There is so much propaganda, faith-based economic theorizing and simple ignorance and naiveté surrounding the question of soaring gasoline and oil prices in this country!
For heaven’s sake, of course there is collusion, monopolistic behavior and price fixing in the oil industry.
Start with the OPEC, that gang of producers, largely in the thrall of the major oil companies, which sets production quotas for most of the major oil producing nations.
Then move to the large companies. There used to be seven. Now there are far fewer mega companies, thanks to mergers like Exxon/Mobil and BP/Amoco.
But even those few companies aren’t really functioning as independent, competitive enterprises. Because refineries, offshore drilling platforms and pipelines are gigantic multi-billion-dollar capital projects--a typical refinery can cost upwards of billion to construct--most are joint projects involving several oil companies, while others lease the use of them. In such a situation, all those elements of a business which are normally closely-held trade secrets important to maintaining competitive advantage--inventories, crude reserves, pricing, production rates, relative mix of heating oil, low and high-octane gasoline, etc.--are common knowledge.
It’s not like a typical business--say automobiles or television sets--where companies keep those kinds of numbers secret or, if they collude, have to do it by meeting in secret and agreeing on higher prices. The executives of the oil industry never have to get together, whether over a game of golf or in a back office. They know all about each other's operations without ever talking. Collusion, not competition, is a way of life in this industry.
There is simply no way to use a competitive model to explain what happened to gasoline prices after the Katrina storm hit New Orleans. At best, 10 percent of production was shut down, according to reports. That’s 10 percent of 1/4 of U.S. demand--a tiny amount. Even if it were 10 percent of total demand because of reduced import ability at the Louisiana port, we're talking about 10 percent, while gas prices rose 25-35 percent and even more in some areas. Not often mentioned in the same articles on this phenomenon was the fact that the world price of oil actually fell by almost 10 percent over the same period.
When the world oil price rises, I notice, as I'm sure most readers also notice, that the price at the pump is up the next day--sometimes the same day that a report comes out. Yet oil from places like Saudi Arabia and Kuwait takes month to go from the wellhead to retail gas stations in the U.S. Even oil from Venezuela takes weeks to become gas at the station in the U.S. What other product do you know of where the retail price in stores jumps immediately when the price of raw materials that goes into it goes up? Does bread go up at the store the day that wheat prices kick up on the Chicago Merc? Does candy in the story go up when the price of sugar rises on the Comex? Of course not! Just gasoline and home heating oil. So if more expensive crude oil doesn't actually physically get to the pump for months, and the price at the pump goes up immediately, who’s pocketing that money in the meantime? Hint: It's not your local gas station owner. Just check out the stock prices of the oil companies, and you’ll have the correct answer.
In a competitive model, the kind Milton Friedman likes to celebrate, companies like Sunoco and Exxon would keep their retail prices as low as possible until costs forced them to raise prices--something that simply doesn’t happen. Indeed, it's a one-way arrangement. When the per barrel price of crude falls, the price at the pump hangs at its high level, sometimes for weeks, but if crude goes up, so does the pump price. Consumers can't shop for bargains because all gas stations behave the same way. For the most part, though, it's not the stations that are doing this--many of them aren't even independent businesses, but are owned by the major companies--but rather the oil companies themselves. The money that results from this collusive, monopolistic behavior, in other words, is accruing to the oil companies and their stockholders.
The beauty of this arrangement, from the oil industry’s perspective, is that nobody can be fined or jailed for it. Under U.S. anti-trust law, it's not illegal to have collusive results. The government would have to prove collusive behavior, and as long as the oil executives don't actually sit in a room or a teleconference, and expressly conspire to collude on raising prices or cutting production, it simply cannot be done.
If Congress and the White House were serious about combating price rigging and coordinated production slowdowns, they would be changing the anti-trust laws so that the objective existence of anti-competitive pricing and production alone would be illegal, not just deliberate conspiring to fix prices. A simple step would be just to make all the competitive information regarding production and pricing of oil and oil products, all the way from wellhead to pump, public. After all, if the oil companies all know everything about each other's internal pricing and production, there’s no justification for keeping that information from the public. Instead we have the opposite situation of course: secret meetings by our oil-industry-subsidized vice president and executives of the oil industry, where real collusive decisions were made.
Oil and energy are too crucial to the economy and to people's daily lives to allow them to remain the private domain of oil company executives and the oilmen--Bush and Cheney to name two--who run this blood-and-oil administration.
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