Friday, May 05, 2006

Windfall profits, price gouging and wounded minnows

Mark Dorroh

Here we go again. The price of a vital commodity has shot up due to market pressures so a bunch of people who should know better are looking around for someone to blame.

In point of fact, the law of supply and demand is a lot like the law of gravity. It can be ignored, but it will profoundly affect our lives with or without our approval.

Over the past 50 years, increases in oil prices have pretty much followed the same track as general inflation. Even serious spikes such as the one caused by the OPEC embargo of 1973 tended to flatten out in the fullness of time. During the 1990s, not counting a brief bump upwards around the time of Operation Desert Storm, price hikes were stuck well below the general rate of inflation due to OPEC member nations' inability to stick to production schedules. For a good many years the price of a gallon at the pump fluctuated between $1 and a $1.30. That's about the same dollar amount we paid in 1980. Adjusted for inflation, that would be something in excess of $2.50 in 2006 prices.

Not to put too fine a point on it, gasoline, for most of the 1990s, was a stone bargain.

So what has changed to kick up today's pump prices above the general rate of inflation? Specific contributing factors include:

• Americans love our gas guzzlers. When OPEC couldn't get its act together and the resulting prices for gas stayed artificially low, everybody and his cousin Sam went out and bought a Rampage 3000 SUV or a Mega-Leviathan pick-em-up truck. Even as our sedans and compact cars were getting more and more miles per gallon, the average miles per gallon of all the vehicles in the country were being held nearly static, while a growing population of drivers put more and more vehicles on the road. Thirsty light trucks and SUVs now account for fully one-half of all new vehicles sold. Blame the (recently closed) loopholes in the feds' fleet mileage standards if you wish, but mostly, supply and demand are having their way with us.

• Two socialist nations, China and India, finally realized their command-and-control economies were messing with the workplace practices and ethics of some of the smartest, hardest-working people on the planet. So they've been allowing industry and trade to flourish via relaxed state regulation. Those policies, predictably, have sent productivity skyrocketing. All this is happening in the two most populous nations on earth, and their rapidly expanding economies are now slurping up unprecedented amounts of oil.

And all that brings us back to what, class?

Oh come on, let's not always see the same hands.

Yes, very good. Supply and demand.

But when things go wrong, it is human nature to try to identify the scalawags responsible. So there are now outraged demands for yet another probe into allegations of oil company price gouging. Every single time this has been done over the past 30 years (with the exception of Enron's diddling about in California, which we'll get to in a minute), it has been determined that oil companies were making reasonable, non-gouging profits.*

Then there are the windfall profit tax advocates, those of us who think we ought to take away depreciation allowances and/or otherwise place more tax burdens on the oil industry. I have two questions to pose to those people:

1. Increasing the oil companies' cost of doing business will result in lowering the price of their products ... how?

2. When you sell your house (after enjoying years of substantial tax breaks for your mortgage interest payments) and make a 300 percent profit on its appreciation, should you pay a windfall profit tax?*

If not, why not?

Now, on the Enron-California debacle: The shortages and attendant panic which attracted corporate shysters were caused by a peculiar confluence of circumstances, some man-made, others not.

First, three years of lower-than-usual precipitation in the mountains whose melting snow powers west coast hydroelectric plants left that production sector short of juice. Also, a transmission line bottleneck - left unaddressed for years - was still screwing up delivery in some areas. Then there was the shutdown of several power plants for scheduled maintenance.

Finally, the state crafted the world's worst power company deregulation policies. California created a system that encouraged providers to buy on spot markets instead of locking in long-term rates. Oh yes, and there had been no construction of a single new power plant in decades (NIMBY strikes again).

So California limited its supply of electricity while simultaneously experiencing a huge increase in demand. When that caused prices to go through the roof, predators showed up and took advantage of the situation.

This should surprise no one. As every fresh water fisherman knows, one of the best ways to attract predators to the hook is to spin-cast a lure that thrashes the water like a wounded minnow.

So the big question becomes, "Who wounded California's minnows and attracted all those hungry largemouth bass in the first place?"

* A tip of the Noisy Voice topper to Columnist Barton Hinkle.

1 comment:

SunLover76 said...

Fantastic post...I am so glad to see someone else gets it. It frustrates me to see what has happened not only in California, but so many other parts of the country. For example, there is oil in the ANWR, the Outer Continental Shelf, among others. Yet the government has blocked drilling in these areas. I am a firm believer that opening these up would do us some actual good, not enacting a windfall profit tax (which would make matters worse by making gas more expensive).