Monday, April 24, 2006

Here We Go Again.....

With oil prices and therefore gas prices reaching new record highs, the scapegoating of "big oil" continues. Now, I'm not gonna say that "big oil" is America's most persecuted minority as they are good at securing government favors.

But the fact is that high oil prices are driven by factors which are not controlled by oil companies, soaring world demand, artifical limitations of U.S. oil drilling as well as worsening geo-political unrest in the Middle East. Oil and gas are internationally traded commodities whose price is determined by global supply and demand. If corporate greed from oil companies are the explanation for high prices, does that imply that when oil and gas prices fell dramatically in the late 1990s, oil companies were run by altruists?

As Alan Reynolds put it when the issue was discussed the previous time:

"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."

The angry denounciations of high oil and gas prices from U.S. Senators are extremely hypocritical as they themselves are partially responsible for it by banning the drilling of oil in Alaska.

As usual, politicians are complaining about and blaming the market for problems they themselves have created.


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