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Posted by on Sep 30, 2011 in Business, Economy, Energy, Politics | 20 comments

Are U.S. Oil and Insurance Companies Dealing in Collusion? (Guest Voice)

Are U.S. Oil and Insurance Companies Dealing in Collusion?
by John T. Johnson, III

I’ve got a question for the politicians we have elected to protect our best interests. Are major U.S. oil companies and insurance companies involved in collusion?

The Merriam-Webster dictionary defines “collusion” as: a secret agreement or cooperation especially for an illegal or deceitful purpose.

I was prompted to ask this question because in 2008, I watched the price of fuel climb steadily upwards while I read in the newspapers, and heard all the talking heads on the cable channels tell us that there was a glut of crude oil in the world.

I was told that huge tankers were being used as floating oil storage facilities because U.S. refiners had cut back on refining.

The refiners, by their own admission, had cut back refining because their profit margins on fuel sales were not what they wanted them to be; thereby manipulating a fuel shortage. If the market was truly competitive, they could not have done this without possibly losing their customers to a competitor.

The refining competition was all but eradicated back in the 80’s when the federal government started mandating that old, inefficient, independently owned refineries upgrade to systems more friendly to our environment. Many of these companies shut down operations. Several sold their equipment to foreign companies rather than meet the fed’s demands. Other independents were bought by the major players. The last new refinery was built in 1987.

Here’s the propaganda on the subject as broadcast by GasBuddy.com, who is responsible, along with umpteen other industry mouthpieces, for spitting out misinformation and half truths:

In the early 80’s the U.S. had 15.66 million barrels per day of refining capacity with 254 plants operating. Today while the number of plants operating has dropped to just 137, the capacity of plants has risen to 17.59 million barrels per day. While smaller plants have closed, large plants have increased, expanded, and replaced old equipment with newer, more efficient equipment.

This is true, but as Paul Harvey would say, “And now, the rest of the story”.

During the last 20+ years U.S. demand for refined fuels has greatly increased, so the increase in production during this period has not kept pace with demand. We, in fact, have to import between two and three million barrels of finished fuels each day.

When operating at max capacity, all is well, but what happens when a hurricane hits the Gulf of Mexico and refineries start shutting down, or when there is an explosion or fire, or when just one large operation “shuts down for seasonal maintenance”? You know the answer …prices at the pump start to skyrocket.

This would not happen if there were more independents out there and if refining capacity and reserves were increased.

When a hurricane builds up steam and looks like it might hit the gulf, prices at the pump immediately inch upward. It makes no difference if it ever makes it to the Gulf or not. When the price of a barrel of oil takes a nosedive, it takes weeks to drop down a few cents.

In July, 2008, when the price of a barrel of crude was at $141, the average price of fuel nationwide was $4.114 per gallon. The price per barrel in May, 2009, was at $58 and the national average at the pump was $2.248 a gallon on May 12th.

From July 2008 until May 2009, crude dropped 59% to $58 per barrel. The price per gallon at the pump during this same period only dropped 54%. See anything wrong with this ratio? Why aren’t the drops in the two categories proportional? This is big money. Where did it go? Look at the profit margins of the world’s largest oil companies. The answer should be obvious.

The situation reminds me of something I learned back in the ‘80’s while on business in the Philippines. I had flown into Manila the day before and noticed that the public was in somewhat of an uproar. When I asked my ex-patriot friend about it, he told me that there was a shortage of rice and that the rice that was available was very expensive. This seemed odd since I knew that rice was grown throughout the country, and could not understand why there would be a shortage.

He went on to explain that there was not a shortage in the fields and warehouses; there was just a shortage on the store shelves. It was a manufactured shortage, concocted by all the Chinese merchants who control the sale and distribution of rice in the Philippines. He told me that in a few days rice would again be in all the stores, and that the price would be somewhat less than the high mark hit during the “shortage”. “However”, he said, “The price will never drop back down to pre-shortage levels.”

“It will probably happen again in a few months,” he added.

I want someone in the know … someone in D.C. …to tell me what the difference is in the manufactured rice shortages in the Philippines and what we are now experiencing with manipulated fuel pricing here in the U.S. They seem to have much in common.

Supply and demand is not controlling the price of fuel now like it is supposed to in a free market. Since one process in the chain is now being manipulated, prices at the pump are higher than they should be. The ratio between cost of crude to price at the pump grows wider.

Wikipedia posts this perspective: Economist James K. Galbraith believes that much of the rise is due to the “Enron loophole” drafted in a rider by former Texas senator Phil Gramm, which allowed energy futures to avoid Commodity Futures Trading Commission oversight. Galbraith cites Masters, a hedge fund manager, who observed that index speculation tied to commodities by pension funds and other investment vehicles rose from $13 billion in 2003 to $250 billion in 2008. Galbraith observed that with Goldman Sachs predicting a rise in the price to $200 and Gazprom $250, suppliers may react to the rise by restricting supply until they can sell their product at a higher price.

A recent piece by Kevin G. Hall with McClatchy Newspapers states, “… during a recent week almost 9 in 10 traders who bet that oil prices would rise were financial speculators, not end users of oil.

“The futures markets are important. They allow airlines to buy jet fuel and cereal makers to buy grain to hedge against the risk of changing prices by purchasing contracts for future delivery at a set price. A buyer and seller negotiate a fair market value, but a growing number of experts now say excessive speculation in those markets has driven up prices to the speculators’ profit and to the punishment of the public.”

The price of wheat is soaring for the same reason…Wall Street banks and hedge funds investing for the ultrawealthy – not interests seeking to ever use the wheat.

We can only hope that regulatory rules are reinstated that will place position limits on how much speculators can invest in what is now nothing more than legalized gambling in a game that is rigged.

Are you going to continue to believe the propaganda the oil companies and Wall Street spits out? Not me. It appears they picked up some tricks from the Chinese rice wholesalers in the Philippines.

If you want another example of how closely the Big Oil guys work with each other, you might remember the brouhaha surrounding the discovery of British Petroleum’s Gulf Disaster Contingency Plan which was all bound up nice and neat and made references to a spill’s affect on walruses and other arctic fish and mammals not seen in the Gulf of Mexico for millions of years.

As crazy as this was, I found another discovery much more interesting…the fact that other major oil company’s Gulf contingency plans mirrored B.P.’s, the only difference being the cover page which had their company’s respective names affixed. You don’t think they are all in cahoots?

Here’s what CNN Money had to say about the issue back in August of 2010:

At a Congressional hearing In June, lawmakers slammed executives from five of the world’s largest oil companies for having cookie-cutter contingency plans for dealing with disasters like oil spills.

Those plans included embarrassing errors such as a reference to protecting walruses, which haven’t lived in the Gulf Coast for at least 3 million years, and the phone number of a marine biologist who died five years ago.

This is why our government has to consider controlling the consumables that we cannot live without … refined fuels, natural gas, electricity, and water. The big players gobble up the small, become cozy, divide up territories, and real competition morphs into pseudo competition. This is not free enterprise; it is capitalism gone bad.

The same level of greed and collusion can be found in our health insurance companies. Look what they have done. Just like with oil companies, the big have gobbled up the small, and then one Big buys, or merges with, one of the other Big’s until we are reduced to having only a handful of gigantic players and a few insignificant others.

Our government has allowed this to happen. In the past 20+ years, anti-trust laws have all but been forgotten. It seems that no buyout is too big to be rejected by those charged with protecting us little guys.

Proof of this collusion in heath insurance ought to be obvious to all since all insurance companies are “not allowed” to offer policies nationwide. States have to approve each company; each company can pick and chose where it wants to apply for a license to sell.

I think that the insurance companies themselves have “manufactured” these barriers through helpful state legislators so that they could divide up the country and have their own little fiefdoms. Why else would a state not open its borders to each and every qualified company to promote the healthiest competition possible?

And let’s not leave out the pharmaceutical companies. They seem to have learned some tricks from Big Oil. Here’s a recent report on drug shortages and skyrocketing prices as reported in the San Antonio Express News:

Like many hospital pharmacists, Mark A. Richerson has been struggling with an ever-expanding list of prescription drugs that are either in short supply or unavailable. The situation, he says, “is the worst I’ve seen in my 25 years as a pharmacist…” Normally, Christus Santa Rosa Health Care, where Richerson is the director of pharmacy, pays an average of $15.76 for a 2-gram vial of cytarabine. With the drug in short supply, Richerson earlier this month received a fax from Miami-based Allied Medical Supply offering 17 vials for $995 each — an astonishing markup of 6,213 percent.

Part of the problem, the drug manufacturers say, is attributed to more stringent rules and oversight by our federal government, which has prompted them to review their manufacturing processes and drop some drugs from production altogether. Many of the older drugs are even being discontinued because “they are not cost effective for companies to make”. Translation – they cut back production to drive up the cost, just like the rice wholesalers.
Buyouts and consolidations have also compounded the problems. All you have to do is merge with the competition and drive up the cost.

Recent events have shown us that we cannot expect private enterprise to consider the public’s best interests when weighed against their inherent greed. It is a disease that has no cure. It can only be managed by diligent oversight. It is called “regulation”.

I was always against regulation, but not anymore. With our elected officials being bought off, with anti-trust laws being redefined, with formed cabals being overlooked, I’ve changed my mind. Watch them, monitor them, and give them some guidelines to follow. They are out of control.

If we would study our history, we would be much better prepared to determine just how well deregulation works when it comes to banking and key products and services. Greed is a virulent disease, and without proper treatment in the form of laws and regulations, it will run rampant. A century ago, you would have found the same symptoms you see today…the divide between the rich and poor growing broader.

As a “Progressive Republican”, one of Teddy Roosevelt’s heralded accomplishments was his success in trust busting and increased regulation of large corporations. The railroad, banking, steel, oil and tobacco industries were becoming the “Have’s”; everyone else, the “Have Not’s”. Roosevelt regulated them. He called this program the “Square Deal”, stressing that the average citizen would get a fair share under his policies.

Several years later, his cousin, Franklin D. Roosevelt, fought to control the electric utilities and the utility holding companies that were manipulating costs.

History is repeating itself. Big Oil, Big Insurance, Big Banks are out of control ….literally. Those we have elected to protect us from this greed and corruption need to start doing so. They have been serving the wrong master for too many years now. The Big’s have bought up the competition, and anti-trust rules and regs have watered down. We need to resurrect Teddy R. so he could shove sharp bits in their mouths.

If you agree, speak up.

John T. Johnson, III. is a Texas entrepreneur who has been involved with everything from the travel business, to specialty tool design for nuclear power plants, to food brokerage, to heavy construction equipment sales to S.E. Asia, to pond raised shrimp in Central America, to the design and patenting of new products for the military and oil production industries. He has been married to his wife, Donna, for 37 years, has two grown children, and resides in Arlington. John T. Johnson, III, can be contacted @ [email protected]

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  • EarlRichards

    OPEC, Libya and the laws of supply and demand are not responsible for high gasoline and oil prices. The oil price is dictated by the fraudulent “round-trip” trades of the “dark pool” trading in the Intercontinental Exchange (ICE) in Atlanta. The international Big Oil/big banking cabal owns ICE. ICE operates outside of US law. The Commodity Futures Trading Commission has no jurisdiction over ICE, influenced by Big Oil. ICE’s energy traders and speculators can ratchet-up the oil price anytime they feel like it, for their own profits and on the behalf of Big Oil, through the use of “round-trip” trades. Over 75% of the crude oil futures trades are done in the ICE. Google the “Global Oil Scam.” ICE is a super Enron.”Paper oil” and the crude oil futures market has to be done away with. Oil is too critical a resource to be controlled and manipulated by greedy corporations, greedy refiners, greedy speculators and greedy traders. Senator Sanders has to investigate ICE, and seize, immediately, ICE’s trading records, before they are destroyed.

  • JSpencer

    Welcome to uber-capitalism. (or, the coming new feudalism). The changes we are seeing are just the tip of the iceberg I’m afraid.

  • Allen

    Phil Graham, a Republican, and said to be the “High Priest” of deregulation.

    Do you see now what deregulation does? It allows corporations to make you and I slaves by taking the teeth out of the power of the people. Deregulation makes your elected officials redundant and corporate boards the unelected masters of your fate.

    The United States is rapidly becoming a corporate republic deriving its power not from the consent of the people, but from consent of the board of directors.

    …and you will do what you are told, think what we want you to think and die when it is expedient.

  • Yes, laws and “regulations” are used to limit competition, which is an old problem. FDR, in particular, worked hard at getting the courts to get the federal government into the job of picking winners and losers. Now we’re finding that corporations are using that power for their advantage. Big surprise.

    The health insurance law that was indirectly referenced is McCarran-Ferguson.

  • casualobserver

    “The health insurance law that was indirectly referenced is McCarran-Ferguson.”

    And all the large national players are more than happy to switch to Federal regulation….most of them publicly backed it. Uniform regulation will cut some backroom compliance costs and they don’t really care if their lobbying has to be done in Washington DC or Helena, MT. It will be the second tier regionals that will miss state regulation the most.

  • malcontent

    Casualobserver…I’m confused. Are you a proponent of regulation or not? It appears that allowing the Big’s to get too Big has been one of the major problems. Anti-trust considerations have been ignorned for the past 20 years to the detriment of the consumer. My health insurance premiums have gone up 100% in the last 10 years. Look at the profit margins of the major providers. That’s where it’s going.

  • @malcontent
    McCarren-Ferguson exempts insurance companies from some federal laws, including anti-trust law. It was framed as a states-rights provision, but if you know our country’s history, the real purpose of the commerce clause was to prevent states from limiting interstate competition.

  • casualobserver

    I no longer have any real skin in the game (my deductible is $20,000), so I’m just calling it as I see it.

    The OP’s headline is “collusion” amongst insurers. There is no collusion unless you are one of the folks that think sharing experience statistics through rating bureaus is collusion. I personally think that is efficient and that data pooling certainly would continue to happen with a Federal government controlled health insurance plan.

    The Prof then brings in mention of McCarran Ferguson, I suspect because he must believe McCarran Ferguson is allowing insurance company mergers to avoid Federal antitrust law scrutiny. However, that is NOT the case ever since SEC v. National Securities, Inc. Probably every one of the mergers you have lamented have been subject to each of the following: Clayton Act, Sherman Act, FTC Act and Hart-Scott-Rodino.

    The bottom line is the OP charge holds no water relative to insurance companies and McCarran Ferguson is not exempting Federal regulation of mergers. Yes, I am for reasonable regulation to preclude monopolies. But there is no monopoly or true collusion in the insurance industry.

  • malcontent

    Let’s reduce all this to the lowest denominator – large insurance companies have divided up the pie and basically have a monopoly in various regions of the country. I don’t care about the “Oh, they’re just sharing statistics” argument, or the “there’s still competition argument”. They are bogus. The proof is in the pudding…Big Insurance is sticking it to us and paying off our elected officals so they can continue to do it. Look at the profit margins across the board. There are no losers in the insurance industry. In a true capitalistic system, there are losers.

  • davidpsummers

    Proof of this collusion in heath insurance ought to be obvious to all since all insurance companies are “not allowed” to offer policies nationwide. States have to approve each company; each company can pick and chose where it wants to apply for a license to sell.

    I kinda agree with this part. The health care market is so highly regulated as prevent any effective competition. To me this clearly points to the answer, remove regulatory barriers and allow real competition to occur. That way, if someone tries to raise the price, someone else just comes in makes the profit they would have made. Which is why I am puzzled by the conclusion of this article is that we need _more_ regulation.

  • malcontent

    Let’s put it this way, davidpsummers…I am a Big Company – one of about ten in the U.S. who have bought up smaller competition over the years. I make a “gentleman’s agreement” with the others to take a segment of the U.S. and not move into their territory. When Obamacare was being negotiated, one of the things that Obama wanted removed were the varios state’s regulatory rules. The insurance lobby got this removed from the table. They just use the pseudo regulation as an excuse. In this case, the regulation would require them to offer their services nationwide.

  • Thanks, CO. I hadn’t seen that one.

  • davidpsummers

    malcontent says:
    September 30, 2011 at 5:07 pm

    Let’s put it this way, davidpsummers…I am a Big Company – one of about ten in the U.S. who have bought up smaller competition over the years. I make a “gentleman’s agreement” with the others to take a segment of the U.S. and not move into their territory. When Obamacare was being negotiated, one of the things that Obama wanted removed were the varios state’s regulatory rules. The insurance lobby got this removed from the table. They just use the pseudo regulation as an excuse. In this case, the regulation would require them to offer their services nationwide.

    Well, I’m not sure how this disagrees with me. The regulation on what territory an insurance company can sell in helps to keep prices high. Some have observed that, in fact, some large companies are actually in favor of regulation like this because it helps them control prices rather than have to compete with companies that might lower them. Which is why I don’t really see it as an argument for more regulation.

  • slamfu

    More proof in the pudding, every time there has been a massive round of deregulation, there has been within the next 10 years, usually withing 3-5, some massive fraud or malfeasance in that industry related to whatever just got deregulated. Regulations are there for a reason. Companies would set babies on fire if there was money to made and we let them do it.

    PS – Great article

  • malcontent

    We are, indeed, saying the same thing. My point is that if all state regulations were removed, the companies would still not expand their sales efforts into their good friends’ territories without being forced to.

  • davidpsummers

    malcontent says:
    September 30, 2011 at 9:45 pm

    We are, indeed, saying the same thing. My point is that if all state regulations were removed, the companies would still not expand their sales efforts into their good friends’ territories without being forced to.

    I’m not so sure this is true. Unless the companies are evenly matched, one is probably going to be able to make money going into the other’s territory. So unless there is price fixing, why wouldn’t they. And if there is price fixing, then anti-trust enforcement would seem to be more important than more regulations. And, in either case, the other thing to do is make sure that if neither company is willing to expand, make sure that anyone else who wants to compete and steal the market from the non-competitive companies is in a position to do so.

  • malcontent

    OK…I’m going to, for the sake of argument, defer to you and give into your theory. Now, what I would like for you to do is tell me what is wrong with the current system, what it would take to increase competition, reduce premiums, and expand the choices we now have. Will it take deregulating and already deregulated industry, or regulating an already regulated industry? I’m confused.

    Why did we use to have gas wars with four different brands on the four corners of any given block fighting it out for our business? Why were Cigna, BCBS, Aetna, United and umpteen others that have been bought up and merged by them doing the same thing in insurance? What has changed to cause this competition to disappear?

  • @Slamfu: “More proof in the pudding, every time there has been a massive round of deregulation, there has been within the next 10 years, usually withing 3-5, some massive fraud or malfeasance in that industry related to whatever just got deregulated.”

    Maybe for the “round”. When Reagan did his round of regulation, it had a very positive effect on railroads and phone companies. Unfortunately, he didn’t seem to understand the differences in the financial sector, and deregulated the Savings and Loans, without deregulation their insurance. There are reasons for most regulations, but they don’t always keep up with changing times.

  • malcontent

    Go back 100 years…I have to think the Big’s were buying votes back then just like they are today. Teddy R. had the balls to stand up to the establishment, and at a time when communicating with the voters was archaic comparted to today, get them fired up to help get regulations in place and change implemented. There is so much money changing hands today, I have no idea how to fight back.

  • davidpsummers

    malcontent says:
    September 30, 2011 at 11:34 pm

    OK…I’m going to, for the sake of argument, defer to you and give into your theory. Now, what I would like for you to do is tell me what is wrong with the current system, what it would take to increase competition, reduce premiums, and expand the choices we now have. Will it take deregulating and already deregulated industry, or regulating an already regulated industry? I’m confused.

    Well, for healthcare, the regulation that article cited as reducing competition (preventing companies from selling nationwide) would be a start. If you are complaining about the effects of laws that reduce competition, the answer would seem to be to stop those laws, rather than pile on more regulations.

    Why did we use to have gas wars with four different brands on the four corners of any given block fighting it out for our business? Why were Cigna, BCBS, Aetna, United and umpteen others that have been bought up and merged by them doing the same thing in insurance? What has changed to cause this competition to disappear?

    All good questions. And all steps in figuring out how to open of the markets, which will involve anti-trust enforcement and getting rid of laws that stop competition.

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