Friday, October 28, 2005

Your Misery is OUR Gain! - Over inflated Gas Prices mystery solved!! :: TruthBeFree - Collective Bellaciao

Regular readers will recognize the headline could hardly be mine. It is the headline Collective Bellaciao gives to a recent widely-published Associated Press article on oil company profits:
Exxon Mobil Corp. rewrote the corporate record books Thursday as the oil company’s third-quarter earnings soared to almost $10 billion and it became the first public company ever with quarterly sales topping $100 billion. Anglo-Dutch competitor Royal Dutch Shell PLC wasn’t far behind, posting a profit of $9 billion for the quarter.
. . .
To put its performance into perspective, Exxon’s revenue for the three-month period was greater than the annual gross domestic product of some of the largest oil-producing nations, including the United Arab Emirates and Kuwait -- even though it lost considerable production because of a string of hurricanes that battered the U.S. Gulf coast.
Eye-popping numbers, yes. But what's the story behind them?

Short-run demand for petroleum is inelastic, meaning that a fall in supply translates into a percentage increase in price that is greater than the decrease in quantity consumed. As a result, negative supply shocks drive up revenues and can drive profit as well. What does this prove? That despite its size Exxon and its fellow producers were not exploiting market power - otherwise they would have done on their own what a string of hurricanes did instead.

The article continues:
Those results led Democrats in Congress to demand a new windfall profits tax. "Big oil behemoths are making out like bandits, while the average American family is getting killed by high gas prices, and soon-to-be record heating oil prices," Sen. Chuck Schumer, D-N.Y., said in a statement.
Right. Good plan. Very original. Tails you lose, heads I win.

Not all shocks are negative supply shocks. It is only because government has been able to maintain a reputation not to grab profits that oil producers invest in exploration and production.
Which brings up another contributing factor behind the high prices at the pump: Government environmental restrictions that have stopped investment in refining in the US dead in its tracks for decades.

It's no wonder that OPEC members are considering expanding their investment in refining in the rest of the world.

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Blogger BD said...

Have to say I feel a bit lost in the economics when reading your rebuttal to the article. I would say I agree with the sentiment of the article even if some of its points are weak. My own argument would be that since the build up to the current Iraq war, prices have been rising. When the end, more or less, came about, prices failed to fall. Instead, whatever has happened in the world the oil prices have persisted in rising. Thus, my feeling is that the oil giants could have factored in a way to use or return the flood of revenues and avoid the current windfall in pofits. You can't tell me these guys don't have top analysts working for them who can't look at what's been going on in the world and make better predictions about profits. Really, these guys know what they're doing. In a few years when prices finally stabalize or start to drop again they'll be crying about how they don't have enough money to invest in new explortation.

8:44 PM  

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