Those Greedy Oil Companies And Blind Politicians

Oh those politicians, it seems that our ever so (un)wise politicians had to have a senate hearing to discuss, get this, why are oil execs so greedy. The question I wish was asked is, if the high gas prices makes execs greedy now, does that mean that the low gas prices of the past show the execs were charitable than?

Of course not, you don’t need to hold a senate hearing to know that oil execs are ‘greedy’, of course they are, and, surprise, so are all execs. In addition, this is not just limited to execs, this is the case with, get this, employees too. When you look for a job, you don’t offer to work for less because the company is going through difficult times, do you? I certainly don’t, in fact, when I look for a job, I look for the job that gives me the most benefits, the most pay, and the most of what I want, regardless of the company circumstances. The same is true with a company; it wants to pay me the least, with the most productivity. This is the way the economy works, you have two competing forces, the employee wants the most pay she can get, and the company wants to pay her the least, and based on supply and demand, the two forces meet at equilibrium.

Well, if this is the case, than what to do to solve the high gas prices? Well, first off, I’ll tell you what not to do. You don’t hold senate hearings on the ‘greedy’ oil execs, you know why? Because there is nothing that could make investors pull their money out of an investment more than having the government send signals that it is going to interfere. If you want to send a company’s stock into single digits, have the government declare that it is going to start regulating it more, dictating profits, and overall interfering in its day to day activities, that will do it faster than anything else, and that is the last thing you want to do when your goal is cheaper oil. If you think oil prices are bad now, wait until the government starts to interfere, remember those long gas lines during the Carter Administration? Think shortages and even higher prices….

Alright, so now that we’ve gotten what not to do out of the way, what can we do? Well, basic economics will tell you that the only way to lower the price of something is to do one of two things, lower demand and/or increase supply. This is precisely why price controls are so dangerous, a high price addresses these two issues, a higher price makes consumers use less of it (thereby lowering demand) and increases investors incentives to supply more of it (increase supply). Okay, so since gas prices are already high as it is demand has already been somewhat addressed, now the only thing left is supply, we need more supply.

Well that is the interesting part here, at the very same time that the senate was holding hearings on the ‘greedy’ execs, the house was dropping drilling in the Arctic for oil from the budget bill. Well, let’s think this through, if you plan to lower prices, and you’ve already significantly lowered demand, what else is left but increase supply? And does anybody have any better ideas to increase supply than drilling in ANWR? Surely you don’t think windmills and electric cars will solve the problem – that is only a very small fraction of our oil consumption. Or do our politicians honestly think that the government could supply oil cheaper than private industry? Now, I know the typical response here, ANWR will not give us oil for X more years, it only has Y amount of gallons, etc, etc, but that is precisely the attitude that got us in this predicament X years ago, and this is the time to start changing it. Especially now that technology has significantly increased, to the point where drilling for oil and protecting the environment are no longer mutually exclusive things, you can now do both.

Okay, fine, I understand that there will still be some people who would rather do with higher gas prices than drilling for oil in the ANWR, and that is fine. If we as a country decide that higher gas prices are a worthy cost (and this is precisely why environmentalist tend to be largely upper-income city dwellers, it is precisely those people that can afford to prefer higher gas prices), than so be it, but please don’t fool yourself into thinking that you are not making this trade-off. You either refuse to drill in the ANWR and deal with higher gas prices, or you increase supply of oil and among other things, drill in the ANWR, there are no other options. Politicians in congress seem to think that they live in an alternate universe, and try to hide reality from the rest of us.

Walter Williams, Professor of economics at George Mason University, explains in more detail the economics of profits.

Update: Macroblog has a summary of the reactions.

Update: UC San Diego professor Hamilton has an update.

Update: Thomas Sowell has more.

23 Responses to “Those Greedy Oil Companies And Blind Politicians”

  1. mortalez says:

    I dont really agree that all people are greedy, I’ve quit jobs I hated for lower paying jobs I actually enjoyed(the evil of capitalism forces us to make such choices). And not all executive people are greedy(most but not all) but the more honerable ones tend to not last as long because the “free market” rewards those willing to screw others(note the ruling that says companies dont have to pay the retierment that was promised to workers).
    Point being the government does many things cheaper than the “free market” imagine if the police were privately ran , or the fire dept? and do you think UPS or fedex would deliver your letter anywhere in the world for less than 40 cents?. look at cities with private ambulance contracts vs cities where thats a county or city job? out of pocket costs are just plain exploitive.
    Now I get to the oil industry part of the reason for high gas prices are the ceo’s and other executives huge salaries , and even if it is not the sole reason it is bad PR to pay such bonuses and salaries is a slap in the face to those of us who have to suffer such high gas prices , and being that the oil industry has made record profits on the backs of the consumers of their products.
    And history shows that prices went down after the break up of standard oil and the economy as a whole benifited , for those of you who dont know standard oil was the “micro$oft” of the early 20th century, it got so bad the country rose up against standard oil and the antitrust laws were formed and standard oil was the first target , it was broken up into several smaller companies being Gulf(now chevron) texaco,mobal,exxon and shell , is it not interesting that in recent years most of those companies have remerged and they are back to their old tricks.

  2. Michael says:

    I agree with you here HP. There is nothing illegal that the execs did here. There is no requirement to lower prices.

    If congress wantsto assign any blame, it should be at themselves for voting huge tax giveaways to the oil industry as part of the energy bill.

    The only thing that could be probed is possible collusion. I find it odd that oil prices are always relatively the same at all companies. I often wonder if there is price fixsing among the competing companies. Why has no Wal-Mart of oil companies come out with a way to lower prices to drive volume and increase profits even higher.

  3. DD says:

    Something I read from the article that grabbed my attention:

    “The CEOs said their companies were not receiving tax breaks, and two other senators, Committee Chairman Ted Stevens, R-Alaska, and Mary Landrieu, D-La., said those breaks were directed more to smaller refinery operators and need to be maintained”.

    I can see that. ^^

    From the rest of my read, it sounds like the ‘public’ wants to find out what’s going on and they want to know why some petro companies are making ‘record profits’.

    Since the ‘public’ and politician constituents want somewhat of an investigation, well, I think that is ok. Since that is what the public outcry is calling for.

    I see this as a type of ‘balance and check’ type of system except from the public.

    My two centavos. 🙂

  4. mortalez says:

    Well it will only get worse sense all the oil companies are merging , fewer companies means higher prices, note when at&t was broken up , it seemed like magically over night service got better , rate got cheaper and calling someone across country sounds like your calling your neighbor up the street, where as before 1980 calling the next city over all you heard was static. This happoned so fast you have to wonder if the technology was already available just not used, and you can understand why, with no compatition there is no insintive to improve your service.
    flash back to today , with all the petro companies merging they can get away with ripping us off because we have few other choices.

  5. DD says:

    Mortalez wrote:

    “you have to wonder if the technology was already available just not used”

    Yes. This happens.

    Back to petro…….

    Mortalez wrote:

    with all the petro companies merging they can get away with ripping us off because we have few other choices.

    Which is why U.S. policy flaws should be fixed in order to prevent crisis.

    Also, due to the unpredicting gas prices, more and more consumers are buying energy cars. Go ahead and put your on order now. lol! 😆

  6. mortalez,

    I didn’t mean the word ‘greedy’ in the traditional sense, but in the sense economists tend to use it. In other words, both employees and company’s want to maximize profits. This is true of all company’s, and this is true of all employees, the only thing holding both in check is supply and demand, the company can’t charge more than equilibrium because the consumer will go somewhere else, and the employee can not demand more pay than equilibrium because the company can hire someone else, these are the constraints that we all face.

    Now, granted, there are some people that do charity work, just as there are some company’s that are dedicated to charity, but this is not the case with oil, and for the most part, most other companies. This is also not the way the market is structured, for it is this competition between employee and employer that makes the market work so efficiently, and makes the poor so much richer by global standards.

    Now, you write,

    Point being the government does many things cheaper than the “free market” imagine if the police were privately ran , or the fire dept? and do you think UPS or fedex would deliver your letter anywhere in the world for less than 40 cents?

    It’s interesting that you bring this up, because, it was precisely the presence of competition that made UPS drastically more efficient. Think back twenty or so years ago, when the United States Postal Service had a monopoly on the market, and you will see a significant difference in quality and price, in other words, the presence of competition made UPS more efficient, or it was going to go out of business.

    Also, another problem with government run activities is that they give the impression of being cheaper than they actually are, afterall, it is your tax dollars paying for it, so the cost is somewhat hidden from public view. However, this does not mean that the cost is actually cheaper than had the private industry done it, just ask poor cities like my home town of Compton why they don’t get more public employed police officers, and they will start running down the list of how overwhelmingly expensive they are.

    Lastly, while it is debatable whether or not the government can do things like police depts and fire depts better than the private industry, it is clear that the government cannot do oil production better than the private industry, and there is no better proof of this than the long gas lines and gas shortages under the Carter Administration, back when the government had a heavy hand in oil production. Most people are old enough to remember this, and no matter how expensive gas prices get, we can all agree that expensive gas is better than no gas.

    Now, onto salaries and bonuses. I won’t get into the economics of salary pay here because it is long and time consuming, but it is important to note that even if the CEO’s of the oil company’s donated all of their pay and bonuses to lower prices of oil, that would still be a very small, insignificant, reduction in oil prices. It would probably come down to less than a penny on national oil prices, overall insignificant in the grand scheme of things.

    With that said though, it is also important to note that the oil industry does need a higher profit margin than most other companies. Oil is extremely expensive to find, and the overhead costs of operation are very large, and to make matters worse, when you do find a place high in oil, you have to go through all of the extremely high costs associated with environmental regulations, city regulations, and federal regulations, permits, senate hearings, etc…Than you have to add probabilities of failure and so forth, and all of this has to be done at a high enough level to maintain, and attract future investors.

    If the charge were that oil companies are ‘price fixing’ with one another, well that is a different story, and while I would be skeptical of the charge, atleast that charge is economically sound. But to have a senate hearing on the ‘greed’ of oil execs is pure nonsense, and it shows just how bad our politicians are in need of economic lessons.

    For more on this, read Krauthammer’s latest article here.

  7. DD says:

    HP wrote:

    “….. and it shows just how bad our politicians are in need of economic lessons”.

    I agree, and so does the average American. We all need lessons…… 😉

    I am so glad I finished that book….whew! It was a good book but I had to sike myself into continue reading it with everything that I’m involved in.

  8. mortalez says:

    Actually the long gas lines were because the petro companies withholding supply, not them runing out of supply, at the same time there were gas lines wells(that still had oil) were being caped off.

    And there are suburbs throughout the country that do have private police paid for through home “owners asociation” fee’s , fee’s inwhich joe sixpack could not afford.

    And if you are for compatition then you would aggree we would be better off with 12 petro companies instead of 5.

    Also your employee vs managment is correct to a point , being that we are now a global economy managment now has the upperhand ,the value of your job is nolonger set by US market forces, fair negociation or local economy , the value of your job is dictated by how much some child of a goat herder in elsalvador is willing to be paid.
    you see the market does not shift in favor of the worker often enough. Like I’ve said before the market only works during a labor shortage(more jobs than people to fill them).
    When a company has 200 openings and only 150 people apply the worker has the power(much like the 90’s).
    Right now we are in a labor surpluss(workers hell).
    Meaning now you the situation where an employer has 40 job openings and 200 people show up to apply.
    Now the company has the power and thats not good.

  9. mortalez,

    The question of whether the government can run police depts, fire depts and so forth, cheaper than the private sector is a very different question than whether it can run oil companies cheaper. Most people would agree that police depts and fire depts should be done by the government, but most people, and certainly the vast majority of economists, would strongly disagree with having the government run oil companies. We can get into the economics of that later, but for now, I just want to make the point that we should not merge the two as if they are correct comparisons.

    Now, to address your comments, first, about the gas lines and shortages of the Carter Administration, I provide economist Walter Williams, who writes:

    Some Americans are demanding that the government do something about gasoline prices. Let’s think back to 1979 when the government did do something. The Carter administration instituted price controls. What did we see? We saw long gasoline lines, and that’s if the gas station hadn’t run out of gas. It’s estimated that Americans used about 150,000 barrels of oil per day idling their cars while waiting in line. In an effort to deal with long lines, the Carter administration introduced the harebrained scheme of odd and even days, whereby a motorist whose license tag started with an odd number could fill up on odd-numbered days, and those with an even number on even-numbered days.

    In other words, it was precisely because of government interference, in the form of price controls, that we had those shortages.

    You also write,

    And if you are for compatition then you would aggree we would be better off with 12 petro companies instead of 5.

    No, I do not. There is a significant benefit to having a few economies of scale as opposed to having several small companies. Your statement is equivalent to saying that we would have cheaper products if Wal-Mart, for example, was forced to break into 2 or more companies instead of one global company, clearly that is not the case, and in Wal-Marts case, as many small businesses will tell you, its large size contributes signifcantly to its cheaper products.

    Of course, the other side is also not true either. In other words, it is not necessarily true that bigger companies always produce cheaper products. There is a sweet spot, a maximum efficiency point where a larger size, or a smaller size, increases costs and in doing so, increases prices, but while I don’t know where that spot is, I do know that the free market is alot more efficient at finding it than the government is.

    As for the rest of your article, it falsely assumes that free trade, the ability for companies to hire cheaper labor abroad, is a net loss for a country. This is not the case, and this is precisely why all economists, whether liberal or conservative, Democrat or Republican, are for free trade. The reason it is false is that cheaper wages also helps to produce more products, more company’s, and more employment. It is as close to a win-win situation as you can get in economics.

    Update: Thomas Sowell has more here.

  10. A to Z Linkfest #7

    It’s been a while since I did one of these. It’s fun discovering new blogs, rediscovering some I haven’t visited in a while, and of course, including some I visit almost every day.

    Charlie at

  11. Michael says:

    “The CEOs said their companies were not receiving tax breaks, and two other senators, Committee Chairman Ted Stevens, R-Alaska, and Mary Landrieu, D-La., said those breaks were directed more to smaller refinery operators and need to be maintained”.

    The Ceo’s lied and politicians always say that tax cuts benefited the little guys, however the big guys always get a savings. Ana nalysis just confirmed that 1 in 4 large cap oil companies had a lower tax rate this year than last despite vastly increased profits. Those include Shell and BP.

    Stevens and Landreaux have a big interest in protecting these oil companies. They represent oil states.

  12. DD says:

    You know, Michael……how do you know that the CEO’s lied? 😕

  13. Michael says:

    As I said above, 1 in 4 large cap oil companies had a lower tax rate this year than last despite higher profits. At least two of these companies, BP and Shell had their CEO’s testify that they did not receive a tax break this year. There is an obvious cotradiction between what they said and what is true in the real world.

  14. DD says:

    Can you link us? Did I miss this in the article we are discussing? 😕

  15. Michael says:

    It is in a different article.

    Here is the link

    http://money.cnn.com/2005/11/14/news/fortune500/oil_taxes/

  16. DD says:

    Hi Michael! Thanks for the link, I read it. I sort of combed it a couple of times over and I just can’t get past this statement:

    “…John Felmy, chief economist at the American Petroleum Institute, the industry trade group. “We’re a cyclical industry, earning a fair rate of return for everything we have to do to meet our energy needs, all the money we have to invest, all risk we have to take.”

    I’m sorry Michael, but I agree with that. There is a LOT of risk right now in the petro industry…..people invest their monies and take risks. I think the petro companies need breaks (tax breaks) every now and then in light of what’s going on in the world don’t you think?

    Everyone has the opportunity to set aside monies to invest in businesses/corporations and what have you, but many don’t (especially now in light of what occurred on 9-11) because many think it to be too great of a risk.

    I really believe that businesses do not get enough tax benefits for what we sacrifice and what we risk. It’s gambling, Michael….business is a gamble and it is what makes the world go around. Make it harder on business and watch us look like the Cuban economy.

    Anyway………..back on topic 😳

    In light of the world situations……. I think petro companies should be entitled to a bit of a ‘breather’. Let them get comfortable so that they can pass on the savings to us….the consumer.

    I don’t particularly like paying over $2.00 per gallon and I hear many, many individuals screaming and yelling about this. The prices have dropped under $2.00 here in the midwest and hopefully they will continue to drop a little bit more.

    In the meantime, consumers need to take proactive steps and buy energy efficient cars and so forth to send a message to these petro CEO’s.

    On a fair note, and I’m sure HP disagrees with me, I think it’s ok for investigations to be conducted to keep business owners/shareholders aware that inappropriate behavior may land them in a world of sorrow.

    I think that’s what makes our democractic country better than most other countries…..public outcry to the officials may call for hearings. I like this. And if the officials don’t have anything to hide, well then they shouldn’t be upset that the hearings are due to public outcry.

    However, the senators who were venomous towards the CEO’s is uncalled for and they (senators) who were being ill-willed IS uncalled for and overly dramatic. Que no?

  17. Michael says:

    DD-

    I disagree with you. Businesses get far more tax breaks than individuals do. Businesses get to deduct all sorts of costs taht individuals don’t get to like Dividends received aportion of meals and entertaining etc. Aggressive depreciation schedules etc.

    Also not eveyrone has the oportunity to set aside money ti invest ins stocks. Far too many Americans live paycheck to paycheck to inverst in the market.

    All businesses have risks, that is the nature of business in itself. brought up a good point on buying fule efficient cars. Not all people can afford to buy a new car. I have a 6 year old VW fully paid off and I can not afford to make another car payment. Wouldn’t it be nice to get a tax break to buy a hybrid.

    companies making record profits do not need more tax breaks. In struggling industries with risks of layoffs like manufacturing companies, I agree with getting a break, but not in this case. This is corporate welfare. It is enabling profitable companies to pocket more money.

  18. DD says:

    Michael wrote: “DD- I disagree with you. Businesses get far more tax breaks than individuals do. Businesses get to deduct all sorts of costs taht individuals don’t get to like Dividends received aportion of meals and entertaining etc. Aggressive depreciation schedules etc.”


    Only a percentage of meals, Michael, and the entertainment is arguable. If one is conducting business during lunch or dinner, it ought to be deducted. Many business owners work many hours and conduct business during lunch and/or dinner.

    Michael wrote: “Also not eveyrone has the oportunity to set aside money ti invest ins stocks. Far too many Americans live paycheck to paycheck to inverst in the market.”


    Yes, and on that same note, far too many Americans choose to go to movies and buy cable and go to bars. Far too many Americans do not make the sacrifices as well. Many American’s make sacrifices albeit, partying, movies, expensive clothing, BMW’s and so forth to set that money aside to start a business.

    I might believe you, Michael, however, I know many Mexican and Asian immigrants who shack up together to save a small pile of cash to start their own restaurants. The opportunity is out there, however, many don’t like to live with a dozen other people crammed into a house to make those sacrifices.

    Michael wrote: “All businesses have risks, that is the nature of business in itself. brought up a good point on buying fule efficient cars. Not all people can afford to buy a new car. I have a 6 year old VW fully paid off and I can not afford to make another car payment. Wouldn’t it be nice to get a tax break to buy a hybrid.”

    Understand….however I heard VW’s are good on gas anyway. Isn’t the VW fuel efficient? 😕

    Michael wrote: “companies making record profits do not need more tax breaks. In struggling industries with risks of layoffs like manufacturing companies, I agree with getting a break, but not in this case. This is corporate welfare. It is enabling profitable companies to pocket more money. ”


    I do believe that petro companies do need breathers so that the shareholders/directors and owners can feel comfortable in their ‘risk taking’ business decisions to pass on the savings to us, the consumer.

    And by the way, there are methods for an individual to receive tax benefits aside from owning a business.

    The businesses should be and ought to be rewarded to create a sense of growth and job opportunities. We are the ones who take risks and we are the ones who look for any advantage we can get from government particularly when we are taxed on just about everything you can think of.

    Business owners ought to be taxed less to make it more desireable for one to open up more shops.

    The LESS RESTRICTIONS to enter into the market, the better. More people will consider it worthy of their time to open up shops if they felt more comfortable in knowing that the risk isn’t as great.

    Again, I’m not complaining about the hearing due to public outcry, I’m complaining about the many lazy American’s who don’t understand business.

  19. Michael says:

    More revelations that the CEO’s lied in front of congress as I claimed earlier.

    From cnn.com…

    At a Senate hearing last week on record oil profits, Democratic Sen. Frank Lautenberg of New Jersey asked five executives, “Did your company or any representatives in your companies participate in Vice President Cheney’s energy force in 2001?”

    Each executive answered the question in the negative.

    However, The Washington Post reported Wednesday that a White House document showed some companies did in fact meet with the task force. It said the document showed officials from Exxon Mobil Corp. (Research), Conoco (Research), Shell Oil Co. and BP America Inc., whose executives testified at last week’s Senate hearing, met with Cheney aides.

    A Chevron (Research) official also testified at the Senate hearing, but the company was not named in the White House document.

    However, the Government Accountability Office has found that Chevron was one of several companies that gave recommendations to the task force, the Post reported.

    In a letter to the attorney general, Lautenberg demanded an investigation, saying the new information “casts doubt on the veracity of some of these (executives’) statements.”

  20. DD says:

    Michael:

    Are we still on the CNN link that HP provided? I just want to be sure. Can you link me? I want to be on the same page that you are on. 😕

  21. James Okon Igwo says:

    Dear sir/madam,

    It has come to mind that most people are greedy, while our Lord Jesus, were not greedy, even to sacrifice his blood on the cross of calvary and pray to our father in Heaven to forgive us, not minding the turture and suffer he was passing at the time.

    Many has lots to eat and can have enough to keep to their great grand children, but find it difficult, to look at the immediate sufferings of the less privilage ones, lot of people cannot afford a plate of food in a day, while many children are on the road hawking all types things to keep a leaving, without education, tomorrow of these children are unknown, as many will become criminals etc.

    It’s time that we share little we have to the poor, we that has concerns cried daily when you see a child ought be in school, hawking and selling all kind of things at the express road, no mining the incoming cars, lories etc. Let see to our tomorrow – today, God bless you and you think over and kill the spirit of greednies, like to hear from you, I remain.

    James okon Igwo

  22. davemooregan says:

    As Americans struggle to fill their tanks for a summer trip to Disneyworld or the Grand Canyon (or just to get to work).Yeah!!! send those greed bastards to us and we’ll exploit them! http://www.greedypeople.com

  23. Walter says:

    Maybe a part of the solution could be a lower profit for the investors and owners, and maybe that savings could be passed down to the consumer. Maybe that’s the biggist part of the equation. Maybe, another part of the price issue is Opak. The price of oil is already regulated by Opak, an organization made up of members of oil bearing countries. As I understand it, At the current usage rate of know oil in the world there is roughly a thirty year supply. Currently there is no shortage of oil. There is one excuse and then another for the high price of oil. If you still think there is a shortage of oil ask the persons that live on the East Coast that depend on the ocean for their livelihood and the creatures that live in the in the ocean and the air above the ocean. You say they can’t talk. I say you’re not listening. They talk when they’re drenched in oil, and they talk when they float to the sea shore, and fall from the sky. What about the creatures that that live on this Earth with us. Shouldn’t we consider them first and greed second. Safety and respect should be foremost above profit.

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