As I was preparing to sit down for a nice brunch with my wife today before we made our way over to the ballpark for the Sunday afternoon Giants game, I read this article by Al Saracevic in the Sunday San Francisco Chronicle. Essentially, Al’s point seemed to be that oil companies are making lots and lots of money, and also that the response thus far from politicians has been less than inspiring.

I don’t disagree. But I was left feeling like there was a great deal of GOOD news that Saracevic had ignored in his column. So I wrote him the following email:

“Thought provoking stuff today.

There is an upside to the higher gas prices, of course, part of which is simply that people will be driving less (as the Chronicle reported on Page One this week.) More carpooling and public tranist use will result. People will weigh fuel economy more heavily when considering their next vehicle purchase. Those are GOOD things, right?

Also, as gas prices rise, alternative energy sources become relatively more attractive. So, there’s another benefit: powerful stimulus to the development and use of (greener) alternatives.

There may be frustration in some quarters that market forces will accomplish what endless TV pieces, Op-Eds and Public Service Announcements so far have not been able to achieve — making a real, widespread change in American behavior. But let’s face it, many of us make a change when we feel some pinch of discomfort, not when it vaguely “seems like a good idea.”

Oh, and one other thing: the numbers you quoted in todays column about oil revenue seem huge. Heck, they ARE huge. But one needs some context to properly understand them. I’m not sure your readers got that context from your piece today (perhaps in a follow-up piece?)

I think the following speaks powerfully to the questiton of “oil profiteering”. (Via Instapundit):

‘ From 1986 to 2003, using 2004 dollars, the real national annual average price for gasoline, including taxes, generally has been below $2 per gallon,” noted the Federal Trade Commission in a 2005 report absolving the industry of collusion. “By contrast, between 1919 and 1985, real national annual average retail gasoline prices were above $2 per gallon more often than not.”

In other words, gasoline prices were lower than at anytime since 1919 for much of recent history. Some conspiracy! Maybe somebody should have been investigating consumers for “gouging” the oil companies.

And just who is the profiteer here? While the average profit on the sale of a gallon of gasoline is nine cents, the average state and federal tax on that same gallon of gasoline is about 45 cents (and 52 cents in Michigan). And if we must have an investigation, how about investigating the extent to which government regulations drive up prices and block new production?

Management guru Peter Drucker once remarked, with his usual drollery, that profit is “whatever government lets a company keep.” But most folks have a vastly inflated view of corporate profits. One regular survey of Americans found that the majority believes the average corporate profit is between 30 percent and 40 percent of sales, while the real figure is closer to 4 percent.

Washington should cool its carburetors. The pursuit of profit is one of the main engines of Western progress and prosperity. And as people in my neck of the woods are fast learning, it is only out of profit that we can afford to pay for a comfortable retirement. As profits in the steel, airline and auto industries erode or even vanish, so do pensions and health care benefits, not to mention jobs. ‘
I encourage you to read the entire thing here. ”

JASON ADDS: it is not just that higher prices make alternatives more attractive. Additionally, it actually makes them economically viable to explore. Not just greener energies, but also shale oil and other difficult [read: expensive] points of extraction and extraction methods for fossil fuels. Right now bio-diesel [that cool soybean/vegetable oil fuel] is still more costly than a gallon of gasoline. Supply and demand limited production.

Additionally, while record profits have been recorded for oil co’s recently, that is a gross number, rather than a percentage of revenue. As a percentage of revenue, profits have remained largely the same–at about 10% 9.4% recently [can't find source I read days ago]. When oil companies raise the cost of gasoline, it is because _their_ costs have increased. Article on basic economics of price controls [that far too many are ignorant on and of] here. If gov’t really wanted to do something about gas prices rather than just grandstanding, they would relax environmental regulations on building refineries and expanding that capacity, they would do away wth boutique additives and mixtures of same that require certain regions, states, and municipalities to sell specific mixtures — they would _standardize it_ or repeal it altogether and they would forget about enthanol [it is more expensive as an additive than MTBE], but again, environmental regulations and exposure to liability drove the oil co’s away from MTBE. AND the Senate would permit drilling in ANWR and our costal areas. Canada and Cuba are doing it anyway in areas we will not allow ourselves to.

If they were serious, they would have these items as a to-do list and educate the public after [probably and sadly] educating themselves about basic economics. A politician making decisions about economic policy is the equivalent of a professional wrestler making decisions for the NFL’s competition committee; they might watch the game, but they have no real idea about what is happening and how.

UPDATE JASON further adds: a great piece on perspective and profit here comparing Exxon [9.4%] profit to GE/NBC [60%!!] and adds a few others for good measure. My conclusion? PRICE GOUGING FOR ADVERTISING BY NBC. Let’s call for immediate investigations!

April 30th, 2006 | Economics, Politics | No comments