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Congress and Oil Prices: The Outrage Continues / Interess. Artikel, engl.

verfasst von JüKü, 09.05.2002, 22:31

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Congress and Oil Prices: The Outrage Continues
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by William L. Anderson

[Posted May 9, 2002]



[img][/img] One
of the enduring myths about Washington, D.C., is that the political classes can
be--or at least want to be--educated about economic matters. Individuals
and foundations have sunk millions of dollars into"think tanks" and
seminars, all in hopes of teaching basic concepts of economics to those who are
in positions of political leadership.

Lest we be tempted to fool ourselves into
thinking that this is working, have a look at the latest outrage from
Congress--a U.S. Senate"investigative report" on oil prices. The
political classes and their media allies have cooked up yet another conspiracy
theory on the evils of private enterprise. A conspiracy theory that claims Osama
bin Laden was the mastermind of the John F. Kennedy assassination is more
believable than this latest outrage of a congressional document.

According to the Washington Post, the
report claims that oil companies are"manipulating the markets"
through mergers and by"withholding" gasoline from the market in order
to drive up gas prices. The sponsor of the report, Sen. Carl Levin (D-Michigan),
claims that oil company mergers have left consumers vulnerable because the
companies now"are able to raise prices without fear of competition. They
are able to manipulate supply to keep it low, and as supplies are low, the
prices will go up."

While Levin does show a little bit of knowledge
on the role of supply in a market, he demonstrates once again that political
instincts always trump economic reality. He goes on to cite a litany of
statistics that, as we shall see, mean absolutely nothing.

The Senate report says that, in 1981, some 189
oil companies owned 324 refineries. By 2001, only 65 companies owned 155
refineries, and this year, figures have declined to 63 and 150, respectively.
The report further states,"Because of the decline in the number of
domestic refineries, total domestic refining capacity is slightly lower than it
was 20 years ago. At the same time, demand has increased. A tight market
optimizes profits for a refiner.

"In the summer of 2001," the report
ominously continues,"major refiners affirmatively reduced gasoline
production, even in the face of unusually high demand at the end of the summer
driving season."

Levin further complains that gasoline prices in
the U.S. vary widely from region to region. For example, gas prices in
California are substantially higher than they are in rural Georgia and South
Carolina. This, he says, is further evidence of conspiratorial behavior on
behalf of oil firms.

This is a wonderful example of how to lie with
statistics--something that politicians and their media allies have perfected
over time. It is difficult to know where to begin in criticizing this outrageous
document, but we must begin somewhere.

If one were to take this report at face value,
one would have to conclude that (1) gasoline prices are substantially higher
than they were 20 years ago, and (2) oil companies are much more profitable than
they were in 1980. In fact, the opposite of these conclusions is true.

If one accounts for inflation, the average price
of gasoline today (when gasoline prices have been recently rising) is more than
a dollar less than it was in 1980, and that is not taking into account
that substantial new gasoline taxes on the federal and state level have been
placed on gasoline since then. If one were to take away the gasoline taxes, the
price today would be roughly half of what it was two decades ago.[1]

In other words, the mergers and acquisitions that
have taken place in the oil industry have not raised the price of gasoline, as
the report claims. To say otherwise is simply untrue. Furthermore, in the
last 20 years, average profitability of oil companies has been substantially
less than other firms listed in the Standard and Poors Industrials Index.[2]

In the world of mainstream economics, the ideal
economic arrangement is an economy full of tiny, backyard companies which have
tiny economies of scale, are numerous, and produce very little. That is what we
call"perfect competition." The greater the number of firms that exist
and the smaller their productive capacities, the better off all of us will be.

This, of course, is a picture of the
precapitalist and pre-Industrial Revolution world. Three centuries ago,
production was small-scale, and no one firm could dominate a market. While
mainstream economists might celebrate such a state of affairs, we are also
describing a world in which the average life expectancy was about 30 years of
age, half of all children died within a year of birth, and the vast majority of
people lived in unspeakable poverty. This is the world that the Carl Levins and
a gaggle of economists say would be most ideal for all of us.

Besides the obvious debunking of the statistics
that Levin and his tax-funded cohorts have thrown at us, let us further examine
the charges he has laid upon the oil industry. For example, he says that oil
companies are withholding present supplies of gasoline when prices are cheaper
in order to sell gasoline later when prices are higher.

Such a statement presupposes that the markets
determine prices, but since Levin has already claimed that oil companies are
impervious to market conditions, or that they create market conditions on a whim,
he has managed to contradict himself. Either oil companies control the markets
or they do not. If they do, then companies would not be engaging in speculative
behavior, since speculation would be unnecessary. If they don't, then perhaps we
need to look at the issue of speculation.

As elementary students of economics are supposed
to be taught, speculation is an act of buying low in hopes that one can sell
high. In the situation of oil markets, during slack periods of demand, companies
may wish to withhold some gasoline in order to have more of it available when
demand is higher. However, such behavior actually would tend to make prices more
even over a long period of time--something that is the opposite of what
Levin claims is really the case. (The report decries the large variability in
gasoline prices, yet condemns oil companies when they try to do something about
that volatility.)

According to Levin, withholding present supplies
of gasoline is a crime against humanity, yet he supports the presence of the
government?s Strategic Petroleum Reserve, which is a large stockpile of crude
oil in the former salt domes of Louisiana. In other words, it is OK for the
government to withhold crude oil from production, but wrong for oil companies to
do so.

At the same time, the amount of present supplies
oil companies can hold back is limited by capacity. By its nature, the oil
industry is in constant flow. Oil comes from wells to tankers and pipelines, to
refineries, through more pipelines, to storage tanks, and then to the final use
as fuels or chemicals. Companies do not have much room to"hold back"
anything, since to stop the activity in one place would invariably create
bottlenecks elsewhere. This idea that oil companies have a Secret Hideaway where
they are keeping their products from public sale is yet another version of the
bin Laden-JFK conspiracy.

As for the regional differences in gasoline
prices, the blame rests solely on federal and state governments. In the real
world, when there are price differentials in different markets of the same
product, supplies tend to flow to where prices are highest and away from where
they are the lowest, something the ancients once called arbitrage.

Congress and state governments, unfortunately,
have prohibited such arbitrage in the sale of gasoline. First, governments have
blocked the construction of cross-country pipelines that would allow gasoline
and other fuels to be shipped quickly to places where prices are highest.
Second, the draconian rules of the Clean Air Act Amendments of 1990 require
different formulations of gasoline for different regions, depending upon the
permitted emissions levels.

For example, gas that is sold in rural Georgia is
formulated differently than gasoline that is sold in Atlanta or California. (It
should be noted that many of the required additives to help gasoline burn more
"cleanly" during the warm summer months actually do little more than
drive up prices. It is yet another failure of the command-and-control
environmental regime that Congress and the Environmental Protection Agency have
imposed upon us.)

Thus, when price differences emerge, especially
during the warmer months, it is illegal to engage in arbitrage, since legal
gasoline for South Carolina is illegal in other places. Furthermore, many states
have used gasoline as a huge tax repository, which creates huge differences in
prices between high-tax and low-tax states.

The kindest thing one can say about the Senate
report is that the government has found no antitrust violations on behalf of oil
companies. However, the whole thing is an exercise in economic illiteracy. One
might wish that someday, all the efforts to give Washington some basic economic
education could succeed, but I am not holding my breath. This is not for lack of
effort on the parts of well-meaning people. Rather, it is because of the simple
fact that Congress, the mainstream media, and their erstwhile allies can seize
more power when they act out of willful ignorance than they can by being
truthful and honest.


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William Anderson, an adjunct scholar of the Mises Institute,
teaches economics at Frostburg State University. Send him MAIL.
See his Mises.org Articles
Archive.

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[1]
William L. Anderson,"Uncle
Sam?s Energy Mess: How the U.S. Government Empowers the OPEC Cartel and
Takes Power from the People," Institute for Research on the Economics
of Taxation, Studies in Social Cost, Regulation, and the Environment: No. 5,
March 2001, p. 7.

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[2]
Ibid., p. 4.
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Congress and Oil Prices: The Outrage Continues / Interess. Artikel, engl. - JüKü, 09.05.2002, 22:31