When people in public offices start bleating about a conspiracy of private firms to screw the public, it is usually a sign that said public official is trying to spread a profound misunderstanding of market forces, or is an idiot, or is trying to name a scapegoat to shore up public support. In the case of President George W. Bush – not exactly the brightest light in the harbour – it may be just be a combination of all three.
Anyway, veteran libertarian scholar and free marketeer Tibor Machan is having none of it.
Oil prices are high – though in inflation adjusted terms, not as high as in some periods. The reasons for this have nothing to do with the nefarious activities of Big Oil. It is caused by rising demand from the expanding Chinese and Indian economies; a lack of supply caused by low investment during the 80s and 90s when crude prices fell to below $10 per barrel at one stage; a lack of refining capacity for the same reason; regulations designed to cut pollution, which raise production costs, the interruptions to supplies from the Middle East because of the conflict there, and finally, an element of speculation from hedge funds and the like.
Adam Smith famously warned of the dangers of firms forming cartels to prop up the price of a particular good or service, although in practice such cartels tend not to last very long unless they can enlist support from governments in some ways to prevent new companies from entering a market. If Exxon, say, tried to do a deal with Shell to rig the price of gasoline at X dollars a gallon (not litres, dammit) then sooner or later another firm would see a market opportunity to undercut that price, and in an age when motorists can check prices on the internet, it is hard to see how this process could be stopped without State intervention.
Conspiracy theories are great fun, and I hate to be a party-pooper, but in 99 times out of 100, they are bunk.
Adam Smith famously warned of the dangers of firms forming cartels to prop up the price of a particular good or service, although in practice such cartels tend not to last very long unless they can enlist support from governments….
Apparently you’ve forgotten about the existence of the organization commonly known as “OPEC”- a cartel that exists specifically to maniupulate the price of oil.
I think OPEC is covered by the bit about enlisting the support of governments ….
Apparently you’ve forgotten about the existence of the organization commonly known as “OPEC”- a cartel that exists specifically to maniupulate the price of oil.
I haven’t forgotten. As the guy below in the thread said, many OPEC countries control their oil supplies directly, such as the Saudis. In any event, the OPEC cartel nearly collapsed in the late 1990s (I was involved in tracking that market at the time), when oil sank to below $10 per barrel, and when countries such as Russia refused to go along with the quota system. Sorry, but no cigar.
Well O’Reily on Fox is in a bit of spat with Neil Cavuto over this. O’Reily is big on “price gaugeing” bandwagon but Cavuto things he is full of it. Its most amusing to watch; especially when some of the more inbred of O’Reily’s fans start sending hate mail to Cavuto and he reads em’ out.
Lets not forget the 70-75% direct and indirect taxation that goes straight to The Fat Thief.
Robert
That’s a tax rate of about 300%
Pete,
Tell me about it!
I work for the eeevilll oil companies, and much of the reason for low refinery capacity is that we haven’t been building or refurbishing them. Why? We cant afford it at the moment. The oil companies make a profit of about 10-15 pence a litre, the retailers the same if they’re lucky, all the rest goes to Gordon ‘Fat Thief’ Brown. The oil companies make money on petrol on aggregate, the big profits are chemicals, feedstocks and pharmeceuticals.
PS- The oil companies pay distribution out of that profit, they actually trouser about 5p per litre at the end.
I’ll second the previous lack of investment; but would also add that oil companies are making up for it in quite spectactular fashion. The contracting industry has seen a period of activity like this in a decade. I can think of 10-12 billion dollar expansion / new build projects off the top of my head in the middles east alone. There are also plans to build two heavy crude upgrader refineries in Middlesbrough to feed the UK market (using heavy crude from the North Sea fields) and 3-4 new LNG terminals for North African Gas. There is also a great deal of activity in China, especially Teraphthalic Acid plants (polymers) – of which I can think of 4-5.
theres an article in the Independent today in which the CEO blames oil speculators for the curent price.
“There has been no shortage and in fact inventories of crude oil and products have continued to rise.”
sorry BP’s CEO
Judging by the very low margins in retailing, big oil is pretty incompetent if it is indulging in uncompetitive activities.
Francis Poretto wrote an entry called Opposing Leashes on why the price of gasoline is realatively high. All his observations still apply today, and I’ll add two more: the U.S. government mandate to use more ethanol and tax increases at both the state and Federal level.
At any rate, almost every reason is caused by the heavy hand of government.
What’s Bush really said? He’s going to allow the ustice Department to investigate the oil companies knowing full well, as a former short term oil man, that they’ll find nothing again this time. It’s a sop to his enemies and nothing will comeof it as more people point out publicly that the government makes a much higher profit off the price of gas than Big Oil. The word is getting out.
PS- The oil companies pay distribution out of that profit, they actually trouser about 5p per litre at the end.
Mind citing a few sources for me, Robert? Not that I don’t trust you, but it’s hard to make an argument with my friends on the issue by saying “some guy on this anarchist blog said…”
Isaac, this is a Libertarian blog.
Libertarians want minimal government, Anarchists want no government.
Dude; I’m at the place doing South Hook and Grain LNG terminals, and I also worked on Langelled which is a 42″ pipeline from the Fenris field to Hull. I am also doing work for China for LNG plants. Thing with all these plants, in terms of size they are tiny. The Middlesborough crackers are having a bit of a stop start problem with costs, last I heard. One thing we do, is to take Russian refined product such as Diesel, and use that as a feed in our refineries. Russian diesel is crap, but makes a good feedstock for us as there is little or no waste.
Isaac; I worked this last bit out from BP’s posted profits (Internet)of billions of pounds on hundreds of billions of barrels refined. I know the figures are about correct because I work with the people and these are the margins that say go/no go on starting a job up. Sorry I dont have anything to hand.
George W’s actions aren’t surprising given his low approval ratings. The really sad part is that too many people still believe in the “Big Oil” conspiracy.
His actions really aren’t surprising considering that Senators and Congressmen, especially in the opposition but also in his party, have been bleating for this for weeks.
Indeed, given the amount of research connecting approval ratings historically to gas prices, it could be said that some commentators have the causations the wrong way round– his approval ratings appear to be low because gas prices are high and because the public has a blinkered view about them, thinking that politicians are somehow responsible. Part of the reason his approval ratings are low is because he hasn’t ordered this silliness yet again, though of course they will find nothing, as the FTC always does.
In the USA, there is a refinery capacity crunch due in part to enviro-nutters fighting permits for new ones, the spectacle of multiple states defining their own specific gas blend (for environmental reasons of course). This then creates shortages which puts upward pressure on prices. Add to that the fact that many states are now *raising* gas taxes and viola! $3.00/ gal gas. No mystery here.
What’s worse is that laws that prevent the US from drilling in international waters only means that foreign countries may eventually drill there. Countries like Cuba.
It is unseemly to refer to Gordon Brown as “the Fat Thief”. We should accord him the respect of calling him by his proper name:
The Golem.
This whole gasoline situation would improve immensely if gas saving technology was not suppressed like alternative medicine is suppressed. During the 1918 flu the mortality rate with conventional treatment was 30% and with homeopathy it was 1% and yet with the bird flu we don’t hear anything about using effective methods, only that presently we have no effective conventional treatment for that flu.
Paul Harvey said a few months ago that right now there are hundreds of 18 wheelers traveling our nations highways burning Hydrogen obtained on board from water by electrolysis with the current from the vehicles alternator.
I have a copy of a front page local newspaper article from 1989 telling of a fleet of vehicles arriving here in MN from CA burning 1/2 water & half fuel & then they apparently dissapeared from the earths face.
The enviro-weenies are convinced that Bush is driving the oil cost up himself so that he will be able to convince Congress to allow drilling in Anwar and other places. I sincerely hope that is the case.
Because of enviro-loons and Democrats the US is far too dependent on foreign oil. The higher the cost of oil the more attractive it is persue more exploration and drilling. This is a very good thing.
Just one thing: if the high price is down to low refining capacity or a shortage of supply… why would any oil company spend money to increase refining capacity or supply when that would lead to a decrease in the sale price? As long as there is _enough_ (and there’s always enough if the price keeps going up, as people find better ways to use it and use less of it) then what’s their incentive? It’s not like someone is going to start an ‘instant oil company’, shit out 15 drilling rigs and corner the market in half a year, is it?
The last point is true, and is a valid argument about the markets always are geared towards public demands. It can be far more profitable for an oil company to spend it’s capital on gobbling up another rather than seeking out a new oil field for example. Eventually as the price rises someone will step up efforts to develop new oil production since it willl be seen as a profitable opportunity, but you can have short term inefficiencies in the market. An unregulated market doesn’t alway produce good results, private monopolies can be just as harmful as governmental ones.
Breakdown of pricing structure of a litre of petrol (PDF) from UKPIA. It does tie in with Robert’s comment that about 5p in a litre is left over after the gross one has taken his cut.
I agree with sammler that we should not confuse the issue by terming too many nuLab rats as ‘fat’. Two Jags Prescott (now known as 2Shags and shortly to be known as just Jag after his wife takes 50% of everything he owns) is the one we instinctively think of when someone refers to ‘that fat thieving bastard’ when mentioning Labour MP’s.
I recently came across a China Daily article laying out how gasoline was rising. The article was a startling collection of mismatched dates and odd measuring units. Clearly something was up. After converting to good old $/gal instead of yuan per ton, I discovered that the new, higher price was going to be $1.47/gal give or take (conversion from tons to gallons requires you to know the weight of gasoline, something that changes by grade). My local pumps showed a price this morning of $2.89/gal and Indiana’s not as pricey as neighboring Chicago which is well over $3.
In other words, 1.3 billion chinese running a top 5 national economy have a 40%-50% subsidy on their fuel price over free market prices. Who wouldn’t want to relocate their energy intensive projects to the PRC? Who wouldn’t want to expand demand rapidly and without end? The problem of explosive demand growth is to a significant extent a problem of government subsidy.
It’s too bad that there seems to be little interest in investigating this.
When I was in China, I noted that fuel in local currency was slightly cheaper than that available for purchase in urban Australia. And I believe fuel here in Oz is quite a bit more expensive than that in the States – far higher govt taxes. Regular unleaded is about US$1 a litre.
I can’t comment about the article you mentioned having not read it, but those are the prices I noticed advertised at Chinese petrol stations.
GWB is “not exactly the brightest light in the harbour”. But, what? He has an MBA from Harvard and I thought he was running this wonderfully brilliant gas scheme to run up the oil price and make his family rich? No? And why does he care what his “approval ratings” (by the liberal media) are? He’s not running again. The best favor he could do Condi or McCain or Giuliani would be to leave them some running room to distance themselves from him. But that couldn’t be. Clinton was smart. That’s why he got himself disbarred and impeached and lost a 40-year Democratic monopoly on control of Congress and the statehouses. And lost his hand-picked successor – and his hand-picked successor – to the moron from Crawford. Brilliant!
One controversial theory is that oil prices are skyrocketing because conventional oil production will soon reach its peak — the so-called ‘peak oil’ hypothesis.
Perhaps this theory is invalid as regards the world in general, but it certainly applies to Europe, the United States and the West as a whole. Without the Middle East, Russia and Venezuela we would certainly be in deep doodoo.
Many ‘peak oil’ sites are a bit on the loonie side, but The Oil Drum is worth taking seriously.
Robert,
Then you have probably come across some of my work having been involved with both of those projects!