THE BLOG
05/31/2008 05:12 am ET | Updated May 25, 2011

Oil Execs to Congress: I Drink Your Milkshake

"The fundamental laws of supply and demand are at work."

-- John Hofmeister, chairman, Shell Oil Co. 5/21/08

It's an economic principle that's fairly easy to understand: Rising gas prices are traditionally accompanied by a rise in bullshit. When it comes to oil prices and oil company press releases, the correlation coefficient of getting gouged to getting lied to is 1.

Why are prices going up? Oh, it's refinery maintenance. Did I say "refinery maintenance?" I meant hurricanes. No hurricanes? Well, then it's obviously Nigerian rebels. Or fear of Nigerian rebels. Or fear of Hurricanes. Or fear of Nigerian rebels worshiping hurricanes, when they should be performing refinery maintenance.

(The Yoruba have a goddess named Oya, specifically for hurricanes. You do the math.)

What other explanation is there? Must be environmental red tape. Or speculators. Or competition from India. Or a combination of all three, a shadowy partnership of polar bears and Laurie David, gaming the Bombay Stock Exchange.

I don't know. I'm not an economist.

When it comes to gas prices, only one fact is absolutely certain: They have nothing to do with oil company profits.

Record oil company profits.

They can't help it if they're lucky.

This week, executives from Chevron, BP, ConocoPhillips, Shell and Exxon Mobil were in Washington to talk about the $36 billion in profits their companies have made in the last three months. Not earnings. Profits. It was a pretty hollow exercise, but what was sort of striking this time was how little energy they put into the oldies and greatest hits (OPEC/environmentalists/Oya) and how often they said prices were a simple result of supply and demand.

The "...comma, stupid" was implied, but not stated.

In a general discussion of economics, "supply and demand" is what you say when you want the other person to know you think they're an idiot.

And when an oil executive claims the price of his product is determined by supply and demand he means: "Haha, the fix is in. Fuck you."

Because supply and demand is one factor in determining price, but another factor used to be called "competition." Again, I'm not an economist, but I'm pretty sure that was supposed to drive prices down.

Now, of course, not all markets conform to a model of perfect, atomistic competition. For that you need:

Homogeneous products
Mobility
Perfect knowledge of the market
Free market entry and exit
Many firms and buyers

Does that describe American drivers and gas? Let's see:

Homogeneous products. The products must be not only identical but also perceived as identical by consumers. One brand of gas is as good as any other, right? Except Arco. There's water in that crap.

Mobility. Can the consumer buy it in many different places? Yes. Some gas stations even have mini-marts. Can the seller move it around? Yes, in those big shiny trucks.

It conforms to the shape of its container, being a fluid.

Perfect knowledge of the market. Can the consumer learn what other gas stations are charging for the same product? Yes, he can look at those large signs.

Free market entry and exit. Can the consumer choose where to buy gas? Yes. Can an entrepreneur start his own oil company? Ditto. All he needs is a shovel. I saw it in "There Will Be Blood." Before I feel asleep.

Many firms and buyers. Of course. There are 200 million drivers in America and they all buy their gas from... five companies.

Huh.

That's funny.

I wonder if that's the problem.

Why aren't the supermajor energy companies competing for customers by undercutting each other's prices? Shouldn't at least one mover seek that advantage?

It's almost like -- and this is going to sound nutty, but -- in any classical economic model, the only explanation for windfall oil company profits is collusion.

That or Oya.