Anyone with even a basic understanding of economics should have seen it coming: our leaders are threatening oil companies for making money off higher prices, writes William Anderson. Neither Republicans nor Democrats are being helpful. Democrats call for price controls or new taxes on oil company profits, both of which are downright destructive. Republicans, on the other hand, are demanding that oil companies “reinvest” their profits in new refineries, more exploration, and the like. FULL ARTICLE
Source link: http://archive.mises.org/4332/profits-and-high-prices-more-economic-nonsense/
Profits and High Prices: More Economic Nonsense
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Great article Professor, and a necessary primer on why government “suggestions” are so destructive.
No doubt we will see here a number of postings claiming that oil industry profits are somehow “different” because of US military intervention on their behalf.
While they will have a point, it in no way invalidates your analysis.
This is a great article! It’s useful everywhere in the world to show how ridiculous political suggestions are. Thank you, Mr. Anderson!
US military presence overseas and military inteventions aim at lower prices of gas because they make the supply side of oil much more stable then it would be otherwise. Without that military presence over tens of years, prices of gas would be much higher (my guess) because the market would have to discount the reality that supply can be quite easily disrupted. Or Company would have to assume the costs of protecting their operations. By the way higher prices of oil would probably mean lower energy prices.
Federal + State + Local taxes take 45 cents of every gallon in California which peaked at about $3 per gallon. That’s 15 cents per dollar of revenue in “profit” in taxes with zero expenses to obtain that profit and using the least favorable numbers for the argument (also neglecting the fact that governments, with the damage they create, likely deliver about one-tenth the market value in services for every dollar they take in). Since oil companies made on average over time somewhere around 8.5 cents per dollar of refined gasoline, who is gouging who?
The Federal take is about 18.5 cents per gallon. That’s about the same “profit” as oil companies when the average cost per gallon of gasoline is plugged in, although arguably the oil companies deserve their profits, having put huge sums of capital at risk and successfully coordinating massive infrastructure at a positive return, while frankly no one needs to pay for windbags in congress tell all the rest of us what is or isn’t excessive. Talk about hypocrites.
Of course (after Reisman), wages are profit, i.e. profits are what’s left after expenses deducted from sales and the wage earner is in the business of selling their labor. So profit certainly cannot be bad unless everyone in the U.S. is bad.
John,
Can I point out that since the latest two interventions in the Middle East, ostensibly on behalf of the multinational oil companies, have caused costs as well as profits to skyrocket? Indeed, it seems that, since the oil companies prifit margins seem fairly fixed, military interventions designed to keep crude prices low would seem to be against the economic interests of big oil! Lucky for them, our leaders are so incompetent that the exact opposite thing happened.
Excellent article. As troubling as it is to see such hearings with oil executives even taking place, a more troubling aspect was not only Sen. Dominici’s obvious ignorance of what determines oil and gasoline prices, but also the oil executives’ inability to satisfactorily explain the phenomena of high prices to the Senator. Perhaps they don’t understand it themselves.
Vince,
I think you are correct that profit margins for oil companies are relatively fixed on the refining side, but certainly not on the drilling side where they can reap huge profits with whilr oil prices remain high. If prices fall too much they can easily shut down drilling platforms that would be operating at a loss. The extent to which oil companies are able to profit from high oil prices seems to me to be related proportionally to the extent to which they own the oil they extract. Oil companies who purchase oil from OPEC, which they then refine, pay market prices for the oil and don’t therefore benefit from high prices, they just pass them on to consumers. I believe this is an accurate description of what occurs.
I don’t see how forcing taxpayers to pay for foreign stability and low oil prices is a good thing. Even assuming military intervention has the desired effect (it often doesn’t), doesn’t that mean that we would simply be hiding the true cost of providing that oil, and amount to a subsidization of the oil companies?
I’m no big environmentalist, but part of the response to environmentalists is that a free market would indeed have incentives to protect the environment. Subsidized oil doesn’t seem to provide such incentives, nor, of course, would it be a free market.
That’s why although the public and the politicians take to such simplemindedness as a oil “industry” making too many “profits”. The reality is subtler than we hear spoken about on TV. The major oil companies, while still doing their own exploration, also rely a great deal on companies like Halliburton and Slumberger to do production of their “own” oil, as do the Saudis, for instance. So the production and exploration picture is far from monolithic. Even more reason to avoid a federally-subsidized or imposed “solution”.
A free market would have incentives to protect the environment only if the environment were privately owned, and the owners had the legal ability to sue for trespass by pollution. None of this is true now.
Good essay. I would have guessed that the retail price would not have dropped back below $2.50 There must be some real competition between retailers at least in the large cities.
Hi,
What’s going here?
Discontinuance of M3
http://www.federalreserve.gov/releases/h6/discm3.htm
The call by politicians for the oil industry to invest in refineries is not as much interfering in market mechanisms as it seems is because the reason that refineries are working at an unsustainable 90%+ capacity is because politicians (both parties) have for years supported an EPA veto on building new refineries.
They are thus actually interfering with previous political mechanisms & merely passing the blame.
billwald,
As I sit here at my desk, my wife is filling up her car at an independent gas retailer (in Rosenhayn, NJ) at $1.89 for regular. It’s at least 30 miles from any major, or even minor city (unless you count Vineland). The market is indeed a strange and wonderful thing.
US military presence overseas and military inteventions aim at lower prices of gas because they make the supply side of oil much more stable then it would be otherwise. Without that military presence over tens of years, prices of gas would be much higher (my guess) because the market would have to discount the reality that supply can be quite easily disrupted. Or Company would have to assume the costs of protecting their operations. By the way higher prices of oil would probably mean lower energy prices.
Great… this argument again.
Military interventions do not help the supply of oil; they disrupt it. To believe that military intervention is necessary to keep the oil flowing, you would have to believe that the countries currently in possession of oil would turn down the billions they could make by selling it. Yeah, no one seriously tries to establish that point either, they just implicitly assume it.
Now let’s look at the extreme case where military intervention is necessary, and the government didn’t provide it. This would make gasoline more expensive, right? No, then private oil companies would just hire their own troops at a lower cost. (Since they are private and there are no public goods issues.) The only reason they don’t already do it because the US government does it for free.
Now, oil may be more expensive without government intervention (though I doubt it) but it wouldn’t be due to lack of military intervention.
For an idea of how stable the supply of oil has become thank to the latest military intervention, click here: Iraq Pipeline Watch.
Of course, the price of oil has gone from about $30 to $60 since the beginning of Bush’s war. That should tell you enough by itself.
“Oil firms will invest in those things Republicans want if and only if they perceive future profits to be made from them. However, oil executives have been badly burned before and must make investment decisions based upon the realities of the markets, not political oratory.”
From Mr. Anderson
and
“(also neglecting the fact that governments, with the damage they create, likely deliver about one-tenth the market value in services for every dollar they take in)”
From Jim Bradley
Don’t Very Large Oil Companies, — Anthony Sampson, probably with others, called them Seven Sisters, — along with other large business invest in the election campaigns of Republican and Democratic Senator, Representative and Presidential candidates. If so, they must consider ownership of members of government officials profitable.
And the sevices provided something above 10% of market.
Yang,
Looks like the Feds finally realized they were accidentally publishing something that was a pretty fair measure of inflation. I half expected something in this nature to happen, although I would have picked M3+hedonics rather than simple discontinuation (the inertia of tradition and so forth).
Scary, isn’t it?
Xellos
“Sore wa…. himitsu desu.”
While reading this, I received the impression at first that it was on the side of the oil companies, i.e. big corp., but after thinking about it and reading the blogs, it seems to be more about the government interfering yet again where its not wanted and not needed…though I have to agree that it must be very profitable to own the proper politicians, and that to impose “industry-wide” “solutions” on an industry that is as widely varied as this one is would be typical of the government…pointless and over-all inefective, I am not a believer in coincidence…the timing seems to be too perfect…like the big companies saw a perfect opportunity to make up for poor profits from earlier years by raising prices when the need was the highest…I,for one,didnt even drive my car for the last two months as a way of protesting…proof of the whole “coincidence” can be seen, I think, in New Jersey, it looks like.
AJR;
Nice summary – we don’t favor the oil companies here – we do, however, disfavor the government’s interaction with them, whether it is perceived as benefitting or punishing them (invariably, it benefits them, in the long run). We oppose Federal intervention, not just on principle, but because it always benefits the corporations and harms the consumers in the long run.
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