Many claims are made by politicians, however most people would agree that very few are actually upheld. A lot of what a politician says, especially during an election period, is what people want to hear. This all makes sense from a politician’s standpoint, given their incentives and restraints. However, it is very dangerous to continue to take any politician just on their word. Studies and facts need to be taken into account. For example, a politician who proclaims they will bring down our dependency on foreign oil, while at the same time fight global warming by curbing c02 emissions, must change their stance when facts and reality will not coincide with such claims. The question we must ask ourselves is how a politician could possibly accomplish such a feat and how this agenda affects each of us.
On one hand, if we are attempting to decrease our foreign oil dependency it makes sense to increase America’s refining and drilling capabilities. This is not very plausible given the incentives and constraints which are given to American explorers and refiners of oil. So the solution for a politician is rather complex. A politician will have a hard time convincing extremist environmentalists, and many in the general public, that freeing up the energy market would actually create an increase of America’s energy supply and drop the price of gas and other products affected by oil. What a politician does instead of this is go for the oldest and most trusted of allies, blame. Pointing fingers at all the people who seem to be villains by merit of their actions, such as the greed of corporate CEOs. Politicians claim that while these companies are getting rich the constituents of a particular politician are being hit where it hurts them the most, their pocket books. Politicians point fingers at these CEOs and exclaim that these companies’ profits are too extreme to be mere ‘economics.’ In their minds, Americans having to pay ever increasing amounts of money at the pump, while oil companies make record breaking profits is simply unacceptable.
Many will claim that we must invest in alternative energy. While there is nothing wrong with individuals spending their own time and effort on a new type of energy, it is highly immoral to make taxpayers pick up a bill for someone’s political agenda. Many people claim this is the best way to secure our future. It is praiseworthy for those who wish to invent new ways to convert nature’s resources into energy. However, it is not praiseworthy to spend billions of dollars on futile endeavors not worth their weight in paper. The idea that crippling oil companies and forcing alternative energy to the forefront of our current economy is reminiscent of the broken window fallacy made famous in Henry Hazlitt’s Economics in One Lesson. The fallacy is when one claims that by the destruction of property, we actually create wealth. Its claim is that if a hoodlum were to throw a rock and break the window of a baker, it is not a bad thing, because now the baker, upon replacing his window for one hundred dollars will allow the man fixing his window to buy a new suit, which will give money to the tailor and so on. The fallacy is that the shopkeeper must now spend his hundred dollars on a new window, instead of on new shoes for himself, or new equipment (capital) to help his business. This misallocation of resources is the fallacy. And, it is no different than allowing the government to hinder oil companies from doing their job, while at the same time, giving millions or billions in subsidies to alternative energy advocates. We are simply rerouting precious resources. Confiscating hard earned money from taxpayers and handing the money to whomever has the most political pull at that moment.
An oil company is like any other company. It provides a product to a customer and asks for money in return; trading value for value. There is no gun involved. Therefore, there is no force. Men and women are free to purchase the product or not. There is no denying our need for energy, as individuals and as a society. The discovery and subsequent success of oil is due to its value to each of us as individuals, not because the company forced people to buy its product.
The claim that oil companies are cartels or monopolies is also a myth. The idea here is that these oil companies collude with each other to force us to purchase their products and force out any competition. The basis for this argument is that capitalism will inevitably lead to collusion or monopoly of some sort. Oil companies, like any individual, act in a self interested manner. If an oil executive decides it is in his best interest to collude with other oil companies in order to increase the demand for their product, it is their right to do so. The oil executive will soon discover, however, why such endeavors have failed throughout the history of capitalism.
The failure will begin simply. As all the oil companies in collusion raise prices above market level, some of the colluders will realize the opportunity for undercutting their fellow conspirators and making a profit. Once again, greed comes to the rescue. Each company will realize the opportunity and work to seize it. Businesses do not make money by simply raising prices; they make money by lowering prices, making the product available to more people, and by increasing output, quality and more. To understand this more just simply look to history. Standard Oil was accused of price collusion, predatory pricing and much more. The facts tell another story however. In 1869 the price of kerosene was 30 cents a gallon, and 28 years later the price decreased to 5.9 cents. People paying 30 cents in 1869 probably did not complain as prices began regularly dropping. Another classic example in more recent history is the Aluminum Company of America (ALCOA). This company was able to gain and hold an actual monopoly. Did they raise prices? No. In fact, it lowered its prices dramatically. ALCOA was the only producer of ‘primary’ aluminum in America (there were foreign competitors). In 1887, aluminum was 5 dollars a pound and by 1941 it was 15 cents a pound. The reason ALCOA would drop prices when they had a monopoly, rather than increase, is simple; substitutions. ALCOA knew that if they were to raise prices their customers would simply purchase substitutes such as wood.
In a free market, would people have alternatives to oil if oil became a monopoly? Yes. If the market was free and open, and oil companies began to collude to increase prices, people would begin looking into alternative forms of energy. They would not need government to confiscate money from the population and feed it to alternative energy, because people would be motivated by profit. As prices rose above market level, investors would shift their money from oil to alternative energy, thusly creating true wealth. Economic fact: money flows to its most valued uses.
Although this scenario is possible it is actually unlikely. Oil companies would not increase prices, as ALCOA did not raise prices, because they know economics: raising prices above market level will bring in more competition that will drive down price. By freeing the oil companies, we would solve all problems. Oil companies would compete with one another by reducing prices and increasing quality. The end product would eventually be a cheaper and cleaner burning fuel.
These facts don’t stop oil executives from being attacked for making a profit. During this previous summer when the price of gas rose to 4 dollars a gallon, senators dragged oil executives to Capitol Hill in order to investigate ‘bad’ business practices. Senator Patrick Leahy claimed they wanted to identify the causes of the rising prices of oil. The problem was oil executives were not in charge of the price of oil, the market was, as is determined by supply and demand. Notice these executives were condemned for making large profits during this time and considered greedy and evil, but also notice that as prices dropped to almost 1 dollar a gallon across the country, there was no congressional hearing to praise these individuals for their hard work; nor, was there much in the media about the benevolence of these executives. This makes sense given politicians’ and the media’s incentives to be elected and receive high ratings. For nothing gets officials elected faster – or higher ratings - than enormous problems in our country.
So, what does the government do to help the problem? Create more problems. Refining and distributing oil involves millions of interactions. The government impedes these interactions every step of the way. I will very briefly outline three major aspects of oil and how government interferes.
DRILLING
America has large sections of its underground oil off limits to oil explorers, such as the Alaskan National Wildlife Reserve and our coasts. This causes the U.S. to have to purchase more of its oil from outside of the country. If these sections were to be freed up to allow for oil exploration there would be a larger supply of world oil to help with the ever increasing global demand. This past summer saw huge profits for oil companies. These profits did not go directly into the executive’s pockets. The vast majority was reinvested into the oil industry. These oil companies were able to purchase new drilling equipment and more efficient rigs to transport their product more safely, among other investments.
REFINING
There have not been any new refineries built in America in over three decades. Inevitably, this causes much inefficiency in the older refineries still in existence. The reason for these inefficiencies is that the government has passed so many environmental laws, thereby making new refineries uneconomical, leading to the extinction of many old refineries. From 1990 to 2004, 50 out of 194 refineries were shut down. These regulations have caused the current refineries to produce at full capacity, due to high demand. This limits the contingency for catastrophe. Which make it nearly impossible to shift from one oil sector to another. When the government interferes with supply and demand the result is always the same. The oil companies are then unable to offset certain sectors during a time of crisis, the net effect is a spike in price. As full producing refineries are shut down due to unforeseen externalities, the only way supply and demand can correct themselves is through an increase in the price of oil.
Another unfortunate byproduct of a government that creates restraints (rather than incentives to build new refineries) is that there has been an overall decline in the actual capacity refineries can handle. While capacity has declined demand has increased. What this all equates to is a country that has less ability to create more supply as demand increases. When any problems occur where more oil is needed, we must turn to foreign supply.
DEMAND
As China and India have grown exponentially, it is obvious that global demand for oil will increase accordingly. As companies begin to adjust to the new demand, the price of oil will increase. In a free market, oil companies will simply increase output to make a higher profit by decreasing prices and meeting the new demand. In a market that is shackled by government, meeting consumer needs is much harder than in a free market.
Fortunately, American consumers are making smarter choices. For the first time in decades, trucks have lost their spot as the number one vehicle sold in America. This will trigger a decrease in oil consumption at home.
Profits allow oil companies to reinvest in the drilling and refining of oil, so long as the government doesn’t get in their way. Oil Companies receive a bad rap whenever something unwanted happens in the economy. However, the fact remains that American oil companies remain the most efficient oil producers in the world, despite the regulations and restraints imposed by the government. It is time for American voters to implore congress to step aside so that the professionals can do their jobs.
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