What To Do About the Price of Oil

Is Big Oil ripping off consumers? Are Wall Street speculators manipulating oil markets? What should be done?

Whether or not Big Oil is improperly restricting refinery capacity, whether or not Wall Street traders are driving up the traded price of oil to heights completely disconnected from supply-and-demand fundamentals, a few things are clear about gas prices — and so is the most appropriate, immediate policy response.

Current pricing arrangements are generating profit gushers for the large, integrated oil companies — ExxonMobil, ChevronTexaco and the like. While the price of oil is going up, these companies’ drilling expenses are not. Oil can trade at $40 a barrel, $90 a barrel, or $130 a barrel. It still costs ExxonMobil and the rest of Big Oil only about $20 to get a barrel of oil out of the ground.

The oil companies’ staggering profits are a windfall of the purest sort (Websters’ definition: “an unexpected, unearned, or sudden gain or advantage”). This is not a moral judgment about the oil companies, it is just a description of what’s happening.

A windfall profits tax could generate substantial government revenues. Allocated to investment in renewable energy, it could significantly increase funds directed to renewables, and be a small but important down payment on the massive investment needed in mass transit, energy efficiency and renewable energy.

Beyond the immediate future, it is important to get a better fix on energy markets. What’s clear now is that the U.S. refining market is very concentrated, thanks to a series of mergers permitted by antitrust authorities; and that oil and energy futures markets are dangerously unregulated.

Just five large oil refiners now control over half of the U.S. market, and the top 10 control over 80 percent, according to Public Citizen. There is very good evidence that the refiners have worked in the past to limit supply and drive up price. Whether this is an ongoing issue is perhaps less clear, given that independent refiners are now facing profit squeezes.

Still, for the medium term, either the government needs to scutinize refinery activity much more closely, adopt new regulatory authority and aggressively enforce antitrust laws, or it must intervene to deconcentrate the market.

Meanwhile, oil and energy markets have mutated in dangerous fashion over the last decade. At Enron’s instigation, these markets have become largely deregulated in the United States. Leading Wall Street firms like Goldman Sachs have subsequently bought up oil transport and storage operations — not because they are looking for new business outlets, but because they want insider knowledge about oil and gasoline markets. Meanwhile, investors large and small are pouring money into oil as a tradable commodity.

Are these markets being manipulated? Perhaps. But even with no manipulation, the intensified financialization of oil trading subjects the market to speculative frenzies characterized by sudden and severe price fluctuations. These prices swings have real impacts at the pump and in the overall economy (and much more ominous impacts for oil-importing developing countries than rich nations).

Re-regulating energy markets, imposing margin requirements and lessening investors’ ability to trade with borrowed money, and cracking down on market manipulation will all slow the Wall Street frenzy and limit price spikes.

For the long term, however, oil demand will continue to shoot up — though higher prices and the U.S. recession will moderate this tendency — and supply cannot keep up. Ultimately, new sources of oil may become available, including from deep water sites and tar sands and shale, but these will be more expensive to obtain.

The world is likely witnessing a long-term, steady (if bumpy) and permanent rise in oil prices. (More on the causes of oil price increases tomorrow.) This price increase will impose major economic hardships, unless there is a massive effort to shift to oil-displacing technologies and renewable energy.

That exactly this shift is needed to address the even more pressing threat of climate change, makes it all the more urgent that Washington adopt a windfall profits tax (and end governmental subsidies for Big Oil) and invest the proceeds in renewables. This is very unlikely for 2008. Will things be different in 2009?

Pharmaceutical Payola — Drug Marketing to Doctors

Last week, a Congressional committee properly raked Big Pharma over the coals for misleading advertising of pharmaceuticals.

A hearing of the House Energy and Commerce Committee’s oversight subcommittee focused on advertising campaigns for three drugs, including the remarkable case of Robert Jarvik. Jarvik is featured in endlessly re-run ads for Pfizer’s blockbuster cholesterol drug Lipitor. Known as the inventor of the Jarvik artificial heart, he is not a cardiologist, not a licensed medical doctor and not authorized to prescribe pharmaceuticals. He’s shown in the ads engaged in vigorous rowing activity, but in fact he doesn’t row. Pfizer pulled the ads in February after controversy started brewing.

Among industrialized countries, only the United States and New Zealand permit drug companies to market directly to consumers. It’s a bad idea, it drives bad medicine, and it should be banned.

But although it has the highest profile, direct-to-consumer advertising is a small part of Pharma’s marketing machine.

Researchers Marc-André Gagnon and Joel Lexchin conclude in a recent issue of the journal PLOS Medicine that direct-to-consumer ads make up less than a tenth of industry marketing expenditures ($4 billion of $57.5 billion in 2004). And Gagnon and Lexchin’s estimate of $57.5 billion on marketing excludes many industry expenditures that are really driven by marketing, including clinical trials conducted for marketing purposes.

The bulk of the industry marketing effort — more than 70 percent by Gagnon and Lexchin’s calculation — is directed at doctors.

Why?

Because it works.

The companies spend huge amounts paying firms that carefully track what doctors prescribe, and then they use the information to tailor messages to doctors, distribute samples and develop continuing medical education programs.

Gagnon and Lexchin report that Pharma spends more than $20 billion a year on “detailers” — the pharma reps that knock on doctor doors, ply the staff with free coffee and lunches, distribute samples ($16 billion worth), and prod docs to prescribe their drugs.

This is complemented by a host of tactics that in other circumstances might be called bribes.

“Virtually all physicians in America take cash or gifts from the drug companies,” says Melody Petersen, author of Our Daily Meds: How the Pharmaceutical Companies Transformed Themselves into Slick Marketing Machines and Hooked the Nation on Prescription Drugs, and a former New York Times reporter. “A recent survey said 94 percent of physicians took something of value from the drug companies. Some doctors take hundreds of thousands of dollars a year from these companies, and there’s no law that says they can’t.”

Petersen says she “had no idea this was so extensive until one day I was writing a story about Celebrex and Vioxx — this was before Vioxx was taken off the market. The story was about the marketing battle between these two pain drugs. I called one of the large societies of rheumatologists and asked for an expert on arthritis. I specifically said I needed an expert who was not being paid as a consultant to one of the manufacturers of these drugs. A staff person said, ‘We have lots of people you can talk to, but all of these doctors are consultants to one or both of the drug companies.'”

Drug companies hire doctors to give lectures, and they hire other doctors as “consultants” to go to fancy dinners and listen to the lectures. “There are more than 500,000 of these dinners or events in America every year,” Petersen says.

The drug companies weave these diverse strategems into an elaborate tapestry — not infrequently to push drugs for inappropriate purposes. One eye-opening case that Petersen details in Our Daily Meds concerns Neurontin, a mediocre drug for epilepsy that Warner-Lambert illegally peddled as an unapproved treatment for bipolar disorder, migraines, attention deficit disorder in children and other conditions. The drug does not work for most of these conditions. Many persons were injured by taking excessive doses of Neurontin, and many others wasted money and emotional energy on hopeless Neurontin treatment strategies. Warner-Lambert ultimately paid $430 million to settle criminal and civil charges related to Neurontin marketing, but Petersen says that, even so, the illegal marketing scheme was clearly profitable for Warner-Lambert (and Pfizer, which acquired Warner-Lambert in 2000).

Petersen’s account of the Neurontin nightmare draws heavily on a whistleblower, David Franklin. She summarizes the central theme of the story Franklin revealed: “The company got doctors to prescribe the drug for all these experimental uses by paying them. They paid physicians to give speeches to other physicians at restaurants or hotels or resorts. The doctors not only enjoyed a nice meal or a weekend vacation, they often also received a $500 check for attending. The physicians giving lectures at these parties were often trained by the drug company’s ad firm to describe how Neurontin could work for conditions like bipolar. … The company tracked the doctors’ prescriptions before and after these dinners or weekend retreats. The executives saw how well it worked.”

Which raises an interesting question: How is that industry can so effectively manipulate highly trained doctors?

Answers Adriane Fugh-Berman, a doctor and Georgetown University professor who runs PharmedOut, a project that focuses on how pharmaceutical companies influence prescribing decisions and encourages physicians to educate themselves from non-industry sources: “Physicians are trained in medicine, not psychological manipulation. Every bit of flattery, friendship and information offered by reps is aimed at selling drugs.”

There is no simple solution to these problems, though ending patent-based marketing monopolies would transform pharmaceutical marketing practices and likely eliminate most abuses.

In the meantime, a ban on Pharma gifts to doctors would be a modest step forward. In the United States, notes Petersen, “radio disc jockeys can’t take cash from music companies. But when it comes to something like medicines — which mean life or death for people — doctors can take as much money as they want from the drug companies. We need a law to stop that.”

Note: I serve as managing director for Commercial Alert, which advocates for elimination of direct-to-consumer pharmaceutical advertising.

Global Poverty: More Big Business is Not the Solution

By most accounts, UK Prime Minister Gordon Brown is genuinely passionate about reducing global poverty.

But he is not willing to challenge the structures of the global economy that generate poverty, or the corporations that build, benefit from and maintain those structures.

Nor, apparently, is he immune to gimmicky notions of corporate leadership to support development, or the lure of high-profile summits to shed light on new plans to do — very little.

Thus, earlier this week the UK was treated to the spectacle of the Business Call to Action summit, which Brown’s office co-sponsored with the UN Development Program. More than 80 CEOs of large companies gathered with Brown and other luminaries to discuss how they could help meet the Millennium Development Goals, which aspire to reduce global poverty by half by 2015. Roughly two dozen of these CEOs — from Anglo American, Bechtel, Citigroup, Coca-Cola, De Beers, Diageo, FedEx, Goldman Sachs, GE, Merck, Microsoft, SAB Miller, Wal-Mart and others — have signed the Business Call to Action, which states, “as leaders from the private sector, we declare our commitment to meet this development emergency.”

The premise of the event, as Gordon Brown said, was to advance “a new approach — moving beyond minimum standards, beyond philanthropy and beyond traditional corporate social responsibility — important though they are — to develop long-term business initiatives that mobilize the resources and talents that are the central strengths of global business.”

The mantra of the event was for corporations to “explore new business opportunities that use their core business expertise” and that also help spur development.

Taken at its face value, this was, um, not exactly inspiring. Says Peter Hardstaff of the UK-based World Development Movement, the CEOs “have all agreed — to do more business.”

But the problem goes way beyond the fact that business as usual — or even a little bit of new business initiative with a development-conscious orientation — is not going to do much to reduce global poverty. The real problem is that business as usual is a central part the problem.

“Instead of holding these companies to account for their actions,” says John Hilary, executive director of War on Want, a UK-based anti-poverty group. “Gordon Brown has allowed them to portray themselves as allies in the fight against poverty. The prime minister should be working to address the poverty and human rights problems caused by business, not giving the companies a free ride.”

War on Want focused attention on the harmful development impacts of many of the corporations signing the Business Call to Action. The group has campaigned against mining giant Anglo American. It has documented how Anglo American has benefited from human rights abuses associated with civil wars in Colombia and the Democratic Republic of Congo (DRC). Local mining communities in Ghana and Mali have seen little economic benefit from Anglo American’s operations (or the spike in the price of gold); instead, says War on Want, the company’s mines harm their environment, health and livelihoods.

Other corporate signatories to the Business Call to Action have directly hurt poor people through their “core business” more than can be offset by development-tinged ventures (even assuming such ventures succeed). Wal-Mart contracts with sweatshops. Bechtel tried to price-gouge and rip-off Bolivian consumers and the Bolivian state through control of the country’s privatized water system. Merck refuses to license life-saving medicines for cheap generic production.

Simultaneous with Brown’s business summit, Action Aid UK pointed to a major systemic abuse by multinational corporations that undermines development: They don’t pay their taxes. The group released a report looking at tax payments of 14 corporate signers of the Business Call to Action. It found that these companies combined are underpaying taxes by more than $6 billion a year, as compared to what they would pay if they paid at the statutory rate in the United States and UK. The group did not suggest any illegal activities by the companies — there are plenty enough legal tax avoidance strategies.

Money lost to developing countries through capital flight and tax avoidance is many times greater than aid flows into poor countries, says Jesse Griffith, the lead author of the Action Aid UK report.

Tax avoidance is a key issue because it strips money from national treasuries that would otherwise be available for social investment, and because it reflects structural problems that could and should be cured without any need for global philanthropy or aid.

But tax avoidance is only one of many ways that corporations exploit and perpetuate economic policies and institutional arrangements that contribute to poverty or inhibit authentic development.

The World Development Movement issued a 10-point challenge to corporations that claim an interest in promoting global development. It called on companies to stop using their political influence to promote policies that undermine development. It urged companies to: stop lobbying to open up developing country markets, and let developing countries “use the same trade policy tools industrialized countries used to get rich;” stop demanding rich country-style patent rules for the poor; support radical government action, starting in rich countries, to address climate change; support binding codes of conduct for multinationals, including respect for labor rights; end support for privatization and deregulation, including particularly financial deregulation; stop lobbying for and exploiting tax loopholes; and other measures.

This is not exactly an agenda that global business leaders are likely to take up soon.

On the other hand, it’s not exactly likely that global business leaders are going to lead the way to end global poverty.

Among other things, that’s going to take a global movement, led from the Global South, to implement the policies implicit in the World Development Movement call.