by Jack Lee
This article is in conjunction with Tina’s story below on price gouging to emphasise a few points she made and add a few new points of my own.
Regarding ethanol, Tina and I are tracking. I’ve been stating loudly, clearly and repeatedly that corn-ethanol is the wrong way to go. The corn lobby receives grants, subsidies and tariff protection from our lawmakers because of undue influence on them by the special interest groups they represent in their farm districts. If Tina says soybeans and wheat fall into this category, then I say it does not surprise me one bit.
Next, and this is a side point on the drug industry that was previously mentioned; it gets accused quite regularly of price gouging, but I would remind our readers it is in a unique situation. They must invest heavily in products before they are marketable and if, God forbid, a product is even “believed” to be at fault for causing someone damage, the lawyers can destroy their multi-billion dollar company quicker than you can say Eli-Lilly.
Let’s look at the allegation of “price gouging at the pump”, but first maybe we should establish what we mean by price gouging. Price gouging is a frequently pejorative reference to a seller’s asking a price that is much higher than what is seen as ‘fair’ under the circumstances. The price of crude does seem to be inconsistent with the forces supply and demand because demand has not increased anywhere close to the proportion of the current high price.
In the absence of price controls, the U.S. price of crude averages out at about $27.00 in inflation adjusted dollars and it does so over the last 50 plus years! Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude, oil prices only exceeded $24.00 per barrel in response to war or conflict in the Middle East. Again, these are inflation adjusted dollars in terms of what a buck would buy in 2007.
Here’s the long history of stable crude pricing: Since 1869 US crude oil prices adjusted for inflation have averaged $21.05 per barrel in 2007 dollars. Now I ask you, is the current pricing of oil priced at a fair value or has it been inflated well beyond the “mean” visa vi price gouging? If you are not sure, re-read the mean price of oil above.
If I can convince you that the price of crude is unfair (talk about an easy sell) and it is grossly exceeding the mean price, then I have effectively won my case for “price gouging” at the pump. But, I really want to drive my point home (no pun intended). So, for my first expert witness I call Saudi Arabia’s Oil Minister Ali al-Naimi.
al Naimi said on June 13 our current record crude oil prices are “unjustified” and he signaled his company may soon start pumping from a new field. The June 22 meeting in Jeddah will discuss the price rise, which are “unjustified by fundamentals“, and suggest appropriate solutions.
The kingdom of Saudi Arabia will start pumping oil from its new 500,000 barrel-a-day Khursaniyah field within the next month.
We are not talking Joe Snot the Rag Man here folks, we’re talking the quintessential oil expert of OPEC, if not the world, who is telling you… flat out…the price of crude is unjustified by the fundamentals. Now hold that thought as we move along.
We (americans) all support the constitution right? Well, in the United States, laws against “price gouging” have been held constitutionally valid, it is a lawful exercise of police power to preserve order during an emergency. This is a time tested, Supreme Court proven fact, not merely a logical extrapolation from a given circumstance. The highest courts recognize price gouging and they do not defer to free marketers that this price gouging is really a good thing to fill a temporary need and all will work out in time. So my humble opinion on price gouging is in line with our nation’s highest lawmakers who recognize price gouging for exactly what it is.
Price gouging comes from prices obtained by practices inconsistent with a competitive free market.
Is there basically free market competition when it comes to crude oil prices? No way! OPEC has 80% of the product and here at home our democrats and a few republicans have conspired to restrain production of crude oil that is under our control on our land. This is a double whammy when it comes to “restraint of trade” when we should be letting market forces resolve the imbalance, i.e. drilling. Even though we are not able to exert much influence on OPEC to alter their prices, it is still unfair and it is really unfair that our own government restrains trade by restraining drilling for our own oil on our land!
On the other side of this issue, we must recognize that many of those who support a right to “price gouging” regard the terminology itself as being designed to create prejudice against a legitimate and beneficial free-market system.
They view the rapid increase of prices as a valid system for rapidly distributing scarce resources to those who need them most (as evidenced by what they are willing to offer in exchange) and rewarding those who have prepared for potential scarcity by taking steps to provide the highly desirable resources.
Gouging sets off an economic chain reaction that ultimately remedies the shortages that led to the gouging in the first place, say the free market people. This is true, but only when a monopoly does not exist and people had an alternative. According to the Sherman Anti-Trust Act a monopoly in America can’t exist! But, in a sense it does, because sometimes our government works like a monopoly when it represents the special interests and not the broader interests of the people. Isn’t that exactly what our lawmakers do when they restrain drilling for oil?
And this anti-trust law doesn’t address the monopoly outside our borders. We’re at the mercy of OPEC because of our dependence on imported crude. So the free marketers are right in theory, but in our most immediate reality and with regards to the allocation of oil reserves and who controls it, their theory won’t work when we are at the mercy of the whims of OPEC or other forces. But, let me defend OPEC for a moment because it’s not all OPEC’s fault for the current high price of crude! Driving up the price of crude is also speculation by capitalist entrepenuers. Some experts believe that as much as 60% of the current price of crude is due to these speculators, and not merely the increase in demand by emerging markets like China or India. In fact China and India, as large as their demand may be, is only a modest part of the real picture, i.e. supply and demand. This is a bit off track, but I’m not sure what beneficial role, if any, speculators play here. Perhaps if they were not part of this situation we would all be better off, but I will defer that answer to you.
My main point is, we have seen grossly unfair increases in the price of crude, prices that have had little to do with ONLY supply and demand. Further, I’ve given you the evidence right from the source there was price gouging taking place. It looks like a correction maybe headed our way soon. When the speculators start to bail the price of crude could collapse back to more reasonable levels.
Has certain practices by our own big 5 oil companies had something to do with the high pump prices? Of course! They have hidden their true profit margin in depreciation of equipment, self imposed costs, higher transport fees, even salary and many tricky bookeeping methods to show a minimum bottom line profit. Look at the gross revenues now and the cost of operation just a few years ago and see if that cost of operation has jumped substantially.
So they are part of the problem too, but the price of crude is where it’s really at and now you have the whole story or at least as much as I can possibly tell without writing a book! lol