In an article titled “A Senate Panel Interrogates Wary Oil Executives” today’s New York Times reports that “The nation’s top oil executives were called before Congress again yesterday to defend their industry’s recent mergers and record profits, in the face of public outrage over high oil and gasoline prices.”
Judging from The Times’ article, the hearings touched on everything but the simple, obvious cause of high oil and gasoline prices. They dealt with mergers in the oil industry, which, it was recognized by Senator Feinstein (Democrat from California), have served to lower costs of production in the industry. Somehow neither she nor, apparently, any of the other senators present, could see that the resulting lower costs would naturally result in lower prices if that were the only factor operative. (Lower prices would be necessary in order to derive competitive advantage from the lower costs and the mergers that produced them. Absent lower prices, smaller-scale, higher-cost firms would be just as profitable as before. But with lower prices, they would not be and would thus have to yield market share to the merged and now lower-cost producers.)
A witness (a professor in the business school at UC Berkeley) seemed to want to say that gasoline prices had risen because the world price of oil had risen, which, in The Times’ reporter’s words at least, made the oil companies “not solely responsible for high gasoline prices.”
Two Republican senators, Specter from Pennsylvania and DeWine from Ohio, placed the blame on OPEC. And Senator Specter has apparently proposed legislation to allow the U.S. government to take legal action against OPEC for its fixing of oil prices.
I titled this article “In the U.S. Senate the Guilty Interrogate the Innocent.” A more complete title would be, “In the U.S. Senate, Senators Serving the OPEC Cartel Interrogate American Energy Producers Whom They Prevent from Breaking that Cartel.”
How do U.S. Senators, and the whole US government, do this? They do it by preventing the expansion in domestic oil production that could take place in Alaska, offshore on the continental shelf, and in the vast territories that have arbitrarily been set aside as wildlife preserves and wilderness areas and closed to oil drilling. They also do it by preventing the construction of new atomic power plants and by impeding the mining of coal and the development of additional supplies of natural gas.
Larger supplies of domestically produced oil would increase the world supply of oil and drive down its price. And they could do so very dramatically, because just as a few percent decrease in the supply of oil is capable of increasing its price by a multiple of several times that few percent, so a few percent increase in the supply of oil would work just as powerfully in the opposite direction.
At the same time, the availability of larger supplies of atomic power, coal, and natural gas, would reduce the demand for oil, since the additional supplies of these fuels would replace oil to an important extent. The oil no longer needed by an electric utility, for example, because that utility would now use atomic power or burn coal, that oil would have to find some alternative use, and to open up that use its price would have to be substantially lower.
Our government’s policy of preventing the increase in the supply of oil, atomic power, coal, and natural gas, is what is responsible for the high prices of oil and gasoline that we must now pay. Let it just get out of the way, and the supply of all these forms of energy will dramatically increase and the price of oil and gasoline will fall, even more dramatically.
Every senator who votes to place obstacles in the way of U.S. energy production, who helps to harass U.S. energy producers, is voting to hamper OPEC’s most important competitors and to allow OPEC to go on obtaining high prices. Such senators are the ones who bear responsibility for the high price of oil and gasoline. They are senators serving OPEC not the American people.
They are the ones who deserve to be interrogated, in order to learn how they could be so blind, so stupid, and so destructive.
This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved.
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Bush should be interrogated
OK, say, local energy production picks up. Then what do you propose to be a new source of revenue to offset the loss of the tax dollars from oil imports? Hm? At least for now this import tax is indirect as it applies to me, and I would not like it to be replaced with a higher income tax.
Americans need to be told that their government is following the same path socialist France took about the current price of oil..
The author is wrong about the recent rises in oil prices. He is just using a different reason equally as wrong as the senators and the NYT.
This is a no brainer. The increases in oil prices and energy prices more generally are from our guardian of our currency, the FED, pumping money into the economy by charging below market rates of interest. Naturally the increase in supply, or more accurately, decrease in value, of money translates into the US having to use more nominal dollars for the same amount of wealth in purchasing oil as it did previously.
I can not fathom two things about getting more energy from US sources. First is the stupidity in energy independence. What does it do or even mean when energy is sold on commodity markets. In the same manner I will not support pulling oil out of 1000ft of the frozen tundra, tranporting it 1500 miles in a heated pipeline to be put on a boat. That makes no economic sense when the competitors in Venezula, Suadi Arabia, etc pull it out of 40ft of sand and transport it 100 miles onto a boat. At some point the government must help the US suppliers because they will always be undercut by the international suppliers.
“At some point the government must help the US suppliers because they will always be undercut by the international suppliers.”
That way, we can be sure of wasting resources pumping oil out of 1,000′ of frozen tundra and piping it 1,500 miles, instead of buying it from somebody else who can do it a lot easer. State intervention is what makes that kind of plan look like a good idea. And you’re saying that the government “must” help? Better to leave it to the market, where ideas that are good are successful and nobody has to pay to make bad ideas look good.
Maybe domestic oil production makes sense, and maybe it doesn’t. The only way we can really know is to leave it to private companies in an unrestricted environment.
F.A. Hayek argued that liberty emerged as the unintended consequence of human action, not of human design.
Even if that is true (and I suspect that it is not), liberty can not endure as an unintended consequence of human action.
If people do not understand that prices are AND SHOULD BE (the “should” is a moral point) be determined by free action (“supply and demand”) then they will (if customers) demand lower prices and (if producers) demand higher prices – to be enforced by the government.
Whether it is Charles the Great in the 8th century Frankish Empire or the modern United States Congress (abusing the words “regulate interstate commerce” in the Constitution) such price controls are both stupid (in that they promote ecomomic harm) and evil (in that they are a violation of the nonaggression princple).
People must understand that such actions are stupid and evil – otherwise they will commit terrible acts.
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