Saturday, November 05, 2005

"Greedy Oil Companies" Revisited

Alan Reynolds have a great column about the issue of "Greedy Oil Companies". Here he points out that oil prices are driven by supply and demand, not by oil executives and points out what would happen if oil companies responded to the populist calls of Bill O' Reilly and others:

"Exxon-Mobil's recent profit margin was up to nearly 9 percent of sales. Suppose they tried to cut that to a nickel out of every dollar by offering to sell crude oil for $3 a barrel less than the going price on the Chicago mercantile exchange. Refiners around the world would instantly commit to buying every drop. By the next day, the world price of crude would be same as before.

Suppose the Big Five oil companies got together and agreed to cut retail gasoline prices at their company-owned stations by 20 cents a gallon. Motorists would soon drain those stations dry, leaving the much larger number of independent gas stations in a position to charge even more. Meanwhile, independent station owners would file a complaint with the antitrust division of the Department of Justice accusing the majors of collusive predatory pricing to drive them out of business."


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