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<font color="#002864" size="1" face="Verdana">http://www.mises.org/fullstory.asp?control=1322</font>
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<font face="Verdana" size="2"><font color="#002864" size="5"><strong>What's the Deal with Oil Prices?</strong></font>
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<font face="Verdana, Helvetica" size="4">by William L. Anderson</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">[Posted
September 08, 2003]</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2"><img alt src="http://www.mises.org/images3/gaspump.gif" align="right" border="0" width="165" height="221">While
they may not be able to solve many of the problems they create, the political
classes of this country have proven they are still adept at causing crises—and
then blaming others for the results. With gasoline prices rising to their
highest levels in years, and then falling again after Labor Day, it was
inevitable that the politicians would come out of the woodwork and demand yet
another costly investigation of the U.S. oil industry.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">According to </font>
<font face="Verdana, Helvetica" size="2">Reuters</font><font face="Verdana, Helvetica" size="2">,
US Energy Secretary Spencer Abraham has ordered the energy department to
"investigate" the spike in gas prices. "The nature
of this (price) fluctuation struck me as being unusually large as well and in
need of greater explanation," Abraham told a Congressional committee.</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">This is a
response to pressure from Congress. According to another report from</font> <font face="Verdana, Helvetica" size="2">Reuters</font><font face="Verdana, Helvetica" size="2">:</font>
<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">
<font face="Verdana, Helvetica" size="2">Democrats criticized record high
U.S. gasoline prices on Friday and demanded that the Bush administration
investigate if big oil companies were gouging consumers at the pump.</font>
<font face="Verdana, Helvetica" size="2">Democratic Rep. Edward Markey of
Massachusetts sent a letter to U.S. Energy Secretary Spencer Abraham on
Friday asking for a probe into the skyrocketing of motor fuel costs that
occurred just as many Americans took to the roads for a final summer holiday.
Markey is a senior member of the House Energy and Commerce Committee.</font>
<font face="Verdana, Helvetica" size="2">"If the oil industry is
going to tip the driving public upside down to shake their vacation money
out of their pockets, then it is time to tip the industry upside down and
shake out a few answers," Markey said Friday at a rally at a gas
station in Lexington, Massachusetts, near Boston.</font>
[/i]
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Trying to do
Markey one better, at least one contender in the California recall election
has decided that the state must do what it can to force down prices, according
to Reuters:</font>
<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">
<font face="Verdana, Helvetica" size="2">High gasoline prices have become
an issue, too, in the California governor recall and election. California
Lt. Gov. Cruz Bustamante, who is the leading Democratic candidate for
governor, has called for regulating the state's gasoline prices, which are
among the highest in the nation.</font>
[/i]
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">Of course, at
least one Democratic candidate for president, Joe Lieberman (who in 1990
introduced a bill calling for five years in federal prison for anyone who
raised gasoline prices without his permission), also demanded some answers
from U.S. Energy Secretary, Spencer Abraham. Leiberman also asked the
Energy Department for an immediate probe into the causes for the price spike
just ahead of the Labor Day holiday weekend and its impact on consumers.
(Earth to Joe: people paid a few cents more for gasoline; that's the impact.)</font>
<p class="MsoNormal"><font face="Verdana, Helvetica" size="2">"It is
imperative that this investigation determine both the underlying causes for
these price increases, and whether or not industry participants are gouging
consumers," Lieberman said in a letter to Abraham.</font>
<div>
<font face="Verdana, Helvetica" size="2">Actually, for all of the
handwringing that is coming from the political classes, one does not need to
consult Spencer Abraham—or even Abraham, himself, for that matter—to
know why gasoline prices have spiked so high recently. The cause is simple
and tragic: policies that come from Washington, D.C., and many state
governments (such as California). If the politicians really want to know who
is responsible for forcing up gasoline prices, all they need to do is to
look in the mirror. A bit of recent history is in order here. As I wrote in
2001, there are a number of myths about oil companies, and especially about
their vaunted"market power."</font> <a id="_ednref1" title href="http://www.mises.org/fullstory.asp?control=1322#_edn1" name="_ednref1"><span class="MsoEndnoteReference"><font face="Verdana, Helvetica" size="2"></font></span></a><font face="Verdana, Helvetica" size="2">
One of the most important things one discovers when researching this
industry is that its profitability relative to other U.S. firms has been
down for more than two decades.</font>
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<p class="MsoBodyText"><font face="Verdana, Helvetica">To put it another way,
oil has not been a particularly good investment since the government finally
deregulated oil and gasoline prices in 1981. This has been 180 degrees
different from the predictions that oil industry critics like Ralph Nader and
a number of politicians were making when President Jimmy Carter first began
the price deregulation process in 1980.</font>
<p class="MsoBodyText"><font face="Verdana, Helvetica">With that in mind, the
"price gouging" accusations made by the above-quoted politicians
ring a bit hollow, since if oil companies actually possessed the"market
power" that Lieberman and others claim, then oil executives are guilty of
a great dereliction of duty towards oil stockholders. If the executives had
this"market power" but did not use it to make better-than-average
profits, then one would wonder why stockholders even permit these folks to
draw salaries.</font>
<p class="MsoBodyText"><font face="Verdana, Helvetica">Yet, it is clear that
gasoline prices have increased substantially from even a few weeks ago. While
Markey and others claim that oil companies were trying to use the Labor Day
holiday to"gouge" consumers, even the anticipated increase in
demand would not explain such high price spikes. (Indeed, the holiday premiums
rarely are more than a few cents per gallon—and without them there would be
almost certain chaos at the gas pumps, as lower-than-market prices would
create shortages.)</font>
<p class="MsoBodyText"><font face="Verdana, Helvetica">No, the answers lie not
with scheming industry executives or incompetent managers. Politicians and the
bureaucrats they empower, on the other hand, have caused major disruptions to
oil supplies. Let us count the ways.</font>
<ul>
~ <font face="Verdana, Helvetica" size="2">A new oil refinery has not been
built in the United States since the administration of Gerald R. Ford.
Environmental laws virtually guarantee that refineries are going to be out
of compliance at one time or another, and with avaricious U.S. attorneys
anxious to prosecute"environmental criminals," refineries are a
losing proposition.</font>
~ <font face="Verdana, Helvetica" size="2">The recent East Coast blackout
really did disrupt the refining and transportation process, and because
the East Coast is a major conduit of oil and gasoline into the interior of
this country, a massive shutdown of northeastern refineries is guaranteed
to disrupt supplies across the country.</font>
~ <font face="Verdana, Helvetica" size="2">The Environmental Protection
Agency-enforced regulations set by Congress in the 1990 Clean Air Act
Amendments calls for a crazy-quilt set of standards for different areas of
the country. When those rules first went headlong into effect in 2000,
small pipeline and refinery glitches became major barriers to some cities
like Chicago, where special clean air standards kept producers from
trucking in gasoline from other parts of the region where gasoline was
more plentiful. Chicagoans, according to the polls, believed it was an oil
company plot, but their friendly members of Congress who voted for the
standards actually were to blame.</font>
~ <font face="Verdana, Helvetica" size="2">From high gasoline taxes to a
constant stream of condemnation from the political classes, the oil
industry has been a favorite whipping boy of politicians since the 1970s.
Whether it is blaming oil companies for the war in Iraq or blaming oil
companies for global warming, the critics are always out in force
demanding new taxes, new regulations, convictions and fines or even
outright property seizures.</font>
~ <font face="Verdana, Helvetica" size="2">The ongoing political crisis in
Venezuela has disrupted the reliability of that nation’s oil industry,
which has the USA as its largest customer. As long as Hugo Chavez is in
power, one can expect that turmoil to continue. Chavez wants to be a
"Castro with oil," (as opposed to a Castro with sugar); his
policies have angered the dwindling Venezuelan middle class so much that
for the most part he has been Castro without oil or sugar.</font>
~ <font face="Verdana, Helvetica" size="2">Finally, there is the
continuing U.S. occupation of Iraq. Government and industry planners had
believed that oil revenues from that country would be enough to pay U.S.
firms to"rebuild" the country (that was destroyed by U.S. bombs
and other weapons of large-scale destruction). Instead, resistance groups
have sabotaged pipelines, refineries, and the oil fields, making the
anticipated Iraqi flow very unreliable.</font></li>
</ul>
<p class="MsoBodyText"><font face="Verdana, Helvetica">These reasons certainly
do not ring with politicians in the way that words like"greed" and
"gouging do," nor are U.S. politicians willing to admit that for the
last four decades, they have openly made oil companies Public Enemy Number
One—and that such attacks have their deleterious effects.</font>
<p class="MsoBodyText"><font face="Verdana, Helvetica">No, all they can do is
to repeat the same tired arguments of the past—and the same lies.
Politicians and bureaucrats created the oil crises of the 1970s, and it looks
as though these folks in the Class of 2003 are trying to outdo their forbears
of 30 years ago. Of course, successes of the political classes are gained only
at the expense of everyone else. Would be that oil company executives were
permitted to investigate Congress and the Energy Department. They would find
more than a few smoking guns.</font><br clear="all">
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<p class="MsoBodyText"><font face="Verdana, Helvetica">William Anderson, an
adjunct scholar of the Mises Institute, teaches economics at Frostburg State
University. Send him</font> <font face="Verdana, Helvetica" color="#000080">MAIL</font><font face="Verdana, Helvetica">.
See his Mises.org</font> <font face="Verdana, Helvetica" color="#000080">Articles
Archive</font><font face="Verdana, Helvetica">. </font>
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<div id="edn1">
<p class="MsoEndnoteText"><a id="_edn1" title href="http://www.mises.org/fullstory.asp?control=1322#_ednref1" name="_edn1"><span class="MsoEndnoteReference"><font face="Verdana, Helvetica" size="2">[i]</font></span></a>
<font face="Verdana, Helvetica" size="2">Studies
in Social Cost, Regulation, and the Environment: No. 5</font>
<font face="Verdana, Helvetica" size="2">[i]Uncle Sam's Energy Mess: How the
U.S. Government Empowers the OPEC Cartel and Takes Power from the People, March
2001, Institute for Research on the Economics of Taxation (</font><font face="Verdana, Helvetica" size="2">www.iret.org</font><font face="Verdana, Helvetica" size="2">).</font>
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