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By Robert Rapier on Jun 12, 2006 with no responses

Rebuttal to “A Gouging Market”

Introduction

I have been aware of Matthew Rothschild’s essay “A Gouging Market” (1) since it started making the rounds a couple of months ago. At the time, I decided not to respond as the article is largely one big whine. However, someone at The Progressive, a magazine that I occasionally enjoy, has deemed it fit to reprint in their June issue (it had originally appeared there in April). I think it’s time to put this one to rest.

Briefly, the article is one long whine about price gouging by oil companies. Rothschild makes a number of unsupported accusations and insinuations, and never defines price gouging (or windfall profits) despite railing against oil companies for gouging. The article oddly embraces two mutually-exclusive themes: Gas prices are too high, and we ought to be conserving. Doesn’t he understand that low prices will discourage conservation?

Selected Points

On to some specifics from the article:

Matthew Rothschild: Accusing oil companies of price gouging is like accusing sharks of swimming. That’s what oil companies do. In fact, that’s the imperative of the marketplace: to charge whatever you can get.

He sets the tone right away in his opening paragraph. A shark. Not just a fish, but a vicious predator that occasionally kills people.

Matthew Rothschild: Rather than having a multitude of ice cream parlors to choose from, the consumer can select from only a few oil companies, and they own not only the parlor but the cows and the dairies, too.

Plus, there’s another big difference between ice cream and oil. The choice of having an ice cream cone is a luxury. Driving a car, for many of us, is a necessity. That’s something the hardcore free market apologists don’t grasp.

There are also a few things here that Rothschild doesn’t grasp, so let me help out. Driving a car is based on the choices you have made to this point in your life. The fuel efficiency of the car you buy is a choice. How far you commute is a choice. So, we buy SUVs that get 14 miles a gallon, and then complain about gasoline prices. People have made their choices because of years of cheap gasoline. They should have known that low prices wouldn’t last forever, and now that the days of low prices are over, they scream and whine. They want the government to intervene. Oil is not as abundant as it once was, so the price has risen. Oil companies have made money as a result, and that’s just not fair, is it? They must be punished.

Europe knew that gasoline wouldn’t be cheap forever, so they heavily taxed fossil fuels to encourage conservation. This generated enormous funds for the government, limited greenhouse gas emissions, and prevented the sort of suburban sprawl we have here in the U.S. The cars in Europe are small and fuel efficient, and therefore they use far fewer fossil fuels per capita than we do in the U.S. Because they have made the right choices, they are less dependent than we are on petroleum.

Matthew Rothschild: “Gas station owners cannot force us to buy gasoline,” writes Alex Epstein of the Ayn Rand Institute, in an article entitled “The Myth of Price-Gouging.” “They can only offer us a trade, which we are free to accept or reject.”

But how free is the independent trucker, or the taxicab driver, or the traveling salesperson? How free is the service worker who can’t afford to live in the expensive city where she is employed, so she has to live thirty miles away, where there is no public transportation? Oil companies know that they have a lock on a crucial product. They’re charging accordingly.

When I get a migraine, I take a medication that costs $15 a pill. Now, I don’t have to take that pill, but it is the only thing that works reliably. I could instead suffer through the migraine for 3 or 4 days until it goes away. But I usually choose not to. Doesn’t the pharmaceutical company have me over a barrel? Yes they do, but I am glad I have that choice. I know that they are making profit margins that far exceed those of oil companies, but those profit margins are driving those companies to research new medicines that might keep me alive and healthy for many years to come.

It’s the same with oil. The oil business is very capital intensive. It costs billions to build a new refinery and to maintain existing facilities, which is why you don’t see Mom and Pop refiners sprouting up to compete with the big boys. The large capital sums required to operate this business is what has driven the consolidation in this business. Even ExxonMobil, as big as it is, is dwarfed by some of the state-owned oil companies like Saudi Aramco. They have revenues that allow them to invest in next generation technologies like XTL. Smaller oil companies simply could not compete at that level, because they would lack the necessary capital to put up the multi-billion dollar “entry fees”.

We already know what would happen if Rothschild got his way and windfall profits taxes were implemented, since it has happened before. Oil companies would have less money to invest in expanding capacity, and we would end up with shortages (and even higher prices). I don’t understand why we can’t learn from history in this case. (2)

Matthew Rothschild: It very well may be that what the oil companies have been doing over the last couple of years does not technically qualify as collusion.

I can just see the pained expression he must have had on his face when he wrote that sentence. Of course it doesn’t qualify as collusion. Technically, or otherwise. The oil majors have been investigated many times in recent years on charges of collusion and price gouging. They have been vindicated time and again, much to the chagrin of people like Rothschild who are convinced something foul is afoot. The FTC recently investigated charges of collusion following Hurricane Katrina, and once again found “price increases were approximately what would be predicted by the standard supply and demand paradigm.” (3)

Matthew Rothschild: “The real problem is legal manipulation of prices,” says Tyson Slocum, acting director of Public Citizens Critical Mass Energy and Environment Program. “The oil companies have gotten so big they don’t need to collude anymore. Advances in computer modeling have really aided the ability of the big companies to game the market.” So game it they do.

It is unsupported accusations like this that really annoy me. It’s nothing by slander. Again, ExxonMobil, the largest oil company in the U.S., controls 3% of the world’s oil. How is it that they are gaming the market? They don’t have the ability to game the market. The prices are set on open exchanges by willing buyers and sellers. Oil companies don’t post prices for their oil, and say “take it or leave it”.

Matthew Rothschild: And because the five largest oil refining companies in America control more than 50 percent of the market, they can individually decide to limit the supply of refined oil products. If ExxonMobil sees Shell taking gasoline off the market, it can do likewise, and they will all end up making more profits without ever needing to huddle together in a boardroom to fix prices.

And the smears continue. Above, he admitted that collusion is not going on. The FTC has found no collusion. Yet, somehow since 5 companies (not 1, mind you) control over 50% of U.S. refining capacity, “they” control the market (i.e., they really are colluding!) to fix prices. Ridiculous. If ExxonMobil sees Shell taking gasoline off the market… What? Have you checked refinery utilization lately? Apparently not, because fact-checking didn’t seem to be an important aspect of this article. Refineries are running just as hard as they can, so people like Rothschild won’t have to wait in gasoline lines or even better, deal with rationing. What kind of thanks do they get? People like Rothschild complaining that the price is too high.

Matthew Rothschild: Even George Bush, as ardent a defender of the oil companies as ever set foot in the Oval Office, has begun to make noises. With his popularity down at the freezing mark, he’ll say just about anything. But he won’t say “windfall profits tax,” even though, according to an Opinion Research Corporation poll (and this was back in September, before the current hike), 80 percent of Americans are in favor of it, including 76 percent of Republicans.

Do you really want to start basing policy decisions on the whims of the public? Didn’t the majority of the public favor getting into a war with Iraq? Does the majority favor it now? Does the majority still favor Bush as president? The thing about legislating and making decisions based on popular opinion as opposed to really considering the implications is that you might end up with something you didn’t anticipate.

Matthew Rothschild: Bush ruled that out in his April 25 speech. “What can the government do?” he asked. “One of the past responses by government, particularly from the party of which I am not a member, has been to have-to propose-price fixing, or increase the taxes. Those plans haven’t worked.” No, we can’t have that, can we? Never mind that the windfall amounted to $36 billion last year for ExxonMobil alone.

Rothschild never did get around to defining a windfall. What exactly is it? Is a profit on sales of 10%, as ExxonMobil made, a windfall? How about a pharmaceutical with a profit margin of twice that? What if I buy a house in California for $200,000 and sell it for $500,000? How much of that constitutes a windfall? What did I do to earn it, other than being in the right place at the right time? I would like to see some of these critics address some of these questions. Define “gouging” and “windfall”, and tell me when it is and is not permissible.

Matthew Rothschild: Bush and conservatives love to harp on the fact that refinery capacity is way down in this country, and they blame that on environmentalists. But as Slocum notes, a small oil company, Arizona Clean Fuels, has managed to navigate the bureaucracy and get all the permits it needs.

Right, and they have only been working on it for 10 years! Another 5 and they might have a refinery. Who wants to wait 15 years to have a working refinery? It is much easier to expand existing refineries than to build a new facility.

Matthew Rothschild: If it can do this, asks Slocum, “why can’t the world’s most powerful corporation?” He offers an answer: “ExxonMobil has no interest in creating additional refineries because it will drive prices down.”

I am sure that ExxonMobil has no interest in waiting 15 years to build a new refinery in the U.S. when they can simply expand existing facilities. That is what they have been doing. A little fact-checking (remember to do that next time!) would have shown that despite the fact that no new refineries have been built in quite some time, refining capacity has increased significantly in the past 20 years.

Matthew Rothschild: We should all live long enough to see the day when the Bush- Cheney Administration hauls ExxonMobil and the other big oil companies into court. What Bush didn’t propose is as telling as what he did. He didn’t propose busting up the oilopoly.

Yeah, that sounds like a great idea. That is if you want to eliminate the ability of the U.S. oil majors to compete with the likes of Saudi Aramco because they lack the size. Next generation fuel technologies do not come cheaply. You need size to compete. So let’s bust up the oil companies and rely on the national oil companies of the Middle East to keep us supplied.

Matthew Rothschild: The average car and truck on the road today gets only twenty-one miles to the gallon. In 1987, the average was twenty-two. We’ve been going backward. And in last year’s energy bill, Bush, the Republicans, and many Democrats, too, blocked an amendment to boost fuel efficiency standards.

“President Bush continues to ignore the most obvious and practical solutions,” the Sierra Club says. “The biggest single step we can take toward saving money at the gas pump, curbing global warming, and cutting America’s oil dependence is to make our cars, trucks, and SUVs go farther on a gallon of gas.”

I found this the strangest aspect of the whole argument. Complain that gas prices are too high, and at the same time complain that fuel efficiency standards are too low. It’s like there is no comprehension on Rothschild’s part with respect to cause and effect. Again, let me help. Fuel efficiency standards are low because we have had cheap gas for such a long time. Pushing gas prices back down will take away the incentive for people to start embracing conservation.

Matthew Rothschild: Americans cannot keep consuming 25 percent of the world’s oil when we have 2 percent of the world’s oil supply and 5 percent of its population.

LOL! Then why don’t we do everything we can to push gas prices back down? That should help. Right?

Matthew Rothschild quoting Representative Dennis Kucinich: “Congress must break the hold that the oil companies have on the politics of our country. Congress cannot stand by while the oil companies are stealing from the American people.”

Frankly, I find that insinuation disgusting. Oil companies are supplying a vital, but declining resource. They are making money as the price of this resource is increasing, and this is “stealing”? Then I guess the guy who made $300,000 on his house in California is also stealing.

Conclusion

In summary, I just can’t figure people like Rothschild out. Complain that gas prices are too high, while complaining that we use too much of it. Offer no solutions to the problem, other than one long whine and diatribe against an industry in which people sometimes lose their lives to provide your gasoline at a lower price than bottled water.

The oil companies are not the problem, Rothschild. The person who thinks cheap gas is an entitlement that must be maintained is the problem. We must embrace conservation, and higher prices have shown that they encourage conservation in Europe. If you don’t like the fact that oil companies are reaping the profits, get behind a higher gas tax so the government can reap a greater portion. But don’t kid yourself: Low gas prices aren’t going to benefit anyone in the long run.

References

1. A Gouging Market, The Progressive, June, 2006.

2. Glassman, James, “Windfall Profits” Tax on Oil Companies, Capitalism Magazine, September 26, 2005.

3. Epstein, Edward, Feds: No Collusion or Price Gouging, San Francisco Examiner, May 23, 2006.