The Great Oil Gouge

[eablair3]

Interesting article on price gouging. Now, I understand why Bush won't be saying anything about this, but does anyone know why the Democrats in Congress are not speaking out about this? Why?

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http://www.counterpunch.org/lindorff08262003.html

August 26, 2003

The Great Oil Gouge
Burning Up that Tax Rebate
By DAVID LINDORFF

Remember that $400 family credit that you got from the IRS (assuming you weren't one of those 8 million poor families that the Republicans and the president decided didn't deserve a tax rebate)?

Well, if your family has the typical two cars and two drivers, and you each drive the typical 15,000 miles a year and get the typical 20 miles per gallon, that windfall will be more than eaten up by New Years by what might be called the Bush/Cheney oil price surcharge, which has seen gas prices soar in recent weeks to the high they reached last March on the eve of the war against Iraq. And that's not counting the even more additional money you'll be forking over for heating oil this winter, which for a typical home in the Northeast or Midwest, could be $450-500 (not to mention your higher electric bills, since a lot of U.S. electricity is generated by oil-fired plants, besides which coal and natural gas prices rise in tandem with oil prices).

Think back a bit to when oil prices were surging last March. The oil industry at the time blamed those record high prices on the unusually cold winter, which had depleted crude oil reserves, and on concern over threats to the Middle Eastern oil supply as a result of the coming war--concerns which caused oil traders to bid up the per-barrel price of crude oil.

Of course, the war never did produce any delays in Middle Eastern oil deliveries, and in fact, some Iraqi oil is now being added to the world market, which should be bringing prices down, not up. And there certainly hasn't been any unusual demand placed upon supplies.

So why the record increase, which the Lundberg Survey says over the past two weeks has been the largest price hike on record since the outfit began keeping records 50 years ago?
According to the oil industry, the problem this time was temporary refinery shutdowns caused by the East Coast blackout, and by a break in a pipeline in Arizona.

Does anyone really believe this malarky? The blackout lasted a couple of days, and was not nationwide. Indeed, it was in an area--the Northeast--not particularly known as a center of oil drilling and refining. There was no blackout in California, or in Texas, or even in the Southeast--all areas with far more refinery activity. And as for that pipeline in Arizona, it is not that crucial to U.S. oil supplies except in Arizona and New Mexico.

What's really going on here is collusive price gouging by an industry with a history of such behavior, and one that in this current political environment has become almost synonymous with the national government.

In recent years, the number of oil firms in the country, and the world, has been dramatically reduced, with the mergers of Exxon and Mobil, of Amoco and Arco and British Petroleum, and of Texaco and Chevron. That means a lot fewer companies competing.

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http://www.counterpunch.org/lindorff08262003.html

[JackSwift]

1. Gas prices in my area

are at an all time high. If this were the Clinton administration, the media would be blaming it on Clinton. As it is, the media is actually reporting the high prices, but they are going far out of their way not to blame the President or his cronies, despite the fact that all of them are from the oil industry and the prices can be fairly attributed to the uncertainty of war in Iraq and the BFEE energy policy.

[TreasonousBastard]

2. I always have a problem with...

conspiracy theories about commodity pricing, including oil pricing.

Granted that those curves in Econ. 101 rarely work in the real world, people somehow have the idea that microeconomics should only make prices go down.

Breaking News: prices can go up, too. It's called a market.

Worldwide refinery capacity happens to be at the breaking point now, and refinery expansion is barely keeping up with demand, so a refinery slowdown in Singapore can affect worldwide supplies. Refiners calculate probable demand months ahead, and adjust their production of heating oil, diesel, and other products months ahead of time, as it takes a while to change a refinery's output. Sometimes, demand doesn't equate with their estimates. Sales of Hummers and increased truck traffic incease demand for diesel, and prices go up. Sales of Cadillac Escalades make gas demand go up, and prices.

Anyway, I have absolutely no doubt that everyone in the business, from drillers to gas stations, is squeezing the last penny out of their products but that doesn't imply a vast conspiracy to rob us. It is what businesses do. Everyone around here bitching about $1.70 forgets it was 99 cents not too long ago when there was more of it around, and it may get down there again.

BTW, a quick accounting course explaining LIFO and FIFO and normal retail pricing practices explains why the gas delivered last week costs more today. Maybe it's not right, according to the consumer, but if you were a retailer, you would do the same.

[German-Lefty]

4. It's not call conspiracy but Oligopoly

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=114&topic_id=1001

Basically when there are too few players on one side of a market, game theory kicks in: the optimal behavior for each individual agent, if adopted by all is bad for all.

OPEC is an example of an oligopoly, each individual country could break it's quotas and make it rich, if the others didn't follow suit and screw it back. What often happens is they learn to play nice with each other.

They pretend for one second that they're a monopoly. They calculate how much (for what price) they should sell to get optimal gain, then they divy up the loot and make quotas. OPEC does this out in the open. If us companies do this it's illegal so they just have unspoken agreements. An example would be the major record companies being accused of Price fixing CDs. It's hard to prove, but I think the did get fine a bit.

[TreasonousBastard]

6. I'm aware of oligopolies...

and monopsonies, too, which also have far-reaching effects (Wal-Mart)

Watching how Mars, Nestle, and Hershey play the cocoa futures is a fascinating study of oligoply. Cadbury might be a player now, but I think even they are too small to count.

The problem with trying to use economic theory in the real world, though, is that there are limits the theory doesn't take into account. Or when it does, it becomes a new theory.

With oil, OPEC can attempt to set prices with pumping limits, but OPEC doesn't control enough oil. US, Canada, Russia, Nigeria, Mexico, Indonesia, North Sea... Then Venezuela screws them by pumping almost nothing, and there are backdoor contracts.

But, that's the crude price, and OPEC tries only to maintain a price profitable at the wellhead, and knows they'll hurt if they boost it too much and sell less. And the crude price is really set at futures auctions in Rotterdam anyway, so they usually still get screwed.

Then we have the refinery problems. A fire in a California refinery a while back caused gasoline price spikes because of a supply problem. Again, supply got cut and the unofficial auction started for what supply there was. We didn't run out of gas, but we didn't have the slight oversupply we normally have to buffer prices-- the traders got worried and sent prices through the roof.

Sure, someone at BP/Amoco is sittng around watching markers at Exxon/Mobil and adjusting spot prices accordingly, if they can. In the grand scheme of things, though, it's a pure market situation, and actual manipulation probably doesn't happen all that often. There's a whole market in gasoline futures that works pretty much the way any other commodity market works.

Yes, I know it happened with El Paso Gas, Enron, and the whole California thing, but that was more of an anomaly. And it involved holding key bottlenecks hostage, which is a lot tougher with oil. A highly illegal anomaly, of course. There's always someone trying to corner the market, like the Hunt Brothers trying to buy all the world's silver, and just made Kodak's film cost 30% more while they lost all their money.

Regulation of commodity markets is not a bad thing.

[PATRICK]

8. In third grade

(no joke) I could see how you could argue both ways on an economic issue. Numbers in an equation after all and the oil is so entwined in the economic system you can justifiably argue a million different ways.

The point here is the media WON'T argue any way that touches upon oil industry exces now running the country into the ground. In fact, the select and substantial argmuents exonerating the industry are as seasonal as the ceremonially repeated bylines probably pulled out of a file index and filled in with a few new tidbits(Arizona pipeline burst- that was lame, but so were the idiotic causes of the blackout)

Politically I think we could simplify the quandary for the reasonable folk. Who profits from all these fatefully serendipitous permutations of oil profits no matter what happens in the rest of the real world? What is the "business" expertise and loyalty of the minority government in the WH? Why is this suddenly so meek and wise a non-issue even though the "gouging" is higher and less spoken about than ever? Why can't there be an alternative policy to end this? Why does the ultimate blame always fall on the consumer who is given little or no say or explanation in the matter? Who is standing up for the consumer or ending our destabilizing dependecy on oil? And sure the competition among thieves protects them and us a bit, but aren't the monopolies consolidating before our eyes? Aren't "we" becoming irrelevant commodities, less than the oil itself?

Such are the things lurking securely in the pure market.

[Vitruvius]

5. I saw numerous organized efforts to commit illegal acts during my career

in industry. It's a way of life. Because breaking the law can be so very profitable.

And the legal term for an 'organized effort to commit one or more illegal acts' is a 'conspiracy'.

Industry is big on teamwork. And when the 'team' breaks the law, legally it's a conspiracy.

[TreasonousBastard]

7. Yes, they try it all the time...

and I was involved in some of that, too, over the years. Our schemes and syndicates were quasi-legal, however, and I don't think I ever did anything indictable.

These schemes do tend to break down, though. There is no honor among thieves, and the syndicates that we set up eventually broke down. Each company was greedy enough to try to go it on their own, and eventually drove prices down to where no one made any money.

Poetic justice?

[German-Lefty]

3. Good let em drive oil prices up, it's good for the enviroment.

I'd rather have a fuel tax be the reason for high prices at the pump, but will make people just as likely to reduce consumption. The problem is where the extra money is going not that the prices are higher.

Take a look at what we pay for gas here in Europe, around $5 per gallon here in Germany. This creates real economic incentives to make better cars, and drive less.