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Tue Apr 1 20:00:00 2008
Profits Questioned
An accusatory focus on energy company profits hurts the Green cause.

Today Congress went through the familiar ritual of questioning energy companies about their high profits (stories here and here for instance).

If there was serious suspicion of collusion or other tactics to defraud customers of money, then a Congressional grilling is warranted, as well as legal charges!

Gulf rig
Image courtesy of Chad Teer (flickr)

However, it is very clear what is happening: oil is a scarce commodity. The massive drop in the dollar's worth, our high energy consumption, and dwindling supply mean that gas is more expensive to produce and harder to come by. It's a triple-whammy: production costs go up along with demand, while supply goes down. Any economist will tell you that prices go up.

And when prices and demand go up, so do profits. You aren't running the business correctly if that's not true. All of these companies are facing the usual questions of "do I cut prices to beat my competitors and steal more market share, or will I lose more money that way?" And the equations get harder if you have less control over supply (they can't lower prices and increase supply, since supply is restricted).

Incidentally, there are some amazing resources for examining how much oil we use. Check out this site for graphs of per-capita energy consumption. Very small states with lots of oil have crazy consumption ratios. If you disregard them, the US and Canada are clearly far above standard industrialized countries in terms of consumption, running 25-50% higher or more than most of Europe!

This page, while atrociously designed and in places slightly out-of-date (but only in places), has fascinating statistics on prices and proven reserves. Also see the author's statement (halfway down, titled "Personal note about bias"), he gives an interesting account of his own shift in thinking. And he links to this interview which is one of the scarier interviews I've read in a while.

For examples of how much the dollar has declined, check out the value of the Euro over the past 5 years, which has climbed as the dollar has weakened. Or look at the value of the dollar vs. the Canadian dollar, which shows how the Canadian dollar is now worth more than the US dollar. Remember, exchange rates are fundamentally a measure of foreign confidence in our economy. Given our trade deficits, inability to control spending, and absurdly low interest rates, most of the world thinks we are a dubious investment.

So, due to poor management of the economy (devaluing the dollar) and poor management of energy consumption (we keep consuming more oil), gasoline prices and therefore profits have gone up. What good does it do to grill the energy company execs?

It is purely political staging. People are annoyed about high oil prices, and members of congress know it is easier to harangue the energy company CEOs than actually fix the real problems (limited supply and increasing consumption).

This is too bad, because it deflects attention from the real problems and their fixes.

The problem of high oil prices can be fixed! The solution is to consume less oil (duh). Oddly, Congress seems to not be talking about that.

This page, from the Natural Resources Defense Council, is old but nonetheless has a straightforward solution. Bump up the required mileage! That is, force an increase in fuel efficiency. This worked well in the 70s, and can work again now.

Curiously, the energy corporation CEO-bashing continues. Get used to it, because as oil supplies dwindle and our consumption increases, gas prices will continue to skyrocket. Hopefully a few members of Congress will decide to fix the problem rather than grandstand.

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