An oily blame

Alberto Sanz
Register Columnist

March 28, 2008 10:20 pm

— When we hear about the outrageous prices of the barrels of going up, breaking previous ceilings, we start wondering about what else is going on in the world.
Maybe Chavez is up to something new and decided to cut the oil supply to the U.S.A. Perhaps we do not have enough reserves or there might be a chance that there is a war that we surprisingly do not know about, affecting the price of oil.
In the meeting of March 16 this year, the OPEC recognized that: “Prices are completely ignoring the fundamentals of supply and demand. Even if we had increased (at the meeting), I don’t think it would have changed anything. It is financial speculators, the weak dollar and funds driving the price.”
Additionally, in the largest oil consumer in the world, our country, crude and gasoline inventories are rising, an indication that oil market fundamentals were not behind the price rise. In fact, three weeks ago it hit their highest levels for 15 years.
The fact that companies like Exxon Mobile and Chevron have been reporting record profits every single year for the last five years should also capture our attention. If you think about their operation costs, much of the investment in finding that oil — and developing the wells and pipelines needed to produce it — has already been made. So an oil field that was profitable with oil selling at an average of $40 (decades of 1980 and 1990) a barrel is much more profitable with oil trading above $110.
So why are we seeing this unbelievably expensive oil prices? The reason is simple. Oil giants are acting like an oligopoly, deciding their production level to maximize their profits. What does that mean to us? It is simple. According to the economic theory, monopolies and cartels (oligopolies) inflict harmful deadweight loss on society. This loss comes from the pretended production cuts and the price increase of the goods.
But government and media are telling us that we are not doing as bad as other countries are doing. We know that the prices of fuel in Europe are high. What we are not being told is that fuel in these countries is highly taxed. For example, gas prices in England have risen as high as $6.65 per gallon, with 78 percent of that going to taxes. In the U.S.A. we pay around 14 percent in taxes. Surely our government is receiving additional income from the soaring gas prices.
The next time you hear about record oil profits and you are paying high prices, do something about it. Call your local representative and express you deep indignation. Oil companies pay huge amounts of money to keep antitrust laws enforcers away from them. This money becomes part of that dead weight loss that is created by oligopolies and we end up paying as a society.