The Oil Bidness

I hate this subject.  The politics are so lame and the oil companies don't help themselves by reporting record earnings.  And everything is done too late.  Politicians scream about windfall profit taxes.  Like they would give the oil companies windfall loss breaks when the price goes down and the companies report lower earnings.  Or maybe one politician could explain to us how a tax would reduce the price of gasoline as the capitalist thing to do when taxes go up is to raise your price to recapture the earnings lost to the tax. 

And when a Republican is the one to figure out how some of this stuff started, I am amazed.  Where are the Democrats on this?  Arlen Specter pointed out that mergers done in the 90's and some in this decade have concentrated the industry.  Way to go, Specter.  But you can't undo mergers.  Oh, you can but not overnight--look at AT&T. 

But I have a rule that I don't rant against things I can't change so we'll leave it alone.  But what I can do is comment on things and one thing I remember is an oil company executive being brutally honest...and right.

In a congressional hearing some senator thought he had one exec on the run.  To paraphrase "Did you raise prices after Hurricane Katrina?"  The exec, "Yes."  A gasp from the audience.  "Did you raise the prices a lot?"  "Yes."  Another gasp.  "Substantially above your cost?"  "Yes."  Yet another gasp...you get the picture.

What was this guy doing?  This guy was going to get killed.  But he didn't because his rationale for 'price gouging' was to reduce DEMAND so as to not run out of SUPPLY.  With Katrina knocking out 50 year old refineries and demand from China exploding and Nigerian rebels taking over oil rigs and Chavez going schizo down in Caracas this guy didn't know what was going to happen.  But he did know he had a supply problem so he had to fix it and he did by raising prices.  And it worked.  We have high gas prices but we don't have a gas shortage. 

Raising prices makes people think about driving and if they cut back, then supply goes further.  Simple.  If the price stays low, people think everything is ok and go driving around wasting gas and if things are not ok, then supply dries up and you have shortages.

This happened in the, well, a long time ago when the Arabs cut us off, we got PRICE CONTROLS and suddenly we had gas lines and people ran out gas in those lines which made things worse and then people filled up whenever they got a chance which reduced supply even more because everybody had a full tank of gas in their car.  Then people cut back on driving and the shortage disappeared.

"So what?" you say.  "I can't cut back on my driving, I have to drive to work or to grandma's or the store."  Yes, you do and you will and you will cut back on driving, somewhere, because you already have, haven't you?  Yes, you have.  And the price and the supply will come back in line unless somebody in Washington does something stupid.   

Comments

[Jay P]

Good Rant Bill!

Gas in San Francisco is up to 3.57 a gallon for the cheap stuff (I got it at Costco for 2.97 this weekend). Of course the big oil companies are going to make money. Oil is cheap to pump (generally pumps itself), refineries are old which means they are pretty much fully depreciated at 1950 dollars, and we all drive SUVs.

Now tell me why milk is nearly $4 a gallon???