"Record Profits Spark New Backlash Against Big Oil"—An Economic Analysis
The story named above, within quotation marks, appears in today’s New York Times. It opens with the declaration, “Still fuming over higher gasoline prices and rising heating oil bills, politicians and consumer groups set off a fresh wave of calls for special taxes against Big Oil after Exxon posted record profits of $10.7 billion in the latest quarter and more than $36 billion for the year.” It then quotes Wisconsin Governor Jim Doyle as saying, “`Once again, Exxon Mobil has reaped the largest windfall in U.S. history at the expense of hard-working families . . . . `I hope that this news will finally convince the U.S. Congress to take action and force the oil companies to give consumers a refund.’”
The article goes on to note that “New York Sen. Chuck Schumer and Rep. Edward Markey, a senior Democrat on the House Energy and Commerce Committee, were others who quickly piled criticism on Big Oil. `The Bush policy of subsidizing wealthy oil companies has proven to be wildly effective in boosting oil company profits, but it continues to harm American consumers and threaten economic growth,’' Markey said in a statement.”
It then proceeds to give the environmentalists their say: “ExxposeExxon, a coalition of 15 environmental and other groups that banded together a few months back, used the record results to launch a fresh attack on Exxon and its policies. `A company like Exxon Mobil that is making record profits, and is making those profits off the back of American consumers, has a responsibility to invest those profits into responsible energy policies,’' said Shawnee Hoover, a campaign director for the coalition. `And that is precisely what Exxon is fighting.’''
Such statements demonstrate breathtaking disregard of facts, logic, and the science of economics.
Let us begin with the fact that oil prices would be lower if the supply of oil were greater. The oil companies, including Exxon Mobil, have been doing their utmost to increase the supply of oil, including reinvesting a major portion of their profits precisely for that purpose. But time and again, they have been prevented from increasing the supply of oil by the environmental movement and the maze of governmental regulations and prohibitions that it has inspired. A prominent part of the environmental movement, of course, is the very organizations represented by “ExxposeExxon.” And prominent among the politicians who have done the bidding of the environmental movement are Senator Schumer and Rep. Markey.
For example, just last December 21, in a vote on the Senate floor, Senator Schumer helped defeat the attempt to open a small part of the Alaskan wilderness to oil drilling, which, had it been successful, would all by itself have made possible an increase in production capable of making the price of oil substantially lower than it is today. (Just as a relatively small decrease in the supply of oil is capable of increasing its price dramatically, because of the great need for oil and lack of available substitutes for many purposes, so a relatively modest increase in the supply of oil is capable of reducing the price of oil just as dramatically. True enough, the development of this source of oil might take a few years, but Senator Schumer and his colleagues have been preventing its development for over twenty-five years.)
The potential oil from ANWR (the Alaskan National Wildlife Refuge), which Senator Schumer and forty-three other Senators (forty-one Democrats and two Republicans) voted to keep from the market last December, significant as it is, is only a small part of the supply of domestically produced crude oil that the environmental movement and its congressional supporters have kept off the market. To it must be added all of the crude oil that could be produced from additional offshore drilling. To that must be added all of the additional crude oil that could be produced from the vast areas besides ANWR that have been closed to oil production by virtue of having been set aside as wildlife preserves or wilderness areas.
The increase in the supply of oil that would be achieved if only the environmentalists and their congressional supporters would get out of the way and allow profit-seeking oil firms to expand their output, is not the only readily available means of bringing down the price of oil. There is also the elementary economic fact that a decrease in the demand for oil would cause the price of oil to be lower. And among the things that would serve to reduce the demand for oil is an increase in the supply and reduction in the price of competing forms of energy, notably, atomic power, coal, and natural gas, all forms of energy whose supply the environmental movement has also succeeded in greatly restricting.
If politicians like Wisconsin’s Governor Doyle, Senator Schumer, and Congressman Markey were serious about wanting to reduce the burden imposed on American working families and consumers by the high price of oil, all they would need to do would be to abolish the restrictions on energy production that they have up to now been supporting. The truth is that their policy has been “wildly effective,” to use Congressman Markey’s phrase, in raising the price of oil and making life so much more difficult for the American people than it needs to be.
This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book. (Email notification is requested). All other rights reserved.