Oil prices – again

Cafe Hayek has a thought on the "obscene" oil company profits.

Here is the text of the commentary I did this morning at NPR's Morning Edition.

Those Senate hearings on the cause of high gasoline prices should be really brief. Three words. Supply and demand.

When hurricanes destroy refining capacity, pipelines and drilling platforms there’s less gasoline to go around and prices rise.

Everybody knows what’s bad about high prices. Less money for us. More money for the oil industry.

But high prices are good, too. When prices are high, some people will drive less, car pool, buy more energy efficient cars allowing the people who really want gasoline to have it.

There’s another benefit of high prices. They encourage greedy oil companies to pull oil out of the ground that isn’t worth pulling out of the ground when prices are low.

But isn’t the recent run up of prices just corporate greed run amok? I don’t know. At my local station, prices are down 85 cents per gallon from the peak of a few weeks ago. Did the owner just get nice overnight? Did he forget how to gouge? Did he figure he’d made plenty of money and it was time to give me a break? I actually think he’d still charge $3.50 a gallon if he could. But now that there’s more gasoline on the market, he can’t charge what he did before and still get my business. Too many competitors are charging less.

If the Senate does have hearings on oil industry profits. My fantasy is that an Exxon executive will have the courage to say:

“Yes, we made a lot of money last quarter. We earned it and we’d like to keep it. And in those times when we make a lot less, or even lose money, we won’t expect to be bailed out.”

As I noted last week, the profit made by the largest oil company was a little less than 10% of its gross revenue. I haven't checked to see how that compares with the percentage compares with its percentage profit in previous quarters. I also haven't compared that percentage with what other oil companies are making, though I suspect it's slightly less, based on news I heard in passing.

Even if we're the sort to begrudge the oil companies even a 10% profit, there's another fact we can derive from that number: If oil companies were to shrink their profit margin all the way to zero, that would lower prices at the gas pump by no more, and probably rather less, than 10%. It'll make some difference, but it won't get the pump price back below $1 per gallon.