Alan Murray writes in the Wall Street Journal:
Give Rex Tillerson some credit. The new chief executive officer of Exxon Mobil Corp. ventured out of his executive cocoon last week to be interviewed by Matt Lauer on NBC’s “Today” show — an act of courage for an oil company CEO….
Mr. Lauer is no Sam Donaldson. Still, in his good-natured, morning-TV way, he went for the kill. In a final question, he asked: “Would Exxon Mobil be willing to lower profits over the summer to help out in this time of need and crisis?”
I think he was serious. After all, what better way to recover from his partner Katie Couric’s defection to CBS than to see headlines reading: “Oil Chief Tells Lauer He’ll Cut Profits, Prices.” It didn’t happen. Instead, Mr. Tillerson answered: “Well, that’s not the business. We’re in the business to make money.”
You might think a network newsman earning $13 million a year would have a firmer grasp of capitalism. Would it really be a good idea for Exxon to take money from its shareholders — many of them pensioners — to subsidize fuel prices for sport-utility vehicle owners? One of the beauties of the marketplace is that it eliminates the need for those sorts of distributional decisions, which no person — not even Matt Lauer — can make well.
I don’t want to pick on Mr. Lauer, though. Just about everyone in this year’s great energy debate earns an “F” for economic literacy. That starts with the MBA-in-Chief, President Bush, who last week called on the Justice Department and the Federal Trade Commission to investigate “price manipulation” by the oil companies. His comments came after he received a letter from the two top U.S. congressional leaders from the “party of business” — Sen. Bill Frist and Rep. Dennis Hastert — calling for investigations into “price gouging.”
Price manipulation? Price gouging? Those are fine fighting words to Americans paying more than $3 a gallon for gas. But when it comes to explaining today’s gasoline prices, they have little meaning — and Messrs. Bush, Frist and Hastert should know better.
“Price gouging” is a common law concept that might apply if, say, a gasoline station in New Orleans charged $10 a gallon to drivers fleeing from Hurricane Katrina. “Price manipulation” is a less-precise term that seems to suggest oil companies have power to set gasoline prices. Neither reflects the situation facing most Americans today, who can choose from multiple, competing suppliers of gasoline. The oil and gasoline markets aren’t perfect. But if the U.S. government wants to go after companies with pricing power, oil companies fall pretty far down the list.
Most experts agree that today’s gasoline prices — unlike those of three decades ago — are the result largely of supply and demand. Supply is tight and threatened by security concerns and political instability in oil-producing nations. Meanwhile, demand from places like China and India is booming.
Moreover, high prices, as painful as they may be, aren’t just a problem, but also a solution.
Since Jimmy Carter donned his cardigan sweater three decades ago, U.S. policy makers have tried all sorts of gimmicks to reduce dependence on foreign oil, to no avail. Oil imports have risen from a third of U.S. oil consumption to 60%. The reason: Oil was cheap. It’s symptomatic that the Arizona resident who complained on the “Today” show about spending $50 to fill his tank was driving an SUV.
As gasoline prices rise — and everyone becomes convinced they will stay high — people will figure out how to consume less, oil firms will invest more, and alternative energy will become more common. That is just Economics 101 — a course that most participants in this debate seem to have missed.
As for those who worry the merger of Exxon and Mobil might have created an industry that is too concentrated — well, stop worrying. Exxon Mobil still has only about 8% of the retail gasoline market in the U.S. And its size is a plus overseas, giving it the clout it needs to push for access to government-controlled oil reserves and the financial heft it needs to undertake multibillion investment projects. That’s all good for U.S. energy security.
Since no one else seems willing to make that case, it is a good thing Mr. Tillerson is. For morning TV viewers, he may have started a trend. On Monday, ConocoPhillips CEO James Mulva was interviewed on ABC’s “Good Morning America.”
I’ve read thousands of blogs on “demand and supply”. But the fact is, the oil price at the pump is largely decided by each country’s government and monoploy oil companies. Norway and Canada exports crude oil, but their gas price at pump is US$5-6 per gallon. China is blamed for increasingly importing oil, but the pump price there is about US$1.5 per gallon. And remember crude oil is bought from international market using US$, so currency factors don’t count here.
So the pump price doesn’t necessarily reflect crude oil price or supply/demand. And that gives us a legit reason to go after our own government and big oil companies.
But the US oil companies represent a small fraction of overall oil output, so they cannot in anyway set the price of oil outside of supply and demand.
Second, the reason that in many other countries – specifically Canada and European countries – gas prices are higher than in the US is because those governments have a much higher gas tax than we do here in the United States. The underlying factors, however, are still supply and demand.
Thanks for setting Andy straight. The 500lb gorilla in this equation is always government and the control they exert. Be it directly as producers of oil, as in the state run oil companies, or taxers of oil as here in the US.
But price really comes from market forces and the dealings at the Mercantile Exchange. The futures market has a lot more to say, even than OPEC, about what we pay for a gallon of gas.