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Jewish World Review Nov. 4, 2005 / 2 Mar-Cheshvan, 5766 The scandal of supply and demand By Rich Lowry
http://www.JewishWorldReview.com |
Congress is clamoring for an investigation into why it is that
when the price of oil spikes, oil companies make higher profits.
This shouldn't be a mystery for anyone with a high-school-level
knowledge of economics, but that exalted category apparently doesn't
include much of the Democratic caucus nor Senate Majority Leader
Bill Frist, all of whom favor a probe. The twin villains of the
oil-profits story are easy to identify: one is called "supply," and
the other "demand."
ExxonMobil has stoked the congressional outrage by having the
temerity to make a $9.92 billion profit in the last quarter. Anyone
who even scanned the headlines in recent months might find this
unremarkable, since they have been blaring news of the price of a
barrel of oil hitting nearly $70 in reaction to surging world
demand, turmoil in the Middle East and monster hurricanes hitting
the Gulf Coast.
If executives of ExxonMobil had anything to do with these
circumstances, they are the most powerful people on Earth, and
perhaps Congress really should try to prevail on them to create
harmony in the Middle East and less cyclonic activity in the
Atlantic Ocean. ExxonMobil stockholders, on the other hand, might
have grounds for a shareholder lawsuit if the company's executives
have always been capable of manipulating world conditions to their
advantage and have negligently failed to do so. Where were these
executives when the price of a barrel of oil was dropping to $10 a
barrel in 1998?
ExxonMobil and other oil companies are riding the crest of a
boom in what is a notoriously boom-and-bust business. Economics
writer John Tamny recalls that when oil prices last soared, around
1980, oil companies were 28 percent of the S&P 500's value.
Investment in the industry fell along with oil prices throughout the
1980s and 1990s, and oil companies' share dropped to 7 percent of
the S&P 500. Now it is 10 percent and will probably go higher with
the prices, before dropping again when prices fall, and so on and so
on.
Even in this boom, there's nothing untoward about ExxonMobil's
profits. They are big, but it is a big company with big
expenditures. What is important is the profit margin. For every
dollar in sales, ExxonMobil makes 9.8 cents. McDonald's and
Coca-Cola make 13.8 cents and 21.2 cents, respectively. Google makes
24.2 cents, and Merck, Bank of America, Microsoft and Citigroup all
make more than that.
As an industry, oil and natural gas are less profitable in terms
of cents per dollar of sales than banks, pharmaceuticals, software
companies, telecommunications, insurance and a host of others. The
most outrageous oil profiteer is government, which has collected
$1.34 trillion in revenue from local and federal gas taxes since
1977, more than double the domestic profits of major oil companies
during that time, according to the Tax Foundation.
In any case, in a market economy, high profits and high prices
are essential. They eliminate scarcity. Investors with visions of
dollar signs filling their heads are now rushing into the oil
business. That will increase supply. Pinched consumers, meanwhile,
are already pulling back on their consumption. Compared with a year
ago, gasoline deliveries declined 4 percent in September, the
biggest drop in a decade. That will decrease demand. These two
trends make for falling prices. Any political interference with this
process through price controls or a tax on companies' "windfall"
profits will only preserve the conditions for scarcity.
Jerry Taylor of the Cato Institute points out that at a time of
a record run-up in oil prices in the late 1970s, President Carter
stripped away most of the counterproductive price controls that were
in place when he took office. Running against him, Ronald Reagan
promised to deregulate even further. So it isn't inevitable that
politicians have to react stupidly to high oil prices. There
appears, however, during the past 30 years to have been a dramatic
increase in economic illiteracy in Washington. Maybe Congress should
investigate.
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© 2005 King Features Syndicate |
Arnold Ahlert | |||||||||||
