Big Oil defends profits before irate senators

radapharoah · May 24, 2008

demand strikes again

Economist

The synchronised jump in global food prices suggests that there is more to the story than disruptions to supply. Prices are also rising partly because loose monetary conditions in emerging economies have boosted domestic demand. These economies have accounted for over 90% of the increase in global consumption of oil and metals since 2002 and for 80% of the rise in demand for grain. This partly reflects long-term structural forces, but it is also the product of a money-fuelled cyclical boom. Peter Morgan, of HSBC, says that the initial shock to food prices may have come from the supply side, but the strength of income and money growth helps to validate higher prices. Were monetary conditions tighter, rises in food prices might be offset by declines elsewhere, keeping inflation under control.
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still dont believe in supply and demand?

Refman · May 24, 2008

"The_Conquistador" is having delusions of grandeur again.

Supermac34 · May 27, 2008

When legitimate companies in America get punitive measures taken to them by Congress for making a 10-12% profit is a sad day.

weslinder · May 27, 2008

http://mises.org/story/1962

Four Thousand Years of Price Control
Posted on 11/10/2005 by Thomas J. DiLorenzo

Supply and demand have been allowed to work — at least in a limited way — in energy markets, resulting in ups and downs in gasoline prices. Strong demand coupled with regulatory supply restrictions that were worsened by several hurricanes caused gasoline prices to go up. Then as hurricane-damaged refineries were repaired, gas prices began to plummet.

There have been no significant shortages, thanks to the absence of price controls, but Congress is working diligently to put an end to that outcome. Urged on by an economically ignorant public, Congress recently held one of its periodic Grand Inquisitions of oil company executives to demand an answer to the question: "How dare you profit from the American free enterprise system?"

Accusations of "price gouging" — i.e. allowing market forces to set prices — abound, as do calls for price controls. They aren't always called "price controls," but some slick euphemism such as "anti-price-gouging legislation." It's the same thing.

The case against price controls is not merely an academic exercise, restricted to economics textbooks. There is a four-thousand-year historical record of economic catastrophe after catastrophe caused by price controls. This record is partly documented in an excellent book entitled Forty Centuries of Wage and Price Controls by Robert Schuettinger and Eamon Butler, first published in 1979.

The authors begin by quoting Jean-Philippe Levy, author of The Economic Life of the Ancient World,as noting that in Egypt during the Third Century B.C. "there was a real omnipresence of the state" in regulating grain production and distribution. "[A]ll prices were fixed by fiat at all levels." This "control took on frightening proportions. There was a whole army of inspectors."

Egyptian farmers became so infuriated with the price control inspectors that many of them simply left their farms. By the end of the century the "Egyptian economy collapsed as did her political stability."

In Babylon some 4,000 years ago the Code of Hammurabi was a maze of price control regulations. "If a man hire a field-labourer, he shall give him eight gur of corn per annum"; "If a man hire a herdsman, he shall give him six gur of corn per annum"; "If a man hire a sixty-ton boat, he shall give a sixth part of a shekel of silver per diem for her hire." And on and on and on. Such laws "smothered economic progress in the empire for many centuries," as the historical record describes. Once these laws were laid down "there was a remarkable change in the fortunes of the people."

Ancient Greece also imposed price controls on grain and established "an army of grain inspectors appointed for the purpose of setting the price of grain at a level the Athenian government thought to be just." Greek price controls inevitably led to grain shortages, but ancient entrepreneurs saved thousands from starvation by evading these unjust laws. Despite the imposition of the death penalty for evading Greek price control laws, the laws "were almost impossible to enforce." The shortages created by the price control laws created black market profit opportunities, to the great benefit of the public.

In 284 A.D. the Roman emperor Diocletian created inflation by placing too much money in circulation, and then "fixed the maximum prices at which beef, grain, eggs, clothing and other articles could be sold, and prescribed the penalty of death for anyone who disposed of his wares at a higher figure." The results, as Schuettinger and Butler explain, quoting an ancient historian, were that "the people brought provisions no more to markets, since they could not get a reasonable price for them and this increased the dearth so much, that at last after many had died by it, the law itself was set aside."

Moving closer to modern times, George Washington's revolutionary army nearly starved to death in the field thanks to price controls on food that were imposed by Pennsylvania and other colonial governments. Pennsylvania specifically imposed price controls on "those commodities needed for use by the army," creating disastrous shortages of everything needed by the army. The Continental Congress wisely adopted an anti-price-control resolution on June 4, 1778 that read: "Whereas it hath been found by experience that limitations upon the prices of commodities are not only ineffectual for the purpose proposed, but likewise productive of very evil consequences--resolved, that it be recommended to the several states to repeal or suspend all laws limiting, regulating or restraining the Price of any Article." And, write Schuettinger and Butler, "By the fall of 1778 the army was fairly well provided for as a direct result of this change in policy."

French politicians repeated the same mistakes after their revolution, putting into place the "Law of the Maximum" in 1793, which first imposed price controls on grain, and then on a long list of other items. Predictably, "in some [French] towns, the people were so badly fed that they were collapsing in the streets from lack of nourishment." A delegation from various provinces wrote to the government in Paris that before the new price control law, "our markets were supplied, but as soon as we fixed the price of wheat and rye we saw no more of those grains. The other kinds not subject to the maximum were the only ones brought in." The French government was forced to abolish its evil price control law after it had literally killed thousands. When Robespierre was being carried through the streets of Paris on the way to his execution the crowds shouted, "There goes the dirty Maximum!" If only this were a lesson learned by contemporary politicians.

At the end of World War II American central planners were even more totalitarian when it came to economic policy than were the former Nazis. During the post-war occupation of Germany, American "planners" rather liked the Nazi economic controls, including price controls, that were in fact preventing economic recovery. The notorious Nazi Hermann Goering even lectured the American war correspondent Henry Taylor about it! As recounted by Schuettinger and Butler, Goering said:

Your America is doing many things in the economic field which we found out caused us so much trouble. You are trying to control peoples' wages and prices — peoples' work. If you do that you must control peoples' lives. And no country can do that part way. I tried and it failed. Nor can any country do it all the way either. I tried that too and it failed. You are no better planners than we. I should think your economists would read what happened here.

Price controls were finally ended in Germany by Economic Minister Ludwig Erhard in 1948, on a Sunday, when the American occupation authorities would be out of their offices and unable to stop him. This spawned the "German economic miracle."

Price controls were the cause of the "energy crisis" of the 1970s and of the California energy crisis of the 1990s (only the wholesale price of electricity was deregulated there; controls were placed on retail prices). For more than four thousand years, dictators, despots, and politicians of all stripes have viewed price controls as the ultimate "something for nothing" promise to the public.

With the wave of a hand, or the flash of a legislative pen, they promise to make everything cheaper. And for more than four thousand years the results have been exactly the same: shortages, sometimes of catastrophic consequence; deterioration of product quality; the proliferation of black markets on which prices are actually higher and bribery is rampant; destruction of a nation's productive capacity in the industries where prices are controlled; gross distortions of markets; the creation of oppressive and tyrannical price control bureaucracies; and a dangerous concentration of political power in the hands of the price controllers.

This is what the economically ignorant among the American public is clamoring for Congress to do with regard to today's energy industry. Let's hope that the recent "hearings" in Congress on the topic of gasoline prices were just another public relations charade.
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Invisible Fan · May 27, 2008

Is there any particular benefit to keep government subsidies to oil companies?

robbie380 · May 27, 2008

this video gets a little technical but it is one of the great cnbc commentators breaking down the speculation myth

http://www.cnbc.com/id/15840232?video=753754816

radapharoah · May 28, 2008

Im a huge supporter of the supply and demand theory but Im starting to believe that our weak dollar has a lot more to do with skyrocketing oil prices than our government would like us to believe. Really the Data is out there and it overwhelmingly supports the “petrodollars inflation” theory and debunks the “peak oil” theory.

Oil is a critical economic and strategic resource - because every country needs oil to develop and prosper, they also need U.S. Dollars. This has raised the demand, and value, of the Dollar worldwide for several decades.
However, the U.S. Dollar is continuously devalued (inflated) by Federal Reserve and U.S. government monetary policies. Due to recent hyper-inflation of the Dollar, oil producing nations are losing money - or rather, wealth - by selling oil in Dollars. To prevent losses, oil producing nations will sell some or all of their oil in other currencies (Euros, for example). This further devalues the Dollar, since oil buying countries no longer need them to purchase oil.
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It seems like this is a very under reported aspect of the big picture... The fed keeps cutting rates that surely does not help to Alleviate high oil prices. Im really getting off the bernake (cant spell his name) bandwagon

Major · May 28, 2008

radapharoah said:

Im a huge supporter of the supply and demand theory but Im starting to believe that our weak dollar has a lot more to do with skyrocketing oil prices than our government would like us to believe. Really the Data is out there and it overwhelmingly supports the “petrodollars inflation” theory and debunks the “peak oil” theory.
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Except that the dollar has been basically flat while oil has risen 20-30% over the last few months.

radapharoah · May 28, 2008

Major said:

Except that the dollar has been basically flat while oil has risen 20-30% over the last few months.
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Oil has gone from around 75 in May of last year to almost 130 a barrel this may. That’s a valuation of over 40 percent. During the same time the dollar compared to the Euro has devalued a little over 15%. That means oil producing nations who get paid in dollars are earning seeing both the money they are currently paid in devalue by 15 percent but also their reserves that they have accumulated over the years while being paid strictly in dollars. I think this aspect plays a bigger role then we are acknowledging

radapharoah · May 28, 2008

radapharoah said:

Oil has gone from around 75 in May of last year to almost 130 a barrel this may. That’s a valuation of over 40 percent. During the same time the dollar compared to the Euro has devalued a little over 15%. That means oil producing nations who get paid in dollars are earning seeing both the money they are currently paid in devalue by 15 percent but also their reserves that they have accumulated over the years while being paid strictly in dollars. I think this aspect plays a bigger role then we are acknowledging
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let me say that clearer both their reserves and their current earnings are devaluing alot

Major · May 28, 2008

radapharoah said:

Oil has gone from around 75 in May of last year to almost 130 a barrel this may. That’s a valuation of over 40 percent. During the same time the dollar compared to the Euro has devalued a little over 15%.
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While technically true that it's a valuation of "over 40 percent", it's actually an increase of 73% in the price of oil - with a 15% decline in the dollar.

There's no doubt that the dollar depreciation has had an effect - but it's only a small part of the overall increase in the price of oil. We have seen oil go from about $110 to $130 with no change in the dollar.

radapharoah · May 28, 2008

Major said:

While technically true that it's a valuation of "over 40 percent", it's actually an increase of 73% in the price of oil - with a 15% decline in the dollar.

There's no doubt that the dollar depreciation has had an effect - but it's only a small part of the overall increase in the price of oil. We have seen oil go from about $110 to $130 with no change in the dollar.
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agreed, but I do believe its playing a role

radapharoah · May 28, 2008

I dont have the figures in front of me right know...but I read somewhere that Europeans are buy oil at a price that would be equvalient to us paying 70 dollars per barrel because of their strong currency. I will have to look that up later, but if true that is very telling.

robbie380 · May 29, 2008

figured this would be the best place to put this piece of news....

crude inventories came out and they were the biggest miss that i have EVER seen by far!

they were basically expecting unchanged in crude inventories and there was actually a draw of 8.8 million barrels. also, gasoline had a draw of 3.25 million barrels versus unchanged expectation.

pgabriel · May 29, 2008

they're sayin the decrease was because of delays in unloading tankers.

robbie380 · May 29, 2008

pgabriel said:

they're sayin the decrease was because of delays in unloading tankers.
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yeah i wondered if that news would cause oil to drop...and it did. i guess i should have traded it rather than watch it drop lol.

radapharoah · May 31, 2008

Major said:

While technically true that it's a valuation of "over 40 percent", it's actually an increase of 73% in the price of oil - with a 15% decline in the dollar.

There's no doubt that the dollar depreciation has had an effect - but it's only a small part of the overall increase in the price of oil. We have seen oil go from about $110 to $130 with no change in the dollar.
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Found this tidbit from the dismal Scientist, and I think it describes the effect of the dollar depreciation.

A second broad factor behind oil's price rise is the depreciation of the U.S. dollar. The greenback's exchange value against other major world currencies peaked in 2002 and has fallen nearly 42% since then. Because international trading in crude oil is done in dollars, a weaker dollar implies that a higher oil price is needed in order to maintain the global supply and demand balance. The role of the dollar in determining oil prices was made abundantly clear last year, when crude oil rose by 9.3% in dollar terms but fell by 0.3% in euros from the prior year. Regression analysis suggests that approximately $20 of the $130 price of crude oil is being caused by the weakening of the dollar.
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radapharoah · May 31, 2008

radapharoah said:

Found this tidbit from the dismal Scientist, and I think it describes the effect of the dollar depreciation.
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In real terms, that means gas is cheaper today than it was a year ago in europe.... still dont believe in petrodollar inflation???

Ehsan · Jun 1, 2008

Major said:

Except that the dollar has been basically flat while oil has risen 20-30% over the last few months.
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Could be speculation on the dollar becoming even weaker soon. Right?

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