 billion, as $80 equity shares now sell for $0.65 — give or take a nickel.

Does government have an obligation to protect innocent contributors to the democratic process from such outrageous consequences? Or should affluent oilmen be considered smart enough to protect themselves — caveat emptor?

Before you duck into the closest caveat, let's review some historical data. It seems that the wily country gentlemen have been plucked in this Republican con game before — repeatedly. Oil prices rose wildly under Jimmy Carter and handsomely under Bill Clinton; they crashed during the Reagan-Bush years, and have again dipped deep during the new Bush administration.

Perhaps the oil barons are confused by ubiquitous press reports heralding a close kinship between the party of Lincoln and J.R. Ewing. But the pundits are often wrong when it comes to energy economics. In 1981, the Reagan administration's decision to deregulate wholesale gas prices was widely attacked by editorialists as anti-consumer, pro-oil. In fact, prices quickly fell from very high levels (in Dec. 2000 dollars, a barrel of oil was selling for over $70 in early 1981), and kept declining through mid-decade. Allowing wholesale charges to float actually reduced pump prices by bringing more gasoline into the retail market. Price deregulation actually produced enormous consumer savings, allowing Reagan's White House tenure to coincide with an amazing $54.70 (or 70%) drop in the price of a barrel of oil.

Now the White House has another set of pro-consumer options: supply stimulus. It already has its sights on opening up portions of the Arctic National Wildlife Refuge for oil production, and is aggressively pursuing Russia as a strategic and economic partner. The Russians, with American help, may soon play the Great Crude Satan to OPEC, price-cutting on the cartel. Other foreign policy initiatives, especially those eliminating trade barriers for African states beginning to tap their oil reserves, could also pay dividends.

If the petrol magnates who reportedly hand-picked Mssrs. Bush and Cheney for high government service successfully compete for these new opportunities, their firms' share prices may yet rebound. But, such new supplies will prevent corporate profits from enjoying much of a bounce from price hikes. Out of respect for their beleaguered shareholders, Big Oil ought learn: the GOP is no gusher.