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Thesis & Antithesis

A critical perspective on energy, international politics & current affairs

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Location: Washington, D.C.

greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

14 November 2005

Big oil sacrifice?

William Raspberry in the Washington Post makes his contribution to the debate on taxing the windfall profits of the oil industry. An excerpt:

“There is another way of looking at what happened last quarter. Katrina and the flooding that followed amounted to a national tragedy and a national emergency. Companies sometimes benefit from such situations. A bakery that somehow managed to stay open would certainly sell out of bread; if the owner could bake more bread, he could sell that, too. If the ingredients became more expensive, he would take that into account in setting the price of bread. But if he started charging $8 a loaf just because he could, you wouldn't be in the mood for cheery songs about the beauty of the free market.

There is also another way to respond to a national disaster, and lots of individuals, organizations -- even entire towns -- found it. I mean the response of sacrifice. Americans opened their hearts, their wallets and their homes to Katrina's victims. Where is the record of Big Oil's selfless largess? As Sen. Barbara Boxer (D-Calif.) told the oil executives: ‘Your sacrifice, gentlemen, appears to be nothing.’”

It is nice but useless to elevate something as mundane as supply and demand to a level of abstraction where this argument makes sense. To keep prices low would mean a shortage: a baker couldn’t feed everyone so a price hike is a reasonable reaction to scarcity. What is more, baking bread and refining crude oil are quite different—you can’t just automatically buy more inputs to meet output in oil as you can in baking.

The notion of sacrifice is ennobling but not terribly useful. For one, there is a coordination problem: even if one company felt magnanimous, others might not in which case the net effect would be the same. But more important, the idea that oil companies should sacrifice eschews the need for dealing with the real problem: there is a refining shortage in this country that needs to get solved. No sacrifice will solve this. Prices are the best mechanism to alert people of this.

Chevron Chairman David O'Reilly put it this way: “We had to respond to the market.” Mr. Raspberry interprets this thus: “But if prices were raised to cover additional costs, whence the record profits?” But prices do not just reflect costs; they reflect scarcity. If oil companies had ganged to create a crisis where none existed, then by all means bring them forth in the Senate and parade them in front of the American people for their wrongs. But the shortage is real and to deny this is futile.

References:
William Raspberry, “An Oily Favor,” Washington Post, 14 Nov 05 (link)

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