Suffolk Closeup: Rigging the game against consumers

Assemblyman Fred Thiele Jr.
Assemblyman Fred Thiele Jr.

Assemblyman Fred W. Thiele, Jr. (D-Sag Harbor) has been steadfastly monitoring the prices charged for gasoline on Long Island and elsewhere in New York State. He’s found a “rigged pricing system” with the oil industry charging whatever it can get away with depending on the area.

“For years, I’ve monitored South Fork gas prices and the higher prices that the South Fork and other regions of the state pay simply because of the practice of ‘zone pricing,’” Mr. Thiele said last week. “Zone pricing is nothing more than price fixing. ‘Big Oil’ distributors are setting prices based solely on geography, not cost.”

This continues to be the situation even though, suddenly, the price of gasoline has plummeted on Long Island, in the U.S. and around the world. Americans are now paying about $2 a gallon at the pump.

Yet the price of gasoline is still higher than national averages in that part of Mr. Thiele’s district — East Hampton and much of Southampton towns — that the oil industry considers affluent. Other parts of Long Island and the state, where the oil industry figures it can sock it to motorists, are similarly hit.

“It’s all part of the same rigged pricing system,” Mr. Thiele said. “Big Oil sets wholesale prices locally, based on geography. But we’re seeing lower prices internationally because the world is temporarily being flooded with cheap oil.”

Mr. Thiele has tried, again and again, to do something about the situation. “I’ve sponsored legislation for years with the assistance of the state attorney general to outlaw this practice,” he said. “It’s passed the Assembly by wide bi-partisan margins, but has not even come up for a vote in the State Senate.”

Meanwhile, he regularly issues reports on the price discrepancy, listing the charges of gasoline at various locations.

But why has oil suddenly dropped so precipitously on the world market?

In my investigative reporting course at SUNY/Old Westbury, I’ve taught students about one of the great journalistic accomplishments of what’s known as the “Muckraking Era” from a century ago —Ida Tarbell’s exposé of John D. Rockefeller’s Standard Oil Trust. Ms. Tarbell documented how Rockefeller and his trust succeeded in controlling the oil market in the U.S. and internationally, setting production quotas and forcing out any competition.

With discoveries of oil in the Middle East in the 1930s, and with offshoots of Standard Oil deeply involved there, the Arabian American Oil Company (Aramco) was created in Saudi Arabia in 1944. With Saudi Arabia as its key member, the Organization of the Petroleum Exporting Countries(OPEC) was formed in 1960.

Answer to our question: The steep drop in the price of oil is largely an attempt by OPEC to quash one of the most dangerous energy processes — fracking.

In recent years hydraulic fracturing or fracking has caused a revolution in petroleum extraction. Using a new technique to split underground shale formations, fracking has vastly expanded gas and oil output in the United States. But it’s a messy and polluting process. Massive amounts of water and 600 chemicals are shot into the ground under high pressure to release the gas and oil. The gas from fracking wells leaks into underground water tables causing serious contamination.

Fracking, however, is a relatively expensive process, about 10 times more costly than the $5 to $6 per barrel cost of drilling oil from conventional wells. By letting the price of oil drop, OPEC has been applying financial pressure on the fracking industry. Oil in much of 2015 went down to $60 a barrel, making fracking a problematic undertaking economically.

As a result, there were reductions and even some cancellations of numerous fracking operations. Still, the frackers cut costs to survive. And that’s resulted in even greater OPEC pressure — the drop in price of a barrel of oil to as low as $35 — in recent weeks.

Oil industry analysts have pointed to other factors, too, including what they describe as U.S. and Saudi Arabia seeking to hurt Russia, dependent on oil production, and also damage major oil producers Iran and Venezuela.

“There are many theories on why OPEC wants to injure the Russians, Iranians, or the fracking industry,” Mr. Thiele said. “Regardless, it is evidence of the same broken system that is not market based, but where a few fix the prices for the many.”

How long will $2 a gallon gas last? As the secretary-general of OPEC, Abdulla al-Badri, said, “I think maybe they [have] reached the bottom and we [will] see some rebound very soon.”

Then he said, the price of a barrel of oil might skyrocket up, to “more than $200” a barrel.

Big Oil continues to deal from a stacked deck.