The Finch Formerly Known As Gold

6 September 2005

Where the gouges are

There's a worthy debate going on between Mike and Sean on the dodgy subject of price gouging.

I tend toward the free-market approach in such matters — the value of something is equal to what someone is willing to pay for it — but Mike wonders just how free a market we have:

I'm not so sure about the lack of cartels; look at the defense industry. Look at the energy industry's influence in government and guiding our nation's energy policy behind closed doors. Look at the circle of business executives serving as Boards of Directors of various corporations, who richly compensate executives (each other) regardless of performance. And whose success is often determined by government hand-outs; welfare, if you will. Using your definition of price gouging, some folks might say the huge profits and executive compensation made during a time of war is gouging. The gap between executive compensation and hourly workers' continues to widen. But how do we define "excessive profit"?

Back during the Energy Crises of the late 20th century, there was a lot of thundering about "obscene" profits. Now to my way of thinking, losses are a lot more obscene than profits, but it was pretty clear that a very large number of people felt that they were being screwed by Big Oil, and I suspect that the same situation persists today. I don't believe that Big Oil, at least the domestic manifestation of it, is particularly cartel-like: most of these firms will happily stab each other in the back for a couple of points of market share. (Not that this has never happened in OPEC.) Defense contractors, however, work on a different dynamic; there is seldom competition on a given project, and they tend to build stuff for cost plus. Needless to say, "plus" leaves all kinds of opportunities to fatten the take at the expense of the taxpayers. Not that they make a habit of this, of course. (And I'm reasonably certain that they can explain away every last dime.)

Bottom line: I feel less gouged by $3.10 gas than I do by a $600 hammer, even if the hammer is mil-spec. Your mileage may vary.

Posted at 10:00 AM to Political Science Fiction

Well, seeking a control over the supply in an effort to increase the price is natural for any business. The difference I see is the commodity in which you deal.

Coffee, orange juice, corn, sugar, gasoline all of these are commodities, but only one of them has a direct effect on our economic and national security (though some would argue for coffee and/or orange juice).

I don't believe the oil companies have actually conspired to create a case of $3.00 gas, but I do believe that they, independently, worked towards razor thin refinery capacity in order to maximize their profit.

And now, I believe that it has spun out of their control entirely. Rather than "Hope for the best, but plan for the worst" we've end up with "Hope for the best, plan for the best, freak out when the worst actually comes to pass and claim that 'nobody could have foreseen this'".

Posted by: Mel at 11:07 AM on 6 September 2005

I don't believe the oil companies have actually conspired to create a case of $3.00 gas, but I do believe that they, independently, worked towards razor thin refinery capacity in order to maximize their profit.

I don't, and your next paragraph is why:

And now, I believe that it has spun out of their control entirely.

That tends to happen when you dance on the edge. It's why most corporate types would make Pooh's friend Piglet look like Evel Knievel: risks tend not to remain mere risks -- they tend to become damages.

And damages make a much bigger dent on the bottom line than whatever gain you think they might have hoped for with "razor-thin refinery capacity."

The problem is that with the designer-fuel mandate from EPA, refiners don't have a realistic gauge for how much capacity is called for. In the summer we have too little -- in the winter, too much.

The feds created that cute little dilemma, and the feds need to kill it by killing the fuel-blend regs.

Posted by: McGehee at 2:28 PM on 6 September 2005

Oh I agree with the fuel-blend issues, the constraints caused by all sorts of EPA regs and the like. As a matter of fact, those very regulations can be our savior at this point. By waiving those fuel regs for say, three years, we can effectively raise the capacity of our existing refineries and make up for the loss of those that will remain shut down for a while. It will have a calming effect on the market as well as the public. Yes, they've already issued waivers until Sept. 15th, but those will have no real effect. The have to be long-term.

OK, I feel myself preparing to go into a long one here, so I'll stop and say this. This situation was the entire reason for me starting my own site. There's a bunch there. I don't claim to be an expert just a guy. But one p*ssed off guy due to the fact that we've let ourselves get to this point (no extra capacity available).

The short of it is this: Oil companies have been restrained by EPA regs. They haven't built a new refinery in years because of regs and the NIMBY problem. Our refineries have been able to achieve higher utilization percentages during this time, so they've been able to meet demand. That increase came on gradually through the last decade or so. We got used to running near max as a "normal situation", even as fuel-blend regs steadily increased in complexity. I do believe the oil companies started noticing that these "restrictions" were actually leading them towards higher profits, due to increased market volatility. I believe they protested such regs much like I would if you insisted that I MUST have one more dish of ice cream (oh please no, I can't take another bite. OK, just a little). I mean hey, a little data mining would have easily shown them where any profit increase was coming from.

So now you have umpteen different fuel flavors and a system running near max capacity. The enviros are happy 'cause "we're cleaning the air" and the oil companies are happy 'cause "Huh, would you look at that - a higher profit margin". Add liberal amounts of Katrina and shake Poof. 10% of the refining capacity shut down for at least a time. 5% of that comes back up (yeah!) but the other 5% remains a "weeks or months" situation. We didn't have 5% to give. I don't think it was planned as some large conspiracy, I just think it turned out how it did.

As for oil prices coming down: They are not and have not been the major driver of gasoline prices for a while (sure, they have their effect). The real issue that has been causing the market volatility has been our refining capacity - and lack thereof.

The Boy Scouts say "Be Prepared". We weren't ... not even for a large fire at a major refinery, let alone Katrina.

Well, so much for stopping.

Posted by: Mel at 4:35 PM on 6 September 2005

Heh. I like a guy who gets going and actually has something worth saying. Why do you think I read Dustbury?

Posted by: McGehee at 8:12 AM on 7 September 2005

I have no idea why anybody reads this stuff, truth be told.

Posted by: CGHill at 8:08 PM on 7 September 2005

*I* read it because you have a more level-headed take on things than -any- of the Talking Buttheads on TV.

Posted by: unimpressed at 1:33 PM on 8 September 2005