Zoo Station

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More on gas prices

Posted by Chance on April 28, 2006

I know I have been talking a lot about gas prices lately, but its on the news so much, I felt like talking about it some more. Also, there was an interesting discussion on another blog I visit about the morality of oil companies being able to set their prices. I think this is a good discussion, and if that person happens to see this post, I’m not hammering on your opinions, I think its a good discussion that I want to talk about on my blog. This discussion has seemed to take a slightly different direction than on the other blog, however.

Sure, with capitalism there is a concern about a company being able to set their own price. This is where competition comes in. Competition is what regulates unmitigated greed. It is a sort of checks and balances. The more a company charges higher prices and tries to own the entire market, the easier it is for another company to come in.

Now, there is concern that with mergers and such, that there is not sufficient competition, and this is a legitimate concern. Right now it is very difficult for a company to simply start up their own oil company. This can be made easier by decreasing regulations and taxation on refineries built. This is not to say that environmental regulations concerning pollution should not be respected, however, but there is a lot of red tape before anyone even considers the environment.

However, even with fewer regulations, starting up oil companies is still a costly venture, and I’m not going to say straight-faced that the only thing preventing more oil companies from popping up is governmental regulations. Maybe it is, but I don’t know enough about it to make such a claim.

As gas prices go up, however, I believe there will be a push for alternative fuels. I personally do not support government measures to push towards alternative fuels (tax breaks, subsidies to car/oil companies, etc…), because I think that people’s motivations to save is a sufficient impetus for the market. For example, I don’t need a tax break to buy a hybrid car; I will already be motivated based on the money it saves me, if that is the case. If I decide the costs and benefits of a hybrid car is not worth it, it soon will be if the cost of gas climbs. Same with gov’t standards for fuel efficiency. Companies are already motivated to build fuel efficient cars for customers who want to save on gas money. Sure, right now people are still buying SUVs, but there will be a breaking point eventually where people decide it is just not worth it.

So, maybe the oil company competition is not satisfactory, but there will be, I believe, increasing competition from outside the oil industry as mentioned above, and decreased demand through conservation methods.

Many complain about how much a CEO makes with such huge spikes in gas prices. The CEO’s salary for Exxon last year was $38 million, out of 36.1 billion made, so his salary was about .1% of the total profit. Assume that gas is $3.00, $2.50 before taxes, with a 10% profit around $0.25. If the CEO worked for free, it would reduce that profit of $0.25 by 1%. So, the price of gas would be reduced from $3.00 to $2.9975.

Of course, there is still the other 36.062 million in profits. Now, nevermind the fact that anyone with a few extra bucks can invest in the oil companies themselves. People invest in the oil company to make money; with no promise of profit, oil companies cannot obtain the capital needed to operate. As the Cato Institute article in my previous post states: “Who would want to park their money in an industry like that? [with windfall profit taxes] If investors were discouraged from putting their money into the oil sector, where would the capital come from to put more oil and gas into a resource-starved market? “

Now, if one wants to claim that the oil companies are charging too much, that’s a fair judgment, but one must consider that oil companies are competing with any other publicly owned companies in the promise of returning a profit. Also, this goes back to my statement that how much an oil company can charge is limited by competition. But, as I mentioned earlier, there is concern about sufficient competition in the oil industry, and this is a fair concern. Currently though, oil companies profit margins are not outrageous (around 10.7%), and the fact that gas prices have gone up more than this amount leads me to believe that much of the price surge has been other factors, other than shareholders wanting to make more profits.

Perhaps the toughest point to debate is the fact that oil is not really a luxury, and therefore should be less subject to market forces. While oil companies make less in profit margin than say Apple Computer, Citibank, Yahoo (again, referred to at Cato), oil is a necessity, whereas an internet search engines, a computer, or a credit card are more as a luxury.

This concern really lies at the heart of capitalism vs. socialism, that is, should basic necessities be guaranteed, or at least, be handled some way by the gov’t so that people have easier access to it. This is not an either/or situation, where one has to go one way or the other. Many will claim that there is a balance in between. But the question of what to do with basic necessities is fundamental, not because someone must choose the side of Socialist or Capitalist (as I sometimes forget), but because how they feel about the question can often be indicative of how they feel about the free market and the government’s role in the economy as a whole.

People who lean to the far right economically, such as myself, ultimately believe the free market can produce the goods better than a more government-controlled economy. The possibility of making oil a more socialized commodity may have the initial promise of being more accessible and maybe even guaranteed to everyone, but economic conservatives and libertarians believe that ultimately this is not the case, that a free market ultimately makes a good more accessible to everyone. This belief is based upon empirical evidence in comparing everyday market goods and services to those provided by the government, and through the belief that people’s drive to make money will motivate them to do a better job in providing services (this second argument is more of a slippery slope because I do not believe that greed makes the world go round, as some objectivists believe).

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