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Wow — Here’s a surprise (update)
Posted by: McQ on Friday, May 11, 2007

This is as predictable as the sunrise:
Congressional Democrats are taking aim at big oil companies as U.S. gasoline prices near a record average $3.05 a gallon.

Although industry experts doubt it will have any effect, half a dozen senators gathered in front of a Washington service station to push their own remedies to the situation, the Washington Post said.

The latest average price for a gallon of unleaded regular gas was $3.042, according to the AAA Fuel Gauge report.

Sen. Charles Schumer, D-N.Y., called on Congress to consider breaking up the giant companies. Sen. Bernard Sanders, I-Vt., pushed for a windfall profits bill.

Sen. Maria Cantwell, D-Wash., promoted her anti-price-gouging bill, which the Senate Commerce Committee adopted earlier this week.

The U.S. government's Energy Information Administration
predicted regular unleaded gasoline would average $2.95 a gallon this summer, 11 cents a gallon more than last summer.
Use the power of government to break up companies, tax the companies or punish the companies. How Democratic of them. And, of course, wonderfully innovative ways to solve the problem, wouldn't you say? Destroy jobs or, have you screwed at the pump when the companies pass on the tax or, arbitrarily set the price of gasoline to a "pleasing level" regardless of the market.

Unfortunately those are wonderfully appealing ideas to the economically retarded. And, of course, is the purpose behind the "event".

It was about political reality, not economic reality. And politically, such nonsense sells.

UPDATE: Scott asks, "I think that with record profits in the hundreds of billions, I think they can afford to cut their marginal profit a tad, don’t you?"

Uh, no.

Are you prepared to call for the same from these other industries as well?
 
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However, in pure economic terms, the oil companies ARE wasting money. 300 billion in profits = what? Not a huge dividend payment, nor are they really doing anything to increase production facilities.

I think that with record profits in the hundreds of billions, I think they can afford to cut their marginal profit a tad, don’t you?
 
Written By: Scott
URL: http://
The economics of resources like oil are odd because there is little relation between cost of production and market price. Demand is relatively inelastic, so price increases can yield very large profits. Currently Chinese growth and world growth in general is raising demand to record levels. OPEC is producing at capacity right now, except for Saudi Arabia (OPEC quotas are rather meaningless), and we’ve seen the fights over oil in Nigeria, and the former USSR. Putin’s regime is building itself via Petrodollars (soon to be Petroeuros?)

So traditional market arguments don’t really apply for oil and on its face such a tax could be seen as sensible. The question concerns whether or not oil companies are investing these profits in the search for either alternative energy sources, or new oil fields. BP has begun its "Beyond Petroleum" campaign, and I suspect oil companies may soon see it necessary to shift large profits to investing in other energy sources (in fact, I’d argue that OPEC states should start moving their economies to nuclear and solar power in order to have an alterate when their oil fields start running dry — some say they are at peak now — so once its gone they aren’t like pro athletes who squandered their wealth and end up in poverty at age 50.

So if these profits are used for investing either in the search for more oil or in the development of other energy sources I’m for not increasing the taxes. If the big wigs are doing like Putin and Mideast leaders and lining their pockets and saying "screw the future," then they should be taxed. One hopes that corporate boards and leaders won’t allow that to happen, but we all remember cases like Enron and Adelphia... The market, obviously, isn’t magic.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
The government makes more in taxes from gas already, then oil companies make in profits from gas. So, how about if the government wants to take oil company profits, they reduce the taxes we pay at the pump. In the end, THE CONSUMER PAYS THE TAXES.

Currently, crude oil prices aren’t the reason prices are high in the US. Summer is coming, demand is rising, and behavior isn’t changing because of the high prices.

Currently refineries are where our choke point is. A few refinery fires, and unexpected shutdowns, especially when the number of blends needed goes up, and you get higher prices.

Make it easier to build new refineries and maybe they would build more refineries.

Also reduce the number of summer blends (which the states currently control) and you would reduce the pressure on the refineries, as they could all make 2 or 3 blends rather then the 20 blends.
 
Written By: Keith_Indy
URL: http://asecondhandconjecture.com/
I live in Maria Cantwell’s Washington. The last time she tried this I wrote letters to the editors, sent emails etc. ONE of the things I mentioned was that Washington just raised their gas taxes-to be among the highest in the U.S.
I cited this-by now dated-post by the Tax prof.
[F]ederal and state taxes on gasoline production and imports have been climbing steadily since the late 1970s and now total roughly $58.4 billion. Due in part to substantial hikes in the federal gasoline excise tax in 1983, 1990, and 1993, annual tax revenues have continued to grow. Since 1977, governments collected more than $1.34 trillion, after adjusting for inflation, in gasoline tax revenues—more than twice the amount of domestic profits earned by major U.S. oil companies during the same period:
As I said then about Cantwell’s proposal it appears the real gougers are federal and state governments. I also looked up the profit margins of ohter Washington corporations (Starbucks, Microsoft, etc) and also RealPlayer which made Cantwell rich. Yeah, profit margins tell alot but hardly anyone addresses the profit margins of governments in "big oil."
 
Written By: tom scott
URL: http://
Eliminate the blends altogether. It just isn’t worth the additional 35-60 cents for every gallon of gas sold in this country to lower the ozone slightly in a dozen or so metro areas. The cost is enormous and the benefits are marginal at best. This is almost entirely an arbitrary government-inflicted problem.

yours/
peter.
 
Written By: peter jackson
URL: http://www.liberalcapitalist.com
Never understood how a "Windfall Profits Tax" would lower pump prices. Seems to me the consumer just ends up paying an indirect tax to the goverment.
 
Written By: Jay Evans
URL: http://
As a college student, I think you can guess what I’d like done to the rate of change for tuition... :)

The thing is, with other industries, excess profit can go to things like R&D, improved manufacturing, and other capital expenses. That really doesn’t happen much in the oil industry.

And honestly, while I’m all for free market, the inelasticity of gas really removes any and all incentive to keep pices down.
 
Written By: Scott
URL: http://
The economics of resources like oil are odd because there is little relation between cost of production and market price. Demand is relatively inelastic, so price increases can yield very large profits.
What makes you think this is true? There is a rarely a close connection between the costs of production and market price, other than such costs must be low enough to allow the producers to make any profit. If the demand price is too low, then there is no production.

You seem to think that producers look at their costs, decide on a price above that, and voila, the price is set. However, in a market exchange, demand ultimately sets the price it is willing to pay for the good. If the producer arbitrarily sets the price, and if the price is too high, then there won’t be enough demand, and the producer will go out of business. The oil business is just like every other business in this respect.

As far as the elasticity of demand, that can change along the same demand curve. IOW, while there may be inelasticity of demand for gasoline when the price near $3.50 per gallon, that elasticity will change as you move up the curve. Charge more than a certain amount, say $5.00/gal. and you will see demand drop dramatically as alternative goods are explored and/or less consumption of the good.
 
Written By: MichaelW
URL: http://asecondhandconjecture.com
I would think disparities in generally accepted accounting principles for those different industries would render a cross-industry comparison less useful than it would appear (not to mention the GAAP-tax difference). The chart shows that oil "makes less" (for a single quarter in ’06...), but it’s hard to know what that means. And I’m not sure I’m willing to trust the American Petro Institute’s objectivity on that question.

I’m not saying they’re wrong, but in a technical area like this one should be a skeptical of the API’s interpretation of data.
 
Written By: jpe
URL: http://
And honestly, while I’m all for free market

Well, there’s a shameless lie.

- Josh
 
Written By: Wild Pegasus
URL: http://
Scott,

I hope you are not an economics student, or if you are, that you are early in your studies. Let’s say that you and I have service stations — essentially identical in quality, services and goods carried — across the street from each other, and charge the same for gas, let’s call it an even $3.00 for simplicity’s sake. We both get the same number of customers, selling 5000 gallons of gas per day at each of our stations.

Now, if I cut my price to $2.98, I will lose 2 cents for every gallon of gas I was already selling, and would gain $2.98 minus my costs (say, $2.88, for a net gain of $0.10 per extra gallon sold) for every gallon of gas I sell because they come to my station instead of yours. Let’s do some math.

I sold 5000 gallons yesterday at $0.12 per gallon profit, for a gross profit of $600. I am going to lose $0.02 per gallon, or $100, on the gas I would have normally sold today. This means that I have to get at least $100 in new business to make the price cut worthwhile. Well, since I’m now making $0.10 per gallon profit, I can make up that difference if I can sell an extra 1000 gallons in gas today.

Given the odds that a customer would cross the street to save himself 2 cents per gallon, that would probably be worth trying. So let’s say that I make that calculation, and decide that it’s worth it, and cut my prices. What do you do? Well, you are losing that 1000 gallons, if I am correct, to me. If your profit margin is the same as mine (fairly likely, given the scenario), you lose 1000 gallons times $0.12, or $120. Or, alternately, you can cut your prices to match mine. Then you lose $100 over what you were making, as our traffic equalizes again. But that $20 less than you would have lost, so it’s still the right thing to do. In fact, if you were to knock a penny off your prices, you’d make that right back up by stealing customers from me.

That is how the market works, and that is the incentive to reduce costs to the minimum you can and still be in business. It is good to be "all for free market." It is better to understand the free market, and why it works.
 
Written By: Jeff Medcalf
URL: http://www.caerdroia.org/blog
And now for the Reality-Based Response: those graphs are from the American Petroleum Institute. Therefore, they don’t count!
 
Written By: SaveFarris
URL: http://
Well, I did have a near-socialist for a teacher...

When speaking of business, he said the first rule was "Rich white men will cheat and steal"...

I should retake Econ when I get to a real school... Maybe in Kansas I’ll have someone who isn’t there solely based on tenure (seriously, some of the stuff he said... My god...)

And I’m nowhere near suggesting that the gas-stations are the ones causing high price. I know that right now a lot of the ones here locally only net about a nickel per gallon.

The price the service station pays for the fuel they sell(and the amounted added on by state and federal taxes) is what puts gas so high.

Please don’t think I blame the guy behind the counter for how much it costs to fill a tank.

the reason I don’t think your example works is for that very reason. The stations can only cut so much before they are selling for less than cost. The market that we need to look at is the market for gas between the producers and the stations, not the stations and us.
 
Written By: Scott
URL: http://
Look at the price of gasoline in the UK. Approximatley $7.50 USD for a standard gallon (when you convert liters to imperial gallons to US gallons and apply some averaging for currency conversions)

Why the difference? The cost per barrel of refining North Sea oil into gasoline (and they do not have all of the blends we have for environmental purposes) is roughly within 10% of our own costs. So that is not the difference. So what is? Taxes!

You want government regulation and price setting and such becasue the oil companies are gouging you at $3.00 a gallon? Get ready for $7.50 a gallon. And soon!
 
Written By: SShiell
URL: http://
But Scott, the economics works much the same between the oil companies and the gas stations. Gas stations are typically franchises of a particular company. If Shell sells to Shell’s franchisees for more than Exxon sells to Exxon’s franchisees, then gas will be cheaper at all Exxon stations than at all Shell stations, and thus more customers will go to Exxon stations overall, and thus Shell will have to cut their prices in order to compete, or lose not just the immediate money, but also income from selling stock to investors. (And this one hits home: as stock prices go down with lower demand, executives at Shell, whose compensation includes large amounts of company stock, lose personal income as well.) Worse for Shell, franchisees up for renewing their franchise agreements will have to consider whether the cost of picking up an Exxon franchise and dumping the Shell franchise is less than the additional profits they could make by being an Exxon franchise. Some will decide that yes, yes they are, and then Shell is in an even worse position because they have fewer outlets for their fuel.

What I suspect you are missing is that while overall demand for gas is inelastic, any particular person’s supplier for gas is very elastically determined. The result is that gas prices tend to their lowest possible point that can still turn a profit at all levels of exploration, development, drilling, production, transportation, refining, distribution and sales. In other words, market forces work to keep prices at a minimum.

While a monopoly in a market can distort this temporarily, it is simply the case that — absent government regulation — the market will always price commodity goods at the lowest possible price that will turn a profit. If that price is too high (including in cases where there is a single source supplier, who can thus charge whatever he wants), alternatives will be created by people looking for ways to take some of that money. Witness, for example, the rise of Linux sales among computer vendors such as IBM and Dell. Or witness how Skype and Vonage are making inroads on traditional land-line telephone service.

Where there is a government-created cartel, such as in health care or education or certain professional services, these rules do not generally apply, and cost simply skyrockets until the service becomes unaffordable. At which point, ironically, big-government types usually call for more government intervention in the markets, seemingly oblivious that government intervention is what is causing the problem in the first place.
 
Written By: Jeff Medcalf
URL: http://www.caerdroia.org/blog
True enough, but since the demand for gas is inelastic, and since companies want money (not efficient operation, to use the economic term), they will raise prices as possible, since if they all raise together they all get a crap load more money...

The problem with gas (and honestly most things) is that it isn’t a truly competative, free market, and thus options are limited, and we get screwed...
 
Written By: Scott
URL: http://
"So traditional market arguments don’t really apply for oil and on its face such a tax could be seen as sensible."

Just how is this tax going to do anything but raise gasoline prices? Since, as you stated, production is maximized and demand is inelastic?

"If the big wigs are doing like Putin and Mideast leaders and lining their pockets and saying "screw the future," then they should be taxed."

LOL. Pray, tell, how are you going to levy and collect a tax on Putin, etc.?


********************

"The thing is, with other industries, excess profit can go to things like R&D,..."

Define "excess". And what makes you think they are not already spending on R&D, etc.?

"That really doesn’t happen much in the oil industry."

Nonsense. How much do you think they pay to build a new offshore drilling rig? Not to mention designing it. How many thousands of engineers and scientists do you think oil companies employ, and what do you think they are doing?


"The market that we need to look at is the market for gas between the producers and the stations, not the stations and us."

What makes you think there is no competition there?

*************************8

Has the price of gasoline also increased in other countries? If so, it is difficult for me to see how US companies are the problem.
 
Written By: timactual
URL: http://
Michael and Jeff nail it. Prices have a very tenuous relation to costs. Prices are set at the margin. The big winners who are making the high profits are low cost producers (mostly governments such as Saudi Arabia) and governments again through taxes.

As for whining about the petroleum institute figures, this point has been made over and over again from numerous sources. The large US oil companies have never made particularly high margins. What is driving their profit growth in absolute terms is a large expansion in demand, mostly from the developing world. Volume is the key for them, not extraordinary high margins.

Not a huge dividend payment, nor are they really doing anything to increase production facilities.
Actually they are very consistent in raising their dividends. And contrary to Erb’s nonsense about bigwigs lining their pockets, profits are after any pocket lining by executives has been done.

If the oil companies are not distributing dividends to their owners, or investing in production, what are they doing with the cash? It does no one any good to just sit there for no purpose, it goes against their interests. One rationale is that they are building cash and distributing it to owners slowly to prepare for the potential slower growth years ahead. Then the cash may be necessary to continue to make increasing dividend payments. They may also be using the cash to retire shares, debt or other things such as acquisitions. It isn’t being used to line bigwigs pockets, because the way to do that is pay it out in dividends. If the profits are not enough to make a large dividend, that tells you margins obviously are not as high as people believe and that the absolute size of profits just means the companies are large, not especially profitable.
 
Written By: Lance
URL: http://asecondhandconjecture.com
So congress wants to break up the large oil companies. Good luck, remember when "Ma Bell" was broken into the "Baby Bells." Ever since they have been getting back together and American Telephone and Telegraph is almost back to the size it was when it was broken up. The only difference, long distance no longer subsidizes home prices, and if you don’t make many long distance calls you pay more.
 
Written By: James E. Fish
URL: http://faroutfishfiles.blogspot.com/
If the big wigs are doing like Putin and Mideast leaders and lining their pockets and saying "screw the future," then they should be taxed."

LOL. Pray, tell, how are you going to levy and collect a tax on Putin, etc.?
Do you really not know what is meant by using the term "like" — it’s a comparative term, meaning that if oil corporation leaders are acting like corrupt government officials in other countries with oil wealth, then they deserve to be taxed. Read more closely next time, timactual.

To Michael W:
You seem to think that producers look at their costs, decide on a price above that, and voila, the price is set.

No, I’m pointing out that the economics of non-renewable resources operates differently than goods one produces. This is a field of study in economics.

In most goods production costs do matter because as long as profit is high, it should bring others into producing that good. As more producers enter, supply increases, price decreases and soon profits get near production costs. At that point, incentives to enter the market decrease. Therefore the market usually gets to a price near production cost — at least in theory. In practice laws and other factors often protect profits. With oil that doesn’t happen due to the limited ability of new oil producers to enter the market. It will lead to a growth in alternative energy production, but because alternates are expensive (some like hydrogen are just energy transfers) and nowhere near as efficient as oil in producing energy, the cost will be high.

Inelasticity is important because if supply drops relative to demand (either by demand increasing or supply decreasing) you will need a large price change to bring supply and demand into equilibrium. Just a minor drop in supply could mean a major increase in price.

 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
True enough, but since the demand for gas is inelastic, and since companies want money (not efficient operation, to use the economic term), they will raise prices as possible, since if they all raise together they all get a crap load more money...

The problem with gas (and honestly most things) is that it isn’t a truly competative, free market, and thus options are limited, and we get screwed...


What you are describing is a cartel. No, most things are not cartelized (at least not in the US). You can tell the exceptions because they are the ones that have rapidly rising prices in real dollar terms, with declining levels of service. These markets include education (both college and primary/secondary), health care, legal services and the like. They do not, so far as I can tell, include oil (in the US, as opposed to the extraction of oil from the ground), and I’d love to see the analysis that shows how refined petroleum products are a cartel in the US. It is certainly not a cartel created by government licensing and regulation, though ironically the Democrats appear to want to push it in that direction. Nor is it a cartel by a limited number of competitors fixing prices, according to every investigation I’ve ever heard of. Though again, ironically, Democrats seem to want to create such a cartel by price fixing or other taxation/regulation schemes. So explain this cartel, please, because I see no evidence of one.
 
Written By: Jeff Medcalf
URL: http://www.caerdroia.org/blog
If the American Petroleum Institute says it, it must be true!
 
Written By: TheGreenMiles
URL: http://thegreenmiles.blogspot.com
What Green Miles said. Because of the complexity of the policies that produce the data (are we capitalizing drilling? expensing? for productive wells? dry wells?), it’s reasonable to take into account the vested interests of the entity interpreting the data.
 
Written By: jpe
URL: http://
...in fact, I’d argue that OPEC states should start moving their economies to nuclear and solar power in order to have an alterate when their oil fields start running dry... -Erb
Ahmadinejad and Chavez couldn’t have said it any better themselves.
 
Written By: Linda Morgan
URL: http://
No, I’m pointing out that the economics of non-renewable resources operates differently than goods one produces. This is a field of study in economics.
Well I was pointing out that your understanding of how a price is determined was incorrect.

And economics doesn’t "work differently" depending on the good or service being traded. No more than physics is different depending on the object dropped from the tower. Economics simply describes how the relationships work such that an agreeable price is arrived at and an exchange happens.
In most goods production costs do matter because as long as profit is high, it should bring others into producing that good. As more producers enter, supply increases, price decreases and soon profits get near production costs. At that point, incentives to enter the market decrease. Therefore the market usually gets to a price near production cost — at least in theory. In practice laws and other factors often protect profits.
I think you mean "marginal cost" as opposed to "production cost", but you are essentially correct here, and this is exactly what I was saying. But then you attempt to differentiate the oil industry:
With oil that doesn’t happen due to the limited ability of new oil producers to enter the market.
Which you then undermine with your very next sentence.
It will lead to a growth in alternative energy production, but because alternates are expensive (some like hydrogen are just energy transfers) and nowhere near as efficient as oil in producing energy, the cost will be high.
As I pointed out in my original comment, when the price gets high enough, demand becomes more elastic, as alternatives are explored. Just as with any other industry, producers are encouraged to enter the market, whether they are producers of the same good, a similar one, or a comparable alternative. As with every other industry, the demand has to be able to support a price that warrants investment into becoming a producer. Thus, the oil industry works just like any other in terms of economics.

I think what you are trying to get at is that since oil is only found in a few places in the world, new producers of that product are not really possible. Fair enough, but that doesn’t change the economics. All resources are scarce, or else they wouldn’t have a price.

Moreover, oil should not be viewed as an industry all unto itself since, generally speaking, it is but one part of a much larger industry that includes things like coal, natural gas, and nuclear power. Oil does have its own speciality — the Petrochemical industry — but that does not drive the price of oil. So, when speaking about the economics of the oil industry it probably makes more sense to consider the energy industry as a whole. By doing so, you begin to recognize that if oil gets too expensive (because of scarcity, cartelization, war, etc.), then demand will shift to the alternatives (to the extent possible) and new alternatives will enter the market.

Now, when viewed as a whole, it does not matter if oil big wigs line their pockets or not. If they do so, at the expense of the future, then they will be overtaken by competitors when their ancient infrastructure is unable to keep up with modern demand. Indeed, a tax on the industry as a whole is exactly what the big wigs would wish for. That would raise the costs of everybody, and make it especially difficult for any newcomers. The established companies would also be in a better position to absorb more of the tax (i.e. not have to raise prices as much) than the new entrants into the market. Accordingly, the big wigs would then solidify their position and be protected from competition (in this way, taxes work like, and really the same as, tariffs). In fact, we saw this very thing happen all over the country during the New Deal, which had such perverse results as killing of the family farm and giving rise to agri-business.
Inelasticity is important because if supply drops relative to demand (either by demand increasing or supply decreasing) you will need a large price change to bring supply and demand into equilibrium. Just a minor drop in supply could mean a major increase in price.
Actually, I explained to you why elasticity matters. What you say here is just not right unless their is complete inelasticity. Such is not the case in the energy industry.

 
Written By: MichaelW
URL: http://asecondhandconjecture.com
Considering that the average state & Federal tax on a gallon of gas is 45.9 cents (by stroke of the pen), compared to the 10-12 cents the oil companies make (after drilling, refining, delivering, etc) just WHO is screwing whom?

Scumbag pols and their statist cohorts, that’s who.
 
Written By: Sharpshooter
URL: http://
Where were these SFB’s when the Dem’s (Hillary, Algore, Kerry, etc) were telling us we "should be paying $5 a gallon like they do in Europe".

Utterly clueless.
 
Written By: Sharpshooter
URL: http://
The only difference, long distance no longer subsidizes home prices, and if you don’t make many long distance calls you pay more.
I work in that industry. There are lot more differences than what you describe.
 
Written By: Mark A. Flacy
URL: http://
Okay Erb, you are still confused, but it doesn’t matter, because even with prices high the large oil corporations margins are not that high. So all your attempts to explain the oil companies unique economic situation founders because you are explaining something which doesn’t exist, very high margins.

As for jpe and TheGreenMiles, well if the oil companies are lying (though exactly how this has escaped financial analysts I would like to know) how about the Washington Post? Is that a source worth taking seriously? They gamely start this article with this quote:

By most familiar comparisons, the $9.92 billion profit earned by Exxon Mobil Corp. in just three months is almost unimaginable. It would cover all Social Security benefit payments for three months. It would pay for an Ivy League education for about 60,000 kids. It would pay the average list price for more than 160 Boeing 737s. It would fund the military operations in Iraq and Afghanistan for more than two months.

Yet oil industry representatives and Exxon Mobil yesterday made a game effort to cast the record profit, earned during a quarter in which the Gulf Coast was shattered by hurricanes and gas prices rose well above $3 a gallon, as middling at best.
Unfortunately, the data flies in the face of their skepticism:
For instance, in 2004 Exxon Mobil earned more money — $25.33 billion — than any other company on the Fortune 500 list of largest corporations. But by another measure of profitability, gross profit margin, it ranked No. 127.

Jay Taparia, a lecturer in finance at the University of Illinois at Chicago and an expert on interpreting financial statements, said a quarterly profit or loss can only be judged in context, given the history of the company and its long-term prospects.

"People who are freaking out about Exxon’s record profit are the same people who were freaking out about AOL Time Warner’s record losses" of $98.2 billion in 2002, he said. "One quarter’s net income or loss doesn’t mean anything."

A $9.9 billion quarterly profit is mostly a function of Exxon Mobil’s size. It had sales of $100 billion this quarter, more than any other U.S. company. At its current rate of growth, Exxon Mobil will be the biggest U.S. corporation this year by revenue, bigger than Wal-Mart Stores Inc., which had $288.19 billion in revenue last year. Generally, the bigger the company, the bigger the bottom line.

Even so, many companies smaller than Exxon Mobil "earn" more, depending on what measure is used.

Most financial institutions, such as commercial banks, are routinely more profitable than Exxon Mobil was in its third quarter. For example, Exxon Mobil’s gross margin of 9.8 cents of profit for every dollar of revenue pales in comparison to Citigroup Inc.’s 15.7 cents in 2004. By percentage of total revenue, banking is consistently the most profitable industry in America, followed closely by the drug industry.

Altria Group, the maker of Marlboro and other cigarettes, made 22 cents for every dollar of revenue in 2004, and pharmaceutical company Merck made 25.3 cents for every dollar of revenue in 2004.

By other measures, such as profit per employee, return on invested capital and free cash flow, Exxon Mobil is nowhere near a standout.

Oil industry analysts yesterday also pointed out that while times are good for oil companies, one of the reasons is the huge American demand for gas at a time when supply is constrained. And the cost of extracting and refining oil in the coming years is only going to increase, requiring hundreds of billions of dollars of investment. Energy research firm John S. Herold Inc. last month predicted that despite short-term increases in profits, higher costs will probably make many U.S. oil companies less profitable in the next five years, even as their revenue grows rapidly.

"The industry has pressure points, which in time will likely impact its forward momentum," said Herold chief executive Arthur L. Smith.
I could list dozens of studies of the profitability of oil companies, and they all say the same thing. Exactly the same thing as the Petroleum institute.
 
Written By: Lance
URL: http://asecondhandconjecture.com
The "Price Changes - Gasoline vs. Other Items" is a bad graph.

First off, the "Other Items" look arbitrary to me. It seems to me that I could cherry pick those 5 Others from a list of hundreds.

But more importantly it measures the price change for gas from one inflated period to another inflated period.

Here’s a historical graph of the price of gas. Whatever the reasons, I agree with the fact prices were exceptionally high just before and during 82-84 time period.
http://zfacts.com/p/35.html

That’s a vary unfair comparison. Skipping from two well spaced peaks each with their own reasons for being peaks is deceptive.

 
Written By: jpm100
URL: http://
First, I doubt that the oil bigwigs are lining their pockets — I pointed out that in places where governments exercise a lot of control over their oil sectors the flow of petrodollars often leads to corruption and abuse (Chavez, Putin, etc.). If we thought our corporations were simply hoarding money for the personal use of their leaders, then a tax would make sense. But that’s not what I think is happening. Also, high gas prices at the pump don’t bother me a bit — we need to recognize the era of cheap oil is over, and politicians shouldn’t try to soften that for cheap political points.

I stand by the claim that oil operates differently in the market place. Oil is far more efficient than any alternate energy source, so while investment in alternates will grow if oil prices get high enough, that won’t bring new products on the market right away to compete with oil. For instance, solar panels require a large input of energy — if oil prices rise, then so does the price of solar panels! It also takes a long time to build the infrastructure for other energy sources.

If oil production starts dropping (inevitably it will — the question is only whether the peak is now, a few years ago, or 10 or 20 years in the future) then prices will rise dramatically with nothing on the market to force prices down for quite awhile. Therefore oil producers will be able to make large profits due to an increase in demand and decrease in supply (to be sure, this will cause an economic slow down which will release some of the pressure by reducing demand).

Unless there is a dramatic new oil discovery, or unless we start massive investment in alternates now before demand increases and supply decreases much, this will mean a major crisis. We will settle to a new equilibrium, but likely an equilibrium with a lower standard of living than we’re used to. (And this isn’t even accounting for possible impacts of global warming) There is nothing like oil as an efficient and easy to transport source of energy.

So build solar panels, invest in nuclear energy, explore fusion (that’s another possible solution — but it’s been a dream for decades so I’m not going to bet the farm on it), develop clean coal techniques and prepare. The key is to have the oil industry invest in alternate energies (they’re starting) and for OPEC states to move their own economies away from oil (towards nuclear and solar — there is a lot of sun in the desert) and be on the cutting edge of trying to come up with technological breakthroughs to keep them profitable in a post-fossil fuel age.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
The graph on Oil Profit Margins is suspect, simply because it is on margins.

Your small rural grocery store is operating on gross margins of between 30 and 40%, while a big city supermarket’s gross margin is under 5%. Obviously, you’d rather own a small grocery store than a supermarket, right?

"Margin" is a percentage, and I’m reflexively suspicious of anything represented as a percentage. There’s simply too much room for finagling. As well, the comparison industries are chosen rather strangely- "beverage and tobbaco" - are we looking at bar profits, or liquors stores, or a combination of both? I’ll bet that this includes a lot of "state store" operations where the margin is monopolistically defined. Electrical equipment? I’d bet that consumer electronics is not in that group, although it could be argued that it should be. Computer industry? That’s got to be mostly software, where the "margin" is on the cost of the CD. Food, clothing, housing? Where did they go? The whole chart is pretty much designed (surprise!) to make the people creating it look good.

And the second chart? We’re almost halfway through 2007, and they can only find data to some undefined point in 2005?

Sorry, neither one of these charts supplies anything like a good argument.

I’d be interested to see those same charts in both total profit (in $) after taxes, and in terms of ROI. :)

The oil companies have an oligopoly. They got to this position quite deliberately, by destroying independent stations at every opportunity. There used to be, at one intersection close to me, Shell, Exxon, and Union stations on 3 of the 4 corners. Within 150 yards in either direction on one of the streets were Texaco and Chevron. There are no stations on the intersection now. Exxon abandoned the market, as did Shell. The Texaco was later bought out as Shell re-entered the market by buying the Texaco chain, and the independent dealer who actually had service bays was pushed out by Chevron - they refused to renew his contract, and his business has been replaced by a company owned gas/Convenience place. Denying that this sort of anti-competitive behavior has occured is useless, and denying that the results have allowed the oil companies to be able to pull shenanigans is willfully blind.

That’s not to say that I’m in favor of a windfall profits tax. Personally, I’d like to sic a few CBO auditors on them, and then prosecute the officers of the companies who have engaged in criminal actions.
 
Written By: bud
URL: http://
Bud,

It doesn’t matter how suspicious you are, the margins are not high. They never have been, and they are not now. You can use any source of information you want, they all say the same thing. Before you complain about their choices can I point out they were chosen because they were illustrative of the fact that there are other industries more profitable. Your complaint is a little ridiculous if you think about it. It is as if when proving that I am not the most handsome guy in the world, you complain that I chose to prove my point by pointing out all the people more handsome. My response would be, duh!)
Your small rural grocery store is operating on gross margins of between 30 and 40%, while a big city supermarket’s gross margin is under 5%. Obviously, you’d rather own a small grocery store than a supermarket, right?
First of all, often you do want the smaller more profitable operation. In fact, generally that is true. Would you rather own Nucor or US Steel? It is no comparison. Moreover, to decide if companies are profiting unfairly, net margins are what you look at. I may make more money than someone making 20% margins, with a 1% margin, but I can hardly be accused of gouging however beneficial it is to me.

Second, the complaint is that they are making high profits. If a company is large, the relevant question isn’t how big it is to its stockholders, but how profitable? GM is a huge company (much larger than Microsoft or Apple) but which would you rather own? Once again, no comparison, the high profit margin companies. That is why in market terms Microsoft dwarfs GM despite being far smaller. So a percentage is the relevant way to look at it.
I’d be interested to see those same charts in both total profit (in $) after taxes, and in terms of ROI.
That is nonsensical. Total profit on a large company will be bigger. It hardly means if I own 1000.00 of each company that oil companies earn me more money than a smaller company with higher profit margins. In fact, assuming the price per dollar of earnings are the same then it is exactly the opposite.

As for ROI, a high ROI is fine and dandy, but once again hardly implies unfair profits. Also, I may get a real high ROI, but have few opportunities to invest at that rate. Many industries exhibit that trait. Thus they pay relatively high dividends (oil being a prime example) because while they may earn a high ROI, they have few opportunities to benefit from it. Thus, their overall profitability is relatively low, which you can see from the profit margins.

Erb,

nice bunch of hand waving, but once again, none of that matters if the fact is that margins are not abnormally high. For your thesis to have relevance it has to show that oil companies have particularly high margins due to all these market distortions, but they do not exist.
 
Written By: Lance
URL: http://www.asecondhandconjecture.com
This has got to be the most annoying political topic for me through the years. I’m sure all of you’ve seen the inane ’man on the street’ interviews on tv that everybody does when the price of gas goes up. It’s almost always some twit whining about the price of gas while filling up his SUV. A vehicle that might get, considering the way most people who drive them, at best 15 mpg. A vehicle that over the span of it’s life will probably have 9/10ths of it’s miles with one occupant and on a highway to and from work or simple errands. In other words a use that a perfectly good midsize sedan could do quite nicely if not better. Now I could be wrong but I don’t remember a campaign by oil companies going around forcing people to buy gas guzzlers. I also seem to remember that the population of the US has increased through the years.

Wow it’s amazing that oil companies will hit record profits with those factors thrown in, it really is.

Bad oil companies..bad!!
 
Written By: Toddk
URL: http://
jpm100 -
The "Price Changes - Gasoline vs. Other Items" is a bad graph.

First off, the "Other Items" look arbitrary to me. It seems to me that I could cherry pick those 5 Others from a list of hundreds.
Go ahead and try. Housing, food, medical care and childcare/education are pretty central to most Americans’ lives. But if you can think of hundreds of equally important baskets of goods, by all means share the price changes in some of those categories.
But more importantly it measures the price change for gas from one inflated period to another inflated period.
If one were looking to make a biased graph to show that gas had not risen much in value, it’s hard to pick a worse time to end your graph than on a price peak.

And if they really wanted to make it biased, why didn’t they make their base year 1979? To answer that, I’ll turn to your next statement:
Here’s a historical graph of the price of gas. Whatever the reasons, I agree with the fact prices were exceptionally high just before and during 82-84 time period.
http://zfacts.com/p/35.html

That’s a vary [sic] unfair comparison. Skipping from two well spaced peaks each with their own reasons for being peaks is deceptive.
It’s not unusual to use 1982-1984 as a starting point when comparing prices, since the average of prices from ’82-’84 is the "base year" of the Consumer Price Index.
 
Written By: Bryan Pick
URL: http://www.qando.net

nice bunch of hand waving, but once again, none of that matters if the fact is that margins are not abnormally high. For your thesis to have relevance it has to show that oil companies have particularly high margins due to all these market distortions, but they do not exist.
What thesis do you think I have? Why would high margins be relevant for anything I’ve said? Remember, I’m not supporting a tax.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm

In most goods production costs do matter because as long as profit is high, it should bring others into producing that good. As more producers enter, supply increases, price decreases and soon profits get near production costs. At that point, incentives to enter the market decrease. Therefore the market usually gets to a price near production cost — at least in theory.
No, the simplistic economic theory says that in a perfectly competitive market prices will decline as competitors enter until profits equal the cost of capital, not until profits equal production costs. I think what you simplistically meant to say was "until marginal cost equals marginal price", a thoroughly and completely different concept than the one you mistakenly describe. Go and read an introductory economics textbook, then come back.

No company can stay in business very long if it doesn’t make back at least its COST OF CAPITAL, that’s called bankruptcy. In any industry, if profits get anywhere near production costs competitors will start dropping like flies. The reality is that the oil industry does not make back much more than its cost of capital in profits. The oil companies (the ones everybody hates anyway) have huge REVENUES and make a small percentage of those REVENUES back in PROFITS. The percentage, the profit margin, is not very big.

If you don’t understand concepts like the cost of capital or marginal versus total costs, then you shouldn’t be playing around in arguments about economics.

There are 2 factors at work here:

1) ALL commodity prices having been rising in roughly the same proportion for about 5 years, globally. This is mainly due to the excess liquidity being produced by central banks around the world. Oil, copper, iron, gold, corn, wheat, soybeans, beef, chicken, and on and on and on all have the same shaped graph: up.
2) Gasoline, while a small proportion of the average person’s budget, is the only price of anything that is displayed on 20 foot billboards on every street corner in every town in America. Nobody sits around the water cooler and complains that the price of a steak has more than doubled in the last 4 years, because IT ISN’T DISPLAYED ON A 20 FOOT BILLBOARD WHERE EVERYBODY CAN WATCH IT CHANGE DAILY. The local news does not send reporters out looking for the grocery store where you can save 3 cents a pound on hamburger because nobody notices that, even though everybody spends way more money on food than gasoline.

Noting brings the economically retarded out of the woodwork like the subject of gasoline prices and oil companies.
 
Written By: DS
URL: http://
What thesis do you think I have? - Erb
Pick a card. Any card.
 
Written By: Linda Morgan
URL: http://
It’s not unusual to use 1982-1984 as a starting point when comparing prices, since the average of prices from ’82-’84 is the "base year" of the Consumer Price Index.
It also just happens to be really really convenient to give the illusion prices haven’t jumped up a whole bunch in the past 5-6 years, out of line with the 15 years prior.
 
Written By: jpm100
URL: http://
Seeing as how we are discussing sources of windfall tax revenues...

How about tenured professors making above US$ 60,000? They don’t need that much to live on, especially seeing as how their job offers so many psychic rewards to offset any financial contribution they can make to society.

It’s a very stable source of tax revenue, too. Recession, Depression, or Boom, these individuals make large sums of money. Let’s tax these hoarders of intellectual capital to help the poor people of America.
 
Written By: Harun
URL: http://
Your point about production costs and marginal costs was irrelevant; I was assuming all factors in cost of production — capital, etc.
1) ALL commodity prices having been rising in roughly the same proportion for about 5 years, globally. This is mainly due to the excess liquidity being produced by central banks around the world. Oil, copper, iron, gold, corn, wheat, soybeans, beef, chicken, and on and on and on all have the same shaped graph: up.
Oil price increases have been driven by, among other things, growing demand plus regional instability (be it Nigeria, Iraq or Venezuela). To blame oil price increases on central banks is silly — it also demonstrates the error of over-determination (trying to blame things on one factor — that’s almost never true in a complex system).

And your attempt to claim that people only complain about gas price increases because they see it displayed isn’t tenable. The price is over 400% greater for gas than in the late nineties. Do you really assert the rest of our economy has seen such inflation, and that gas is nothing special?

I’m not saying that gas prices are too high — they were absurdly low, unsustainably low, in the late nineties (one reason we had such an economic boom). We should have used that period to really invest in alternatives to prepare for when prices would increase. Instead we had a stupid stock market bubble that was obviously untenable as well, though a bunch of people got dooped into thinking it would last.

Noting brings the economically retarded out of the woodwork like the subject of gasoline prices and oil companies.
Like people blaming oil prices on central banks and saying gas price increases are only noticed because it’s posted on billboards? ;-)
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
The price is over 400% greater for gas than in the late nineties. - Erb
Don’t know if it’s the same up in Maine, but right now I’m paying $3.00 per gallon, give or take. Using your math would put gasoline at less than $.60 a gallon in the late nineties.

Not by my recollection, and not by this chart is that so.

Ya wanna plead typo? Or were you speaking perhaps of the 1890s?
 
Written By: Linda Morgan
URL: http://
Don’t know if it’s the same up in Maine, but right now I’m paying $3.00 per gallon, give or take. Using your math would put gasoline at less than $.60 a gallon in the late nineties.
I paid a low of 78 cents a gallon, and right now we have gas at $3.20, which is 4 X .80. But I’m comparing the current rural price with a city price I paid in 1998, and to be fair, the larger towns are about 20 cents cheaper so it’s probably not quite 400%.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Ah, mea culpa, I see the problem. I wrote "over 400% greater," instead of just "400% of the price." While I think most people still would take that to mean four times the cost, I can see Linda thinking I meant the 1998 price as a bench mark, and then adding to it 4 times more (essentially 500% of the 1998 price). So if that’s what she did, then I see what she means.

Her chart, though, ends in 2005 when oil prices were below $50 a barrel, so that is definitely out of date.

The point stands: 400% inflation for gas since 1998 is definitely not the norm, and the claim DS made about us only noticing that because it is posted on billboards is silly — most of us pay a good chunk of our budget in gas and fuel oil. If you get 400% inflation in less than 10 years, you notice it — billboard or not!
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Scott Erb: "400% inflation" is again not the correct terminology. Think about what 3% inflation means, then what 100% inflation would mean, then what 400% inflation would mean.

You’ve stated that more increases in the price of oil will lead to a serious crisis. Would you have predicted in 1998 that the US could sustain a rather sunny economy with the rises in the price of oil since then? And under what conditions do you believe this crisis will occur? Do you have a particular price per barrel, for example, or a particular rate of increase, that will cause this crisis, and what makes you as confident as you are that current dynamics will lead to that crisis without massive intervention (or a dramatic oil find, however defined)?
 
Written By: Bryan Pick
URL: http://www.qando.net
While I think most people still would take that to mean four times the cost, I can see Linda thinking I meant the 1998 price [is] 500% of the 1998 price).
The reason I ventured to think it’s what you meant is that it’s what your words meant, irrespective of what most people "would take" them to mean.
Her chart, though, ends in 2005 when oil prices were below $50 a barrel, so that is definitely out of date.
And that of course is irrelevant, since we know today’s prices per gallon and used them in our calculations. A more important consideration is whether the chart is accurate about the price per gallon dipping only as low as $1.12 or so in the late ’90s. If so, then we’ve seen nowhere near the 8- or 9-year increase in prices you claim, your recollections of $.78 per gallon notwithstanding.
 
Written By: Linda Morgan
URL: http://
whether the chart is accurate about the price per gallon dipping only as low as $1.12 or so in the late ’90s.
I paid below a dollar for quite some time, in the 78 cent range a few times. I think most people remember those days fondly. Do you really not remember gas at under $1.00?

"400% inflation" is again not the correct terminology
True, I mean that in very few other goods is the price today 400% of what it was back in the 90s. All the terminology or poor wording on my part aside, the point still stands that people notice gas price increases not just because they are on billboards, but fuel oil and gasoline are important in people’s budgets and their price has gone up far more quickly than other goods. (And no, I’m not supporting a tax).
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
"I paid below a dollar for quite some time, in the 78 cent range a few times."

Gotta hand it to you, you sure have a good memory. Exactly $.78, eh? And that particular range of prices is relevant because, of course, as Maine goes, so goes the nation.
 
Written By: timactual
URL: http://
Gotta hand it to you, you sure have a good memory.
Thank you for that rare compliment! I even remember the station. I also remember thinking even then that we were in a fools’ paradise — gas could not stay so low, and the stock barket bubble was going to collapse, people hadn’t had that much optimism since 1928! The nineties were a decade of illusions.

We relaxed, indulged ourselves with big cars and a belief that easy times were here, and we even had a President who exemplified the era.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
I even remember the station. I also remember thinking even then that we were in a fools’ paradise — gas could not stay so low, and the stock barket bubble was going to collapse... The nineties were a decade of illusions.

We relaxed, indulged ourselves with big cars and a belief that easy times were here, and we even had a President who exemplified the era.
When you write the novel, don’t forget to put in a valley of ashes and a green light at the end of Daisy’s dock.
 
Written By: Linda Morgan
URL: http://
When you write the novel, don’t forget to put in a valley of ashes and a green light at the end of Daisy’s dock.
I’m trying to figure this one out, but either it’s a literary allusion to something I have not yet read, or there is a deeper meaning I’m just not catching.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
"When you write the novel,..."

*snort*, *choke*, *sputter*

*ahem*. Very nicely done.
 
Written By: timactual
URL: http://
To blame oil price increases on central banks is silly — it also demonstrates the error of over-determination (trying to blame things on one factor — that’s almost never true in a complex system).

And your attempt to claim that people only complain about gas price increases because they see it displayed isn’t tenable. The price is over 400% greater for gas than in the late nineties. Do you really assert the rest of our economy has seen such inflation, and that gas is nothing special?
Wow, you use a fundamental misunderstanding of basic economic theory to make your case, you make a mathematical distortion, you have magical recollections of 78 cent gas, you make no pretense at presenting a coherent economic theory or back it up with data, and you are still here calling other people silly?

If you had presented even a shread of (correct) economic theory or data to back up your position I would, at length, explain the relationship between global central banks, money creation, liquidity, commodity prices and asset bubbles, and dig up all the data that show the correlations that currently exist between the prices of oil (up 284%), copper (up 425% in the same period), zinc (up 346%), iron, gold (up 154%), beef (up 110%), housing prices, the weakness of the dollar, the current run-up in the US stock market and the data on the US money supply.

A simple illustration is the CRB index, an index of 17 global commodities. All commodities are moving in lock-step showing the unmistakable sign of excess liquidity:

http://www.crbtrader.com/crbindex/images/crb-cib781.gif

Any one of these commodities can be explained away by specific conditions within their industries, and they do move relative to each other based on those specific factors. But these specific factors only explain why copper went up 425% while oil went up 284%, not why both of them have more than tripled over the period. That is only explained by liquidity.

The US money supply is simply the forcing function because so many central banks outsource their monetary policy to the fed by pegging their currencies to the dollar. It is hardly simplistic and in world where central banks set monetary policy based on local conditions the effects would probably offset each other, a very complex relationship indeed. But, with the exception of the UK and EU, central banks in major countries around the globe, China, Japan, and numerous small Asian and Latin American countries peg their currency to the dollar (either explicitly or implicitly) so every dollar printed by the fed results in a proportional amount of additional currency added to global liquidity.

It would be very tempting to say that this is "just like the 70’s" and a lot of factors like high commodity prices, weak dollar, housing bubble, soaring gold prices to be sure, but the difference is that in the 70’s productivity was stagnant and increases in commodities are now being offset in the short run by dramatic decreases in primarily non-durable manufacturing, much of which is being produced in China and other Asian countries. This is why the CPI, a narrow group of domestic consumer items that excludes a good number of things that people pay for every day like housing, has remained relatively low, although stubbornly higher than the Fed wants it.

This hardly simplistic, it is a very complex global relationship. The idea that greedy oil companies are conspiring to screw the consumer is a stupidly simplistic theory. The idea that global liquidity driven by central bank money creation is sound, well understood, accepted by many in the economics profession and supported by mountains of evidence.

 
Written By: DS
URL: http://
*ahem*. Very nicely done.
Thanks. Just couldn’t stop myself and, truly, I thought the dude would know. My mistake. Maybe if Stephen Gaghan did a remake with Clooney as Nick or Tom…
 
Written By: Linda Morgan
URL: http://
Wow, you use a fundamental misunderstanding
Whenever someone starts out by insulting the other person it’s usually a sign of a weak argument. So I’ll ignore the insults and look for any substance you have.
I would, at length, explain the relationship between global central banks, money creation, liquidity, commodity prices and asset bubbles, and dig up all the data that show the correlations that currently exist between the prices of oil (up 284%), copper (up 425% in the same period), zinc (up 346%), iron, gold (up 154%), beef (up 110%), housing prices, the weakness of the dollar, the current run-up in the US stock market and the data on the US money supply.
And I would patiently explain to you two things. One, correlation does not mean causality. However your data shows vast differences in these commodity price increases. That means by necessity there are other factors in play, the range in just what you presented (which is by no means a definitive list) is huge. Hence my claim that you committed the error of over-determination. The range is proof that there is far more than the correlation you presented, and the causality of that correlation (and which side causes the other) is still not shown.

Any one of these commodities can be explained away by specific conditions within their industries, and they do move relative to each other based on those specific factors. But these specific factors only explain why copper went up 425% while oil went up 284%, not why both of them have more than tripled over the period. That is only explained by liquidity.
You were OK until the last sentence, then you give an assertion that needs proof. After all, various economic factors outside liquidity have an impact on all prices, to assert that industry specific factors account for the differences (which are huge!) and that liquidity accounts for all the rest is a huge assertion.
The US money supply is simply the forcing function because so many central banks outsource their monetary policy to the fed by pegging their currencies to the dollar. It is hardly simplistic and in world where central banks set monetary policy based on local conditions the effects would probably offset each other, a very complex relationship indeed. But, with the exception of the UK and EU, central banks in major countries around the globe, China, Japan, and numerous small Asian and Latin American countries peg their currency to the dollar (either explicitly or implicitly) so every dollar printed by the fed results in a proportional amount of additional currency added to global liquidity.
Clearly US monetary and fiscal policy has led to a rapid depreciation of the dollar to just over half of what it was around 2000. Now it is true that when a commodity is priced in dollars, its price will usually increase when the dollar depreciates (which is one reason OPEC is considering switching to Euros over dollars; China has been shifting some of its currency reserves to Euros from dollars as well). That also means that the increase in oil prices from 1998 to the present has not been as much of an increase for Europeans since the Euro has appreciated in value. Central banks do play a role in setting currency value, but again are one of many factors in that very confusing market. But to posit central banks as the causal factor as you had overlooks numerous other factors which you seem to want to not only brush aside, but insult anyone who considers them!

This hardly simplistic, it is a very complex global relationship. The idea that greedy oil companies are conspiring to screw the consumer is a stupidly simplistic theory. The idea that global liquidity driven by central bank money creation is sound, well understood, accepted by many in the economics profession and supported by mountains of evidence.
Well I certainly would not say that it was a conspiracy of oil companies to screw consumers, so that’s a straw man. Also you made a subtle shift here, but an important one. You now saw "the idea that global liquidity drven by central bank creation is sound..." Have you shifted from blaming the price of oil soley on central banks to a more sound claim that central bank practices affect global liquidity which then impacts oil prices (as one of many causes?)

The need for liquidity is why the Triffin dilemma emerged and ultimately the gold standard could not be maintained. The dollar plays a huge role in the world economy. But to claim as you seemed to that central banks were the cause of the increase in oil prices was off base, unsupported by actual evidence, and countered by numerous analyses of the oil market, and even the discrepencies in commodity price increases you provide in your post.

As for gas price increases, by honest: do you really not remember prices below $1.00 a gallon in the late nineties? Do you really not see a major increase? Do you really not know that fuel oil and gasoline are major factors in peoples’ budgets? Do you really think people wouldn’t notice the increase if it wasn’t posted on billboards? Would I not notice fuel oil for the winter of 2000 costing me $615 and for last winter approxiamtely $1900? Seriously?
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm

 
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