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?