Gas Prices Aren't Cheap, They're Volatile

By Michael T. Klare, Tomdispatch.com. Posted September 29, 2006.

What the hell is going on here? Just six weeks ago, gasoline prices at the pump were hovering at the $3 per gallon mark; today, they're inching down toward $2 -- and some analysts predict even lower numbers before the November elections. The sharp drop in gas prices has been good news for consumers, who now have more money in their pockets to spend on food and other necessities -- and for President Bush, who has witnessed a sudden lift in his approval ratings.

Is this the result of some hidden conspiracy between the White House and Big Oil to help the Republican cause in the elections, as some are already suggesting? How does a possible war with Iran fit into the gas-price equation? And what do falling gasoline prices tell us about "peak-oil" theory, which predicts that we have reached our energy limits on the planet?

Since gasoline prices began their sharp decline in mid-August, many pundits have attempted to account for the drop, but none have offered a completely convincing explanation, lending some plausibility to claims that the Bush administration and its long-term allies in the oil industry are manipulating prices behind the scenes. In my view, however, the most significant factor in the downturn in prices has simply been a sharp easing of the "fear factor" -- the worry that crude oil prices would rise to $100 or more a barrel due to spreading war in the Middle East, a Bush administration strike at Iranian nuclear facilities, and possible Katrina-scale hurricanes blowing through the Gulf of Mexico, severely damaging offshore oil rigs.

As the summer commenced and oil prices began a steep upward climb, many industry analysts were predicting a late summer or early fall clash between the United States and Iran (roughly coinciding with a predicted intense hurricane season). This led oil merchants and refiners to fill their storage facilities to capacity with $70-80 per barrel oil. They expected to have a considerable backlog to sell at a substantial profit if supplies from the Middle East were cut off and/or storms wracked the Gulf of Mexico.

Then came the war in Lebanon. At first, the fighting seemed to confirm such predictions, only increasing fears of a region-wide conflict, possibly involving Iran. The price of crude oil approached record heights. In the early days of the war, the Bush administration tacitly seconded Israeli actions in Lebanon, which, it was widely assumed, would lay the groundwork for a similar campaign against military targets in Iran. But Hezbollah's success in holding off the Israeli military combined with horrific television images of civilian casualties forced leaders in the United States and Europe to intercede and bring the fighting to a halt.

We may never know exactly what led the White House to shift course on Lebanon, but high oil prices -- and expectations of worse to come -- were surely a factor in administration calculations. When it became clear that the Israelis were facing far stiffer resistance than expected, and that the Iranians were capable of fomenting all manner of mischief (including, potentially, total havoc in the global oil market), wiser heads in the corporate wing of the Republican Party undoubtedly concluded that any further escalation or regionalization of the war would immediately push crude prices over $100 per barrel. Prices at the gas pump would then have been driven into the $4-5 per gallon range, virtually ensuring a Republican defeat in the mid-term elections. This was still early in the summer, of course, well before peak hurricane season; mix just one Katrina-strength storm in the Gulf of Mexico into this already unfolding nightmare scenario and the fate of the Republicans would have been sealed.

In any case, President Bush did allow Secretary of State Condoleezza Rice to work with the Europeans to stop the Lebanon fighting and has since refrained from any overt talk about a possible assault on Iran. Careful never explicitly to rule out the military option when it comes to Iran's nuclear enrichment facilities, since June he has nonetheless steadfastly insisted that diplomacy must be given a chance to work. Meanwhile, we have made it most of the way through this year's hurricane season without a single catastrophic storm hitting the U.S.

For all these reasons, immediate fears about a clash with Iran, a possible spreading of war to other oil regions in the Middle East, and Gulf of Mexico hurricanes have dissipated, and the price of crude has plummeted. On top of this, there appears to be a perceptible slowing of the world economy -- precipitated, in part, by the rising prices of raw materials -- leading to a drop in oil demand. The result? Retailers have abundant supplies of gasoline on hand and the laws of supply and demand dictate a decline in prices.

Michael T. Klare is a professor of peace and world security studies at Hampshire College in Amherst, Massachusetts and the author of Blood and Oil: The Dangers and Consequences of America's Growing Dependency on Imported Petroleum.

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