Slippery Testimony

11 November 2005



Big Oil Grilled by Senate over Huge Profits

One man’s price gouging is another man’s just profit in a tight market. At least, that is what the top oil men who testified before the Senate on oil prices on Wednesday would like the world to believe. Meanwhile, senators who have praised the market till they're blue in the face suggested that Big Oil was taking advantage of recent events at the expense of voters who didn’t like paying $3 a gallon for gas. Fortunately, this was all a big photo-op, and it will likely just go away without anything being done to help or to hurt the little guy.

The problem is that the oil companies have posted record profits in the wake of the Iraqi quagmire, the hurricanes and huge demand from China for petroleum. ExxonMobil profited by $9.9 billion in the third quarter, Shell earned $9 billion, ConocoPhillips earned $3.8 billion. Imagine, a company making a profit has become suspect in America. Senator Pete Domenici, whose record on pro-market ideology has been pretty close to perfect over the years, said there is a “growing suspicion that oil companies are taking unfair advantage. The oil companies owe the American people an explanation.”

Their explanation was simply, “We had to respond to the market,” according to Chevron chairman David O’Reilly. This is bovine excrement, of course, and it is amazing that such a distortion of the facts went unchallenged, but that is what happens when Senators tend to be lawyers rather than economists. Then again, the Republican Senators refused to have the oil big shots take an oath -- hardly reassuring.

To an economist, the oil business fails on three of the four criteria required for a perfect market. It does have a homogenous product, that is, oil from Texas is more or less indistinguishable from Saudi crude (there are some differences between light and heavy, so even here one may doubt whether this criterion is met). However, there are significant barriers to entry and exit from the market (oil drilling, refining and distribution aren’t part-time jobs one can start at home). Market participants lack perfect information about the market (one has yet to see a situation where they do, but the oil market is full of secrets thanks to exclusive drilling rights agreements and the rest). And there are not many buyers and sellers, or at least, there aren’t many sellers. The oil firms would like one to believe that traders in the oil pits in New York set the price, but the supply is controlled by the oil producers – and the term “Seven Sisters of Oil” is an old one.

The oil market is an oligopoly, not a free market. As such, some form of regulation to prevent “unfair” manipulation of the market is in order. However, whether this should take the form of a windfall profits tax, higher corporate taxes in general, subsidizing poor consumers out of general revenues, or some other method, is moot. There is no policy prescription here; the senators merely wanted to be seen to care. And the oil companies wanted to give their side of the story, no matter how uncomfortable the witness chair got. But a year from now, it is safe to say that precisely nothing will have been done about all of this.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
Produced using Fedora Linux.

Home

Google
WWW Kensington Review







Amazon Honor System Click Here to Pay Learn More