Tuesday, December 13, 2005

Windfall profits are good.

'Oil companies make too much money.' 'Every time we fill up, they're ripping us off!' How many dinner party guests and talk-back callers have you heard that from? Everyone knows it's true, don't they?

Well, no they don't. "America's oil companies have earned every penny of their profits," says Alex Epstein.
To characterize any portion of them as an unearned "windfall"--like manna dropped from heaven--is a vicious smear. It is to evade what is truly responsible for their profits this and every quarter: the great value they create and the tremendous thought, effort, and risk-taking that goes into creating it.

Virtually forgotten in the condemnation of oil profits is that the great--and growing--global demand for oil reflects its great value. Producers and consumers have been willing to pay $70 a barrel for oil because it is worth that much to us. Oil is used by us to get quickly from point A to point B by car, train, or jet. It is used by efficient factories overseas to produce the ever-cheaper goods we get at Wal-Mart. In the event of a natural disaster, it allows us to drive to a safer place or to generate power to begin a recovery.

The critics of oil profits take all the benefits of free-flowing oil for granted--with not a word of acknowledgement to those who sell it to them at agreeable prices. They treat oil production as an effortless, risk-less task that requires little more of oil executives than shuffling paper and watching their coffers fill up with mega-profits.

But the continuous mass-production of oil, under all economic conditions, is a tremendous achievement.
So it is. 'But the oil companies are making huge profits,' you say? Good. They have earned them.

Linked Article: The 'Windfall Profits' Smear
Related topics: Economics, Politics-US, Politics

11 Comments:

Anonymous Sam Vilain said...

So, so long as the market can pay for it, it's fine?

In the early 20th Century, it cost 50% of the value of a crop to send it from Mississippi to New York via Rail. This led to depressions where people on the east coast were starving while the people in the Mississippi burnt corn for fuel, all the time the Railroad barons completely extorting every last penny out of the public.

Did they earn that, too?

12/13/2005 03:34:00 pm  
Blogger PC said...

" So, so long as the market can pay for it, it's fine?"

That's right. 'The market' is simply the name for what people voluntarily choose to do with their money.

As long as the market is un-hampered, prices will be set at what is generally affordable -- clearly, if prices are set too high, people won't be paying those prices; if they aren't buying, that's a signal either that prices need to come down, or that opportunities exist either for new competitors, or for new and alternative technologies in the marktplace. In an unrestricted marketplace with no legal barriers to entry, charging higher prices than the market can bear represents an opportunity for new competitors to enter the market (and if you're upset at the barriers that currently ~do~ exist that stop new entrants, then it's the government with whom you really have a beef; to the extent that present prices are higher than they would be in an unrestricted market, it's the government that bears the blame).

But note I said an unhampered market. This is by no means what we have in general, and certainly not what we have with the oil markets. This interview with Daniel Yergin gives you an idea of the sort of regulation and restriction that hampers the oil market, and raises prices -- and raise prices further is exactly what a 'windfall profits' tax would also do!

Don't forget when you're paying those prices at the pump that about forty percent of the money you pay for every litre of petrol ~already~ goes to the government. Now THAT really is a reward for doing nothing. If being ripped off is your concern, then I'd suggest it's Michael Cullen you want to talk to, not the heads of BP, Shell and Mobil.

"In the early 20th Century, it cost 50% of the value of a crop to send it from Mississippi to New York via Rail. This led to depressions where people on the east coast were starving while the people in the Mississippi burnt corn for fuel, all the time the Railroad barons completely extorting every last penny out of the public."

This sounds really interesting, Sam. Do you have the details of this story?

In the absence of those details for the moment, let me quote something from Ayn Rand from the start of piece whe wrote on American railroads ['Notes on the History of American Free Enterprise'], which I've found over time to hold water:

"If a detailed, factual study were made of all those instances in the history of American industry which have been used by the statists as an indictment of free enterprise and as an argument in favor of a government-controlled economy, it would be found that the actions blamed on businessmen were caused, necessitated, and made possible only by government intervention in business. The evils, popularly ascribed to big industrialists, were not the result of an unregulated industry, but of government power over industry. The villain in the picture was not the businessman, but the legislator, not free enterprise, but government controls."

Send through the details, Sam, and let's have a look. Unless it's the 1930s depression you're talking about, in which case there's a few myths about that unfortunate event that should be cleared up first: for that, you might want to have a look at 'Great Myths of the Great Depression' to have a wee look at how governments created and prolonged that great tragedy of the twentieth-century. I've linked it from this post.

Cheers.

12/13/2005 04:18:00 pm  
Blogger Steve said...

You have to be kidding?!

Oil is traded on the open market. You don't want to buy it - use your individual "CHOICE" and obstain - power your vehicle with an alternative. Just don't for fucks sake whinge about it and at the same time rant and rave about the virtues of the market.

12/13/2005 05:13:00 pm  
Blogger noizy said...

But note I said an unhampered market.

So maybe we should ask the American Governement to stop subsidising the Oil Companies, so we're all on a level playing field...

from the Guardian [emphasis added]

The energy policy bill the Bush administration drove through Congress this summer handed a further $2.9bn to the coal industry, $4.3bn to nuclear power and $1.5bn to oil and gas firms. According to the Democratic congressman Henry Waxman, the oil subsidy "was mysteriously inserted in the final energy legislation after the legislation was closed to further amendment ... Obviously, it would be a serious abuse to secretly slip [in] such a costly and controversial provision." Most of the money, he discovered, would be administered by "a private consortium located in the district of majority leader Tom DeLay ... The leading contender for this contract appears to be the Research Partnership to Secure Energy for America consortium", whose board members include Marathon Oil and Halliburton. "There is no conceivable rationale for this extraordinary largesse. The oil and gas industry is reporting record income and profits ... the net income of the top oil companies will total $230bn in 2005." It would be tempting to hold Bush responsible for this, but the oil firms were scooping up taxpayers' money long before they put their robot in the White House: Myers reports that between 1993 and mid-1996 "American oil and gas companies gave $10.3m to political campaigns and received tax breaks worth $4bn".

12/13/2005 05:17:00 pm  
Blogger PC said...

Sorry Steve, I'm a little confused who you're talking to when you say "Just don't for fucks sake whinge about it and at the same time rant and rave about the virtues of the market"?

You talking to me?

12/13/2005 05:20:00 pm  
Blogger Steve said...

The same people you are addressing. I posted in anticipation. ;-)

I love the market, particularly when it teaches those a harsh lesson that idolise it.

12/13/2005 05:22:00 pm  
Blogger Steve said...

I should explain a little further, it always strikes me as somewhat ironic that those typically of a right wing persuasion (granted this isn't always the case) are usually the ones complaining about the price of essential commodities, lately, in particular oil (petrol).

My political leanings I'd argue are relatively benign. I'm happy being called a one issue dreamer (or whatever) - most of what goes on in politics I find quite trite and banal. I view politicians (and politics, hell - western style capitalistic free market based democracies) as typically the problem, never be the solution.

I do notice however that the more left wing leaning argue - this is an expected fact (ie. higher and increasing fossil fuel costs) or maybe it's just stereotypically attributed to this crowd.

Yet most often the same people that complain about the high price are those that would vehemently defend a free market. Evidence? shit no - it's a purely anecdotal observation.

Actually I'm quite impressed that you have taken this stance. And I've always suspected the market will provide (rickshaws and scooters come to mind) as oil screams out beyond $100 per barrel within the next couple of years.
Just as cannabilism is substituted in the absense of a good supply of meat. (don't laugh, there are plenty of examples in anthropology).

12/13/2005 05:48:00 pm  
Blogger libertyscott said...

In response to James - yes, abolish all subsidies to the energy sector. The government shouldn't tax or subsidise any energy sources.

12/13/2005 10:08:00 pm  
Anonymous Anonymous said...

PC, I'm assuming you also support the actions corporations use in third world countries to maintain oil contracts(theft, murder, rape etc...)? Gotta love that free market.

12/14/2005 03:22:00 am  
Blogger PC said...

"PC, I'm assuming you also support the actions corporations use in third world countries to maintain oil contracts(theft, murder, rape etc...)? Gotta love that free market."

If they do, then no I don't. As I'm sure you know. Libertarians are against the initiation of force, and for the rule of law to protect against actionss such as those you describe. As I suspect you know.

Libertarians are certainly against a free market in force as you describe; perhaps you should be talking to an anarchist. Or Keith Locke.

12/14/2005 06:10:00 am  
Blogger Sean said...

The oil companies don't control the price of oil - or actually own most of the supply. The main reason oil prices are as high is because they were so low in the previous decade. During that time, it wasn't a money making proposition to go looking for more and the exploration/development infrastructure atrophied. This will take time to rebuild - and higher profits will help. The last thing we need is more government interference (read taxes - as they are incapable of doing anything else). While taxes do reduce consumption - they do nothing to encourage supply - high prices and profits do. So, if you want lower oil prices in the future, make sure it's the oil companies that get the money now - not a bunch of shiftless bureaucrats. Mind you, it would help if the oil companies were allowed to look for oil where most of it is found (the Middle East) rather than spending most of their time drilling away in Canada and the US - but that's another subject entirely (best left for the 'peak oil' delusionists).

10/18/2006 05:34:00 pm  

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