The
Senate Committee on Energy and Natural Resources grilled oil company executives yesterday about their role in recent oil price increases. For some reason I did not find any coverage in the mainstream media of this very interesting exchange between the senators and oil tycoon Jed Clampett.
Mr. Clampett owns a ranch near Bakersfield, California on which he holds the royalty rights to a small stripper well that’s producing 2,000 barrels of oil each year. His operating costs last year came to $30,000. Last year he sold his oil at an average price of $40, with profits of $50,000 (40 x 2,000 – 30,000 = 50,000). This year he’s selling the oil for $60 a barrel, earning profits of $90,000, almost double what he made just the year before.
Senator Pete Domenici (R-NM) asked, “My constituents think someone rigged the price and someone – them – is getting ripped off. Mr. Clampett, are you rigging the price of oil?” The rancher stared at his hands and muttered that the only thing he knew how to rig was a harness.
Senator Barbara Boxer (D-CA) produced a chart showing that Mr. Clampett earned $40,000 in extra profits this year. “Working people struggle with high gas prices,” she scolded Mr. Clampett. “And your sacrifice appears to be nothing.” Mr. Clampett shifted in his seat and responded that if he wasn’t in the business of selling a little oil to a thirsty market, the problems faced by working people would only be worse.
In other testimony, Lee Raymond, CEO of Exxon-Mobil, claimed that, like Mr. Clampett, his company doesn’t control the price of oil either, since Exxon-Mobil only accounts for 3% of global oil production.
After the hearings, Senate Majority Leader Bill Frist (R-TN) said that the testimony by Clampett and Raymond did not “adequately answer the question of whether the sky-high gas prices we saw earlier this fall were entirely justified,” or whether their “profit margins are appropriate.”
I just hope the senators can get to the bottom of this tomorrow when they call Jethro in to testify. John Whitehead has a suggestion for one question that Senator Domenici might consider posing then.
Technorati Tags: oil prices,
oil company profits
CNBC had interesting coverage of oil from 3-5 pm yesterday (CST). They had a variety of people and viewpoints.
One thing nobody has discussed adequately is ExxonMobil’s pension, and that status of the funding of this pension. It is possible i missed the discussion-
http://www.iie.com/publications/chapters_preview/35/1iie2628.pdf
http://www.forbes.com/personalfinance/2005/07/07/pensions-ibm-hp-cz_bc_0707pensions.html
I copied the wrong URL in the previous posting. Oops!
Listening to some of the questions yesterday, I felt embarrassed to be one of the fools responsible for electing these jerks. This was grandstanding to gain favor on display at it’s lowest form. Is this the best problem identifying and solving process we can devise in our country? Can term limitations possibly diminish the popularity quest? Could this possibly be as monumental an issue to the future of society as steroids in baseball? Does this red tie look okay? Perhaps you should shoot my questioning from the left side. I part my hair over there you know. Airbrush out that pimple.
Windfall taxes discourage surplus capacity
Oil prices are high today because oil consumers have ratchet up their consumption faster than oil producers have brought new capacity on line. A little under half of global production is under government control. As such, most oil production is…
I’m guessing that Jethro will have to answer for the natural gas problem. Granny will be sworn-in later for the ethanol subsidy review, while Elly Mae will demonstrate a biomass energy project involving her “critters”.
[And Mr. Drysdale will be laughing all the way to the bank.]
… and I thought that the US believed in Market Economy
Frankly, I am sick of hearing how high the gasoline prices are (THEY AREN’T) and how much money oil companies are making (A LOT). James Hamilton has a snarky post titled Senate finds the facts about Big Oil, and Environmental Economics has more.
Do you suppose Jed got any of this?
“Between 1948 and 1998, the Department of Energy spent $111.5 billion on energy research and development. Of this amount, $26 billion went towards fossil fuel R&D. Unfortunately, these hefty taxpayers giveaways to the mature fossil fuel industry continue today with tax breaks, royalty exemptions, and direct subsidies.
Subsidies for oil and natural gas began in 1916 with the federal government creating its first tax breaks for oil and gas production. After 90 years of taxpayer-funded subsidies, the oil and gas industries are flourishing. Yet, taxpayers continue to contribute between $4 billion and $30 billion annually to the energy sector.”
http://www.taxpayer.net/greenscissors/LearnMore/senatefossilfuelsubsidies.htm
If Jed did collect some of that money, Odograph, I say the senators should blame themselves for giving it to him rather than blame poor Jed for taking it.
Maybe we should add a requirement to the Constitution that no one may be a congresscreature unless he first completes 20 semester hours of economics with a grade of at least B.
I think a “naturalist” is going to look at what the congress and oil critters do, without putting too many values of blame upon it … at least until “they system” is understood.
It is amusing that the same guys (congresscritters) who were sure oil companies needed drilling credits and subsidies a year ago are now grilling those oil companies on their profits.
… it would certainly be incomplete to pretend that is not part of the drama.
an odd thought … if an oilman is not wrong to accept a congressman’s money, is a congressman then not wrong to accept a lobyists money? interesting economics.
I’m with you on that one, Odograph. I can’t approve of oil companies bribing the politicians in order to get the politicians to deliver handouts. But, I still say, the politicians can’t be the ones to get on their high horse and claim they’re all indignant about the fact that they voted for the handouts.
“the politicians can’t be the ones to get on their high horse and claim […]”
I think you mean “shouldn’t be” … but hey, it’s been a hundred years since the tomato was ruled to be a vegetable.
FWIW, I think the energy and transportation segments of our economy are so convoluted by regulation and intervention that the best we should hope for is that they average out … as much as I’d like them to be unwound, I don’t see it being done by Twain’s “criminal class.”
It’s human nature that people want to consume now and pay later. That has always been the case and always will. So the politico who makes the best show of promissing goodies (or shfiting the blame onto the big corporations for whatever problem we as a society have created) to his constituents is the one who gets elected. The masses,as a mass,are stupid and we get what we pay for.
What the U.S. ought to do is impose an energy consumption tax to make fossil-fuel-based energy even more expensive in real terms. That would reduce consumption and encourage development of alternative sources. If the profit opportunity were sufficiently attractive,alternative sources would come on line fairly quickly.
It’s like the “third rail” of social security. No politician has the guts to face it,because he knows his less-than-brilliant constitutents will vote him out of office in a NY minute.
exactly.
but one more thing,
it is very important to villify the enviromental movement because that is something that has broad popular appeal but makes nobody any money
Robert-
there is hope for me. i might still be able to be a congresscreature…
Biker-
The environment makes money for a lot of people:trash haulers, pollution control equipment manufacturers,tourism companies,etc.
I’m not sure how your comment relates to my post, but I wasn’t implying anything about environmental policy. It’s a public policy issue like anything else.
I think he (biker) was leveraging off your (jim) cynicism (“It’s human nature that people want to consume now and pay later”).
Environmental damange is often done as part of “consume now” … and the anti-environmental sentiment might be fueled by those who want to “keep that motor runnin'”
Jim :
I’m just following the money. Environmental issues are another political football, true that, but they are generally popular with Joe 6 pack and generally unpopular with capital holders. This is a component of the electorate discussion.
Makes for interesting issue framing, and according to today’s WSJ op-ed if cars have to get better mileage next year than they did in 1995 we are freekin’ doomed (at least if it is government mandated).
As a capital holder myself,I would argue that we are not opposed to environmental rules. After all,how can we enjoy our yachts and country clubs if we can’t breathe the air or see into the water.
Seriously,the real issue for capital holders is who pays for the regulations. For example,if a coal-fired power plant has to spend $100 million to install a scrubber and other stuff to meet emission rules,capital doesn’t believe it is equitable that the shareholders (capital) pay for all of it. They believe they ought to be able to pass on the cost of the project to their customers. The customers of that power plant don’t want to pay it. And the people downwind in another part of the country don’t want to pay. So the real issue,imho,is how to apportion the pain.
I think that’s one of the critical functions of government,to dole out the pain and the goodies when it’s not possible to make a mathematical decision.
Pollution is a localized thing, and the capital holders don’t live where the production is taking place. Of course they gotta SAY they don’t wanna pollute, but they can’t PAY for a process change if it means getting outflanked by a competitor, less profit for shareholders, utility customers going nuts – I get that.
(utopian) Answer – government raises standards for all companies across the board and nails the ones that don’t comply. Of course government won’t mandate change even if it is economically viable or inevitable because of the political realities you refer to. At least for now.
The other side of this unfortunate situation is the impasse over nuclear power, and other creative solutions.
CTW had some great ideas, and then she, um, “quit”.
This is an interesting issue because it’s a powerful personal belief for people that doesn’t follow typical electorate divisions. ANWR would zoom through if it did.
Oh, and one more problem is that this may end up like the NHTSA and automakers – the courts showed the guv’mt to be useless in regulation and allowed the plaintiffs to clean up, doing little for our collective good.
Carnival of the Capitalists Goes Back to College!
Before we get into our usual Carnival of the Capitalists rants, we wanted to take a few moments to remember one of the greatest management thinkers and visionaries of all time, Peter Drucker, who passed away this past week….
Jim –
Is it fair to say that in a properly functioning market system, all suppliers are “price gougers”? Isn’t that the core purpose of a supplier — to maximize profits?
If I could charge a million dollars an hour for my labor, and my employer was willing to pay, am I wrong to do so? Or is there a limit on what an hour of labor should be worth? Maybe my question is cultural: why does the media fixate on CEO pay, but not on actress pay?
Anyway, I ask the price gouging question in all seriousness. It seems the defensive reflex is for people to say, “No, we’re not price gougers” when I think the more accurate defense is, “Well, yes, we price gouge, of course, which is exactly what every other business and person does by definition in a free market.”
– Tim
Tim,
How about this for a working definition of “price gouging”? Price gouging refers to a situation in which a dramatic change in either supply or demand results in a sharply higher market-clearing price.
JDH/Tim,
I think a better definition of price gouging is that described in a paper from Berkeley. Price gouging occurs when the supplier charges and receives a price over the scarcity rent. This is possible if the supplier can exercise monopoly power (local or otherwise). I believe the paper’s conclusion was that it is hard to measure since it is hard to know the scarcity rent that will clear the market.
RayJ
Well, Jim, I’ll agree with you on that definition. And I think RayJ has a point as well. But I think the technically correct answer misses the point.
The media / Congressional indignation is focused on the motive, not the act. WHY do suppliers charge higher prices? as if profit maximizing is a crime.
Perhaps I’m tilting at windmills here. Or perhaps some Senators really do have pangs of conscience that they are underpaying for a soda at the grocery … “gee, I value this beverage at 78 centrs – ergo, it is wrong of me to pay only 50.” Maybe they thnk constantly in terms of objective (welfare econ) value, and not market value. I think I smell a John Lennon song in there somewhere. Imagine all the true value prices … you (and an army of central planners) can do it if you try.
“Between 1948 and 1998, the Department of Energy spent $111.5 billion on energy research and development.”
Oh, yeah? That’s a neat trick, since the Department of Energy was only established in 1977.
What else did those morons get wrong? I stopped reading after the *very first sentence*.
Carnival of the Capitalists Goes Back to College!
Before we get into our usual Carnival of the Capitalists rants, we wanted to take a few moments to remember one of the greatest management thinkers and visionaries of all time, Peter Drucker, who passed away this past week….