Is Big Oil ripping off consumers? Are Wall Street speculators manipulating oil markets? What should be done?
Whether or not Big Oil is improperly restricting refinery capacity, whether or not Wall Street traders are driving up the traded price of oil to heights completely disconnected from supply-and-demand fundamentals, a few things are clear about gas prices -- and so is the most appropriate, immediate policy response.
Current pricing arrangements are generating profit gushers for the large, integrated oil companies -- ExxonMobil, ChevronTexaco and the like. While the price of oil is going up, these companies' drilling expenses are not. Oil can trade at $40 a barrel, $90 a barrel, or $130 a barrel. It still costs ExxonMobil and the rest of Big Oil only about $20 to get a barrel of oil out of the ground.
The oil companies' staggering profits are a windfall of the purest sort (Websters' definition: "an unexpected, unearned, or sudden gain or advantage"). This is not a moral judgment about the oil companies, it is just a description of what's happening.
A windfall profits tax could generate substantial government revenues. Allocated to investment in renewable energy, it could significantly increase funds directed to renewables, and be a small but important down payment on the massive investment needed in mass transit, energy efficiency and renewable energy.
Beyond the immediate future, it is important to get a better fix on energy markets. What's clear now is that the U.S. refining market is very concentrated, thanks to a series of mergers permitted by antitrust authorities; and that oil and energy futures markets are dangerously unregulated.
Just five large oil refiners now control over half of the U.S. market, and the top 10 control over 80 percent, according to Public Citizen. There is very good evidence that the refiners have worked in the past to limit supply and drive up price. Whether this is an ongoing issue is perhaps less clear, given that independent refiners are now facing profit squeezes.
Still, for the medium term, either the government needs to scutinize refinery activity much more closely, adopt new regulatory authority and aggressively enforce antitrust laws, or it must intervene to deconcentrate the market.
Meanwhile, oil and energy markets have mutated in dangerous fashion over the last decade. At Enron's instigation, these markets have become largely deregulated in the United States. Leading Wall Street firms like Goldman Sachs have subsequently bought up oil transport and storage operations -- not because they are looking for new business outlets, but because they want insider knowledge about oil and gasoline markets. Meanwhile, investors large and small are pouring money into oil as a tradable commodity.
Are these markets being manipulated? Perhaps. But even with no manipulation, the intensified financialization of oil trading subjects the market to speculative frenzies characterized by sudden and severe price fluctuations. These prices swings have real impacts at the pump and in the overall economy (and much more ominous impacts for oil-importing developing countries than rich nations).
Re-regulating energy markets, imposing margin requirements and lessening investors' ability to trade with borrowed money, and cracking down on market manipulation will all slow the Wall Street frenzy and limit price spikes.
For the long term, however, oil demand will continue to shoot up -- though higher prices and the U.S. recession will moderate this tendency -- and supply cannot keep up. Ultimately, new sources of oil may become available, including from deep water sites and tar sands and shale, but these will be more expensive to obtain.
The world is likely witnessing a long-term, steady (if bumpy) and permanent rise in oil prices. (More on the causes of oil price increases tomorrow.) This price increase will impose major economic hardships, unless there is a massive effort to shift to oil-displacing technologies and renewable energy.
That exactly this shift is needed to address the even more pressing threat of climate change, makes it all the more urgent that Washington adopt a windfall profits tax (and end governmental subsidies for Big Oil) and invest the proceeds in renewables. This is very unlikely for 2008. Will things be different in 2009?
People in Nigeria live on less than $1.00 a day while their natural recourses are being stolen by the wealthy and forgien corporations like our oil companies.
They live like animals so you can drive a HUMMER!!!!!!!!
Take part of these billions in windfall profits, and use these to bump the tax credit up to near the cost of installing such a system. I would install one in a hearbeat (or at least as soon as I could line up a contractor) if I knew that payback would be more realistic.
Also, take the remainder of these windfall profits - and start installing a real electric / recharging network - maybe even cut the oil companies in on the deal so that their current franchisers can get into the system. And - improve the damned mass transit systems.
We need an "Apollo Program" for getting this all on track. And we needed it yesterday.
Taxing this portion of their profits would not negatively affect behavior and the proceeds could be used to fund alternative energy research or implementation. Or it may cause them to come up with a better way to use their windfall scarcity rent in a much more productive way than stock buybacks.
In my opinion the oil companies are clearly benefitting from scarcity rent. Exxon for example, last year recorded a "profit" of $40billion dollars. In economics, normal profit is that rate of minimum profit which a firm must earn in order to survive in the market. Which means they make enough profit to provide a return on capital and fund capital expenditures to sustain their business. Anything earned beyond this, due to rent-seeking, monopoly power, oligopoly collusion (explicit or implicit), even superior efficiency and productivity, is supernormal profit or economic rent. In a perfectly competitive market, which the oil industry clearly isn't, the presence of economic rent would signal other firms to enter into the market and compete because there is money to be made. Clearly not the case.
The problem is it is after the fact.
And based on who's look at what books?
Let's take the players out of the game that are contributing NOTHING to the resource-need balance.
The speculators.
I don't care to bet that I am right that about 35 percent of today's price for both oil and gasoline are a result of speculation.
The fact is that it was not always legal for commodity speculators to trade in oil futures.
This is something that comes about by virtue of legislation and regulation.
Did I say virtue?
It's a right created by a pen.
It's a wrong created by a pen.
It would take a pen to right that wrong.
That, and a couple or three hundred delegates that we elect and send to Washington DC.
And, a President to sign the bill.
But, that can be undone.
No doubt about it.
While we're at it, we should take a look at all commodities markets and the amount of so-called economic growth that is happening as these markets take otherwise productive capital and squander it on outlandish profits for marketers.
As for the need to fund alternative energy, use the carbon tax.
You can reduce the price of oil by 35 percent and tax 10 percent of it back to government and you would have all you need for renewables.
There are areas where the government can take the lead:
-Incentives for those who move to small, more fuel-efficient cars or alternative methods of transportation.
-Telecommuting should be rewarded with tax incentives for corporations with certified programs. Forget about carpools - why go to the office at all any more?
- Housing developments or communities that adopt and maintain certain standards and practices can qualify for federal monies or tax relief (as with the interstate highway system or some such model)
-Communities that make it easier to ride a bike should be rewarded
-I'm sure the Huffpo contributors can come up with a panoply of other ideas too.
We the people need to organize and have a goal of putting the oil companies out of business - the American consumer can do this if we had the proper sense of urgency and leadership. As long as we are united we can win. Divided.... well - you know.
How do you propose you shall heat or cool your home? What do you propose that will fuel your vehicle(s)? Do you fly? What will fuel those planes and jets? Do you drive to work? How will you do so. If you live in an urban area close to your place of employment you could ride mass transit (what will fuel those?) or ride a bike - how's the weather there? Ever rain, or snow?
Are you aware that more than gasoline and diesel are made from crude oil? If there is no crude oil, how will all the other things be made?
Who, do you suppose, has prevented updating and building new refineries?
Who, do you suppose, has prevented the building of nuclear power plants?
Who, do you suppose, has tried oh so very hard to prevent additional drilling for oil and gas?
Oh, yes, those would be the people who are crying the loudest now about the high price of electricity and gasoline/diesel
Just think about what you are proposing.
Please. No really. Please, slow down for a moment and reflect about it. Did you lend a voice to the critics of capitalism ten years ago who said this was bound to happen? Did you think about it twenty years ago? Did you read the reports of the Club of Rome thirty years ago? No? So why are you crying NOW? Because now it hurts and there is little to ease the pain. All of this could have been mediated decades ago. Now it's too late for mediation and we have to make the best of it. But at least we shouldn't whine like small children about dropping our ice cream cone.
(And yes I know how much this all dates me, I'm PAINFULLY aware.....)
Which is why I'm such a pissy, bitchy , curmudgeon about the Green Car =Big Lie thing. I saw how kowtowing to American car worship kept us from making the needed changes in our societyfor THIRTY YEARS, and I have NO intention of wasting my time running down the same cul-de-sac AGAIN.
Between the suppliers and the traders and the devalued dollar, we're seeing a huge bubble in crude oil prices--but if we, as the #1 customer of oil companies, reduce our NEED for there product and strongly indicate that we'll be able to drastically reduce comsumption, they will burst their own bubble in order to make a very good profit at half the current price.
http://tinyurl.com/58m3yh
Our candidates are not showing any leadership on the issue.
Definition of cornering a market: "to purchase enough of the available supply of a commodity or stock in order to manipulate its price."
--Investor's ABC
Commodity index funds ("indicers") have been buying up baskets of commodities, including food and energy, in order to take advantage of increased demand for real goods and have now reached the stage of cornering many of these markets. Normally, this kind of speculation is prevented by position size limits set by the government. For example, the Hunt brothers illegally cornered the Silver market in 1980, sending Silver prices soaring to $50/ounce. Once the government stepped in to break up the corner, Silver prices then plunged to less than $3/ounce. There were quite a few speculators who found that, although they had profits on paper, they were not able to sell on the way down. They got crushed, along with their brokers.
The moral of the story: those who participate in trying to corner a market take on exceptional risks. When the government determines that a corner exists, it will be crushed without mercy as it is antithetical to society as a whole. In other words, markets are not free for a very good reason.
Are things different now? Indicers are the big money interests who often get their way in a capitalistic system. Like the process by which laws are created in Congress and the Presidency, these big money speculators have essentially bribed the government to allow them unlimited position sizes in the markets. Thus, for example, they have bought up the entire Wheat crop for the next two years. Now, if the richest man in America, for example, had decided to illegally buy up, say, all of the milk supply in the US and bribe Congress and the bush in the White House to look the other way, he could certainly do it with his gargantuan wealth. But, consumers, faced with the prospect of paying hundreds of dollars per gallon of milk (which the rich guy would certainly try to charge to maximize returns for his shareholders), would quickly rebel and find ways to smuggle milk into the country to break the market.
SALE ON GASOLINE!!!!!!!!!!! PRICES SLASHED!!!!!!!!!!!
That's how you know oil is not part of the "free market" that republiCONS always talk about.
The misconception that
We're going to be suffering greatly, as it is, so why not join the green movement big time, and if the oil companies want to participate, tough cookie to them. We start simple. Initiate a broadband infrastructure policy out of the white house akin to the present digital tv switch nonsense. The same price for a digital tv converter box buys a wireless access node for each home. From that point on, every community has their local broadband infrastructure in place, and generations of Americans have free local telecommunications, tv and radio access. Oh, but that would disrupt the telco/cableco duopolies. Good. We get rid of them, and we set ourselves up for creating a way to eliminate travel to work.
Time to stop listening to corporate media, corporate thugs that control what we see and hear.