I share the concerns expressed at Mises Economics Blog and the Voluntary Trade Council about antitrust legislation introduced this week targeting both domestic and foreign oil producers.
The bill calls itself the Oil and Gas Industry Antitrust Act of 2006, and is sponsored by Senators Arlen Specter (R-PA), Herb Kohl (D-WI), Mike DeWine (R-OH), Patrick Leahy (D-VT), Dianne Feinstein (D-CA), and Richard Durbin (D-IL).
Here is how the bill begins:
(a) IN GENERAL.–Except as provided in subsection (b), it shall be unlawful for any person to refuse to sell, or to export or divert, existing supplies of petroleum, gasoline, or other fuel derived from petroleum, or natural gas with the primary intention of increasing prices or creating a shortage in a geographic market.
(b) CONSIDERATIONS.– In determining whether a person who has refused to sell, or exported or diverted, existing supplies of petroleum, gasoline, or other fuel derived from petroleum or natural gas has done so with the intent of increasing prices or creating a shortage in a geographic market under subsection (a), the court shall consider whether–
(1) the cost of acquiring, producing, refining, processing, marketing, selling, or otherwise making such products available has increased; and
(2) the price obtained from exporting or diverting existing supplies is greater than the price obtained where the existing supplies are located or are intended to be shipped.
You can see the complete nonsense of this standard by considering what is supposed to happen in a correctly functioning market whenever there is any change in the conditions of either supply or demand. To take one arbitrary example, suppose there is a fire at a refinery in Philadelphia. The basic physical problem that the fire would cause is that there is no longer enough gasoline for people in Pennsylvania to go on doing things as they were. What would the senators propose we do about this problem?
I’m supposing that even Senator Specter (R-PA) would figure out that, in this situation, gasoline has become much more valuable to the people in Pennsylvania than it is to the people in New Jersey. What the senators and society should want to see happen is for some refineries to withhold some of their product from New Jersey in order to ship it to Pennsylvania. As a result, the people in New Jersey will have to pay a slightly higher price– which they should, because this item has become more valuable than it used to be. By spreading the burden around, the people in Pennsylvania would be spared a major crisis, and a potentially huge problem has been converted into a minor nuisance.
Now, what might persuade the New Jersey refineries to take this action that would unambiguously be to the benefit of Senator’s Specter’s constituents? Is it a spirit of comradery with their fellow mid-Atlanticans? Or is it the fact that the New Jersey refiner would say, “gee, if I sell the gas in New Jersey I only get $2.50 a gallon, whereas if I sell it in Pennsylvania, I get $5.00 a gallon. I’m therefore going to sell all my gas in Pennsylvania, and only sell to New Jersey if the price here gets higher.”
This is a textbook example of how a perfectly competitive market is supposed to cope with the problem. Specter’s bill, as I read it, would essentially prohibit markets from functioning.
It seems to me what we really need is to prohibit the Senate from functioning.
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From appearances, this new bill is two legislative bills rolled into one. You are complaining about the manner in which they want to handle internal-sourced domestic shortage problems that can arise from natural and manmade sources of disruption, but ignoring the foreign supplier issues entirely.
Clue: Venezuela. CITGO. (as examples)
Why didn’t you talk about “SEC. 8. OIL PRODUCING CARTELS”?
It appears that you are overlooking one of the major reasons why this bill was drafted.
Anonymous, I have separate concerns about the foreign supplier issues, similar to those expressed at Mises Economics Blog.
I don’t pretend to know the details of this bill, but judging from its title, I can only assume that the senators feel it is necessary because they do not believe that this is a “perfectly competitive market.”
Gee, Joseph, that’s my point. If the title of the bill is “Oil and Gas Industry Antitrust Act of 2006” and the behavior that it prohibits is the socially desirable operation of perfect competition, then there seems to be a problem with the senators’ understanding of basic economic principles.
I think you set up a straw man by inventing a scenario than you presume that they intend to prevent occurring. Perhaps the scenario they intend to prevent occurring is similar to the recent manipulation of the California electrical distribution system by Enron and others. Pehaps they assume that left to their own devices, there will be more occasions of the second case than the first case.
I really don’t have a position one way or the other in the absence of better information, but after the California fiasco I have an inherent suspicion that these mini-cartels are not really efficient markets. After all, most economists insisted that what happened in 2001 couldn’t really happen, until the facts came out later contradicting them.
I’m afraid I don’t follow your point, Joseph. Surely the relevant question is what behavior does the law actually prohibit, rather than what behavior is the law intended to prohibit.
Good intentions do not, by themselves, create a good law.
Well, you have a valid point. The devil is in the details. Part A addresses the intent to artificially manipulate the market. The problem is Part B in which the court must somehow distinguish illegal manipulation from a natural response to market conditions.
At any rate, I’m not losing any sleep over it. The oil lobby and Bush/Cheney will never allow it to pass. This is just political posturing before this summer’s driving season, which happens to occur right before the next election.
But then again, I never thought I would see a Republican administration impose steel tariffs and I seem to remember that occurred just two months before the 2002 elections.
The oil, or energy, markets can not be categorized as “perfectly” competitive. We are just lucky that the storage costs for oil are so high that it tends to keep a lid on the extent of price manipulation we would face from this concentrated industry. Your example of a refinery fire presupposes that gasoline price increases are restricted to the local market. That’s non-sense. A refinery fire in Pennsylvania would instantly result in massive price increases in the world price of oil.
The “suppliers” would attempt to “create” a panic by a coordinated withholding of supplies from one or more areas to simulate a “what if we were unable to deliver supplies to you” scenario. The financial industry would jump into the frey through domination and manipulation of the futures market, leveraging up the price even further through the purchase of futures contracts on margin.
Sound far fetched ? How about the natural gas market of 2005/2006. How about the current market for copper, aluminum, zinc, and nickel.
The legislators are currently rattling their sabres in an attempt to come to grips with the realities of the world in which the price of commodities are not competitive.
Maybe the US government should buy EXXON. Given the whining that went on when the Chinese government was not allowed to buy a major oil company, I’m sure everyone would agree that it would be okay for the Feds to take the DOE budget and just buy EXXON and create a supplier of last resort.
JDH,
Excellent post & analysis.
Anonymous: Exxon is unable to fully replace the reserves it sold last year; imagine how much worse their reserves would be if they were run by the gov’t (think DMV, FEMA, or the Dept of Education)…even without the supplier of last resort thing.
The L.A. Times today attempts to link high California gasoline prices with high refinery profit margins:
http://www.latimes.com/business/la-fi-gas15apr15,1,5149658.story
“As more Californians face $3-a-gallon gasoline, state refiners are making twice as much money as they did at the beginning of the year, state figures show.
“Amid growing worries about summertime fuel supplies, California’s average price for self-serve regular hit $2.91 a gallon Friday and could surpass $3 in the next few weeks, AAA said. Santa Barbara and San Luis Obispo already are posting averages above $3 a gallon, the automobile group said.
“But don’t blame crude oil. From early January to April 10, the cost of the oil most popular with California refiners rose 16 cents a gallon, while retail pump prices jumped 60 cents, according to the California Energy Commission. As a result, refinery gross profits have doubled in that time.”
While they don’t come out and say in the article that oil companies are profiteering, it is a strong unspoken message. And they had no trouble finding gasoline customers willing to make the link:
‘”I think they’re just taking our money,” said Talethia Moore, who put $20 worth of gas in her red Chevy Cobalt at a Chevron station in South Los Angeles on Friday. “People have to work hard for a living and they’re making billions and billions of dollars. No excuse makes sense to me.”‘
Of course the big question reporters never ask is, if oil companies are just profiteering, why don’t they keep gas prices high all the time? Why did they let gas drop so low back during the 90s? Weren’t they interested in profits back then too?
People only think about gas company market power when prices are high, they never wonder where the supposed market power went when prices drop.
Happy Easter to those who celebrate it. I type a few words before I ride my bicycle down Pacific Coast Highway to reach Easter dinner.
On my first pass reading this my first thought was also Enron, and I doubled back to see if it was about “energy” or just “oil.”
Also interesting news on the California refinery profits. But man, people just keep buying. I see a few of the new Toyota FJ Cruisers on the paved streets of Orange County. One of those might be nice if you really needed to rock-scramble with some frequencey … but a 17/21 epa mpg “car” just seems a little out of tune with the times.
Certainly, the “market” is not saying gas is too high or profits are too extreme.
Ah well, I’ll just leave the Prius in the garage and take the bike ;-), the health benefit being more immediate than any long term financial or environmental contibution.
By the way, I still see an (imperfect) social contract exisiting between consumers, oil companies, and even automakers. I’m too bored with that old observation to write too much about it now, but I think it is obvious that people get angry because of percieved “fairness” and a percieved “deal.”
I’m sure many of you have seen this find at Gristmill, on how oil and auto companies feel about their roles:
Catfight!
In summary, the sponsors of this bill are trying make oil “shortages” illegal. A great way to deal with Peak Oil – no future oil shortages because according to CONgress, it’s unlawful. Ha Ha Ha.
Hal: Of course the big question reporters never ask is, if oil companies are just profiteering, why don’t they keep gas prices high all the time?
The fact that it is difficult to manipulate prices when there is an over-supply does not mean than you can’t manipulate prices with there is a shortage.