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Source link: http://archive.mises.org/4627/record-profits-spark-new-backlash-against-big-oil-an-economic-analysis/

“Record Profits Spark New Backlash Against Big Oil” – An Economic Analysis

January 31, 2006 by

The story named above appears in today’s New York Times. It opens with the declaration, “Still fuming over higher gasoline prices and rising heating oil bills, politicians and consumer groups set off a fresh wave of calls for special taxes against Big Oil after Exxon posted record profits of $10.7 billion in the latest quarter and more than $36 billion for the year.” It then quotes Wisconsin Governor Jim Doyle as saying, “`Once again, Exxon Mobil has reaped the largest windfall in U.S. history at the expense of hard-working families . . . . `I hope that this news will finally convince the U.S. Congress to take action and force the oil companies to give consumers a refund.’”

The article goes on to note that “New York Sen. Chuck Schumer and Rep. Edward Markey, a senior Democrat on the House Energy and Commerce Committee, were others who quickly piled criticism on Big Oil. `The Bush policy of subsidizing wealthy oil companies has proven to be wildly effective in boosting oil company profits, but it continues to harm American consumers and threaten economic growth,” Markey said in a statement.”

It then proceeds to give the environmentalists their say: “ExxposeExxon, a coalition of 15 environmental and other groups that banded together a few months back, used the record results to launch a fresh attack on Exxon and its policies. `A company like Exxon Mobil that is making record profits, and is making those profits off the back of American consumers, has a responsibility to invest those profits into responsible energy policies,” said Shawnee Hoover, a campaign director for the coalition. `And that is precisely what Exxon is fighting.”’

Such statements demonstrate breathtaking disregard of facts, logic, and the science of economics.

Let us begin with the fact that oil prices would be lower if the supply of oil were greater. The oil companies, including Exxon Mobil, have been doing their utmost to increase the supply of oil, including reinvesting a major portion of their profits precisely for that purpose. But time and again, they have been prevented from increasing the supply of oil by the environmental movement and the maze of governmental regulations and prohibitions that it has inspired. A prominent part of the environmental movement, of course, is the very organizations represented by “ExxposeExxon.” And prominent among the politicians who have done the bidding of the environmental movement are Senator Schumer and Rep. Markey.

For example, just last December 21, in a vote on the Senate floor, Senator Schumer helped defeat the attempt to open a small part of the Alaskan wilderness to oil drilling, which, had it been successful, would all by itself have made possible an increase in production capable of making the price of oil substantially lower than it is today. (Just as a relatively small decrease in the supply of oil is capable of increasing its price dramatically, because of the great need for oil and lack of available substitutes for many purposes, so a relatively modest increase in the supply of oil is capable of reducing the price of oil just as dramatically. True enough, the development of this source of oil might take a few years, but Senator Schumer and his colleagues have been preventing its development for over twenty-five years.)

The potential oil from ANWR (the Alaskan National Wildlife Refuge), which Senator Schumer and forty-three other Senators (forty-one Democrats and two Republicans) voted to keep from the market last December, significant as it is, is only a small part of the supply of domestically produced crude oil that the environmental movement and its congressional supporters have kept off the market. To it must be added all of the crude oil that could be produced from additional offshore drilling. To that must be added all of the additional crude oil that could be produced from the vast areas besides ANWR that have been closed to oil production by virtue of having been set aside as wildlife preserves or wilderness areas.

The increase in the supply of oil that would be achieved if only the environmentalists and their congressional supporters would get out of the way and allow profit-seeking oil firms to expand their output, is not the only readily available means of bringing down the price of oil. There is also the elementary economic fact that a decrease in the demand for oil would cause the price of oil to be lower. And among the things that would serve to reduce the demand for oil is an increase in the supply and reduction in the price of competing forms of energy, notably, atomic power, coal, and natural gas, all forms of energy whose supply the environmental movement has also succeeded in greatly restricting.

If politicians like Wisconsin’s Governor Doyle, Senator Schumer, and Congressman Markey were serious about wanting to reduce the burden imposed on American working families and consumers by the high price of oil, all they would need to do would be to abolish the restrictions on energy production that they have up to now been supporting. The truth is that their policy has been “wildly effective,” to use Congressman Markey’s phrase, in raising the price of oil and making life so much more difficult for the American people than it needs to be.

[For further analysis of environmentalism and its economic consequences, see the author's Capitalism: A Treatise on Economics available in pdf format on his web site.]

{ 13 comments }

Yancey Ward February 1, 2006 at 8:38 am

Most people with whom I debate this topic claim that since Exxon made money with oil at $12/barrel in 1998, then there is no reason for them to sell their oil today for $68/barrel. It is impossible to get them to understand that the price of oil is set by supply and demand factors, not the costs of pumping it out of the ground. The free lunch mentality is immune to logic, regardless of how detailed you lay it out for them.

quincunx February 1, 2006 at 8:49 am

“`Once again, Exxon Mobil has reaped the largest windfall in U.S. history at the expense of hard-working families . . . . `I hope that this news will finally convince the U.S. Congress to take action and force the oil companies to give consumers a refund.’”

Once again, the various branches of the US Government has reaped 3 to 5 times the largest windfall in U.S. history at the expense of hard-working families, I hope that this news will finally convince the U.S. people to take action and force the THUGS to give consumers a refund.

Seen: “windfall profits” by big oil

Unseen: windfall repairs caused by hurricanes.
3-5x the profits extracted in the form of gasoline taxes.

Bruce February 1, 2006 at 10:22 am

Also unseen: The existing tariffs and excise taxes on imported gasoline. This alone is probably by far the largest contributing factor in the price of retail gasoline as explained in a Mises daily article a few weeks ago.

David Hays February 1, 2006 at 11:25 am

Not only do the politicians artificially hinder supply, they also artificially increase demand. If we didn’t fuel the government machine, especially the war machine, demand and price would decline dramatically, and/or be shifted to more productive purposes.

J. H. Huebert February 1, 2006 at 11:49 am

I hope Professor Reisman or the Mises Institute submits this exceptionally good blog post to newspapers as an op-ed as well. It deserves the widest audience possible.

Richard Garner February 1, 2006 at 3:59 pm

Come on! Are we supposed to believe that the brave oil companies are the helpless victims of these environmental laws?! George Reisman writes,

“Let us begin with the fact that oil prices would be lower if the supply of oil were greater. The oil companies, including Exxon Mobil, have been doing their utmost to increase the supply of oil, including reinvesting a major portion of their profits precisely for that purpose. But time and again, they have been prevented from increasing the supply of oil by the environmental movement and the maze of governmental regulations and prohibitions that it has inspired.”

In other words, government has supplied to oil companies a means of preventing supply from being increased when they raise their prices – in effect, a monopolistic privilege, in the Rothbardian sense… and we are to believe that Oil companies are very angry about this and are trying to increase supplies inspite of it?!

Rothbard pointed out that, “… the government regulation monopolizes and cartelizes much of industry, thereby driving up prices to consumers and restricting production, competitive alternatives, or improvements in products (eg… oil proration laws)” (For a New Liberty, p159). Likewise, David Friedman notes, “Today, although oil still comes out of the ground, federal and state governments have succeeded [at reducing supply] where the oil producers of 1872 failed. Through federal import quotas and state restrictions on production, they keep the price of oil high and production low.” (Machinery of Freedom, p40)

Environmental laws are just some of the monopolistic privileges that oil companies enjoy, and it is laughable to suppose that they aren’t happy with that!

William February 1, 2006 at 4:55 pm

Regulations are normally good for the regulated at the expense of competitors and consumers. The best thing to hurt the regulated business and help consumers is to allow more competition and have less regulations.

As to the high price of oil in particular and energy in general is the policy of the government through the Federal Reserve of reducing the value of the currency. As the Fed creates money these commodities like gold, oil and copper still cost the same amount of wealth so guess what the price rises.

Yancey Ward February 1, 2006 at 5:00 pm

Richard Garner,

A short-sighted oil executive may very well be happy with an artificially restricted supply, however, without further exploration, oil companies will eventually run out of oil to pump and sell, and it is this oil that has provided the large boost in profits.

However, this is beside the main point Reisman was making, which is that it is the populace that are the helpless victims of the regulations.

Dewaine February 2, 2006 at 12:02 am

First thing that should happen: the armed forces should boycott the oil industry and all petroleum products. The government should not be aiding and abetting these vile profiteers!

Yancey Ward February 2, 2006 at 8:23 am

Dewaine,

I think you may be on to something. I think every government employee should be forced to boycott the oil industry and petroleum products as a condition of employment.

Vince Daliessio February 2, 2006 at 9:07 am

Dewaine;

“First thing that should happen: the armed forces should boycott the oil industry and all petroleum products. The government should not be aiding and abetting these vile profiteers!”

LOLOLOL. You forgot about the munitions makers;

http://lexrex.com/enlightened/articles/warisaracket.htm

RICH Truxel February 19, 2006 at 6:01 pm

Of course the price of oil is set by the supply and demand for oil.
However, the price of gas is set by the supply and demand for gas. Which were you addressing?

The supply of gas is not rising to meet demand, or to take advantage of the potential prices. wHY? Many reasons, but here is one no one mentions.

While Exxon sells oil for $68 / barrel, they pay less than $20. How could a new refinery compete if they have to buy from Exxon or the Saudis?

RICH Truxel February 19, 2006 at 6:08 pm

“`Once again, Exxon Mobil has reaped the largest windfall in U.S. history at the expense of hard-working families . . . . `I hope that this news will finally convince the U.S. Congress to take action and force the oil companies to give consumers a refund.

Exxon did not do anything wrong. They are not a charity and have a duty to act in the best interest of the shareholders.
Exxon dones not determine the price of oil. Profits went up due to increase in price relative to their cost of oil. If anyone was fleeced it was not the consumers, but the party which sold exxon oil at such low prices. Who was that? – Us. We give oil companies leases to drill on public lands. If we pay them a lot more for our oil than they pay us for our crude oil, shame on us.

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