During the energy crisis of the 1970s, and again in the last 5 years, Congress b
ID: 1177558 • Letter: D
Question
During the energy crisis of the 1970s, and again in the last 5 years, Congress bemoaned the price gouging and windfall profits of the major oil companies. In the 1970s Congress imposed an %u201Cexcess profits tax%u201D on these companies. It did not do so this time? What does this change show about how our understanding of the way the price system works to allocate resources has evolved? If excess profits are taxed away, where will oil companies get the money to fund new exploration and development of oil properties? Does it matter if these price increases are demand or supply induced?
Explanation / Answer
no.
The planet earth (you're riding it through space at this very moment!) is struggling to meet our demand for oil. Screaming about the pain of high gasoline prices will not magically make God insert more oil into the ground. Get used to it, get into rehab, go see your therapist, get a hybrid or a biodiesel car or, better still, a bicycle - but, whatever you do, get over it. The era of cheap oil and gasoline is dead. There is no "gasoline price gouging" in the United States, or anywhere. For all of the bloviating by front pagers and other various and sundry Kossacks about "gas price gouging", you'd think there was a regular old populist revolution gettin' revved up around here. We're gonna line up our Subarus and Golfs and Hyundais and, yes, our Priuses, and all go drive down and storm the local Chevron or Conoco or Stinker or whatever and nationalize our rightful share of Houston's deadly cocktail. Message to all of you: put down the car keys and step away from the ignition. This is going to hurt. A Beer Analogy To start simply: American oil companies have about as much to do with the price of oil as Preznit Bubblehead has to do with spreading democracy. It's very simple, really: while America uses 25 percent of the world's oil, we control just 3 percent of global supply. While American oil companies may develop oil fields all over the world, they mostly only actually OWN the oil they've leased from the U.S. government (at rock-bottom prices, I might add). For those of you who studied party economics in college, an analogy: if you have 12 beers, and your friend has only one, and then your friend drinks his beer, how much are your 12 beers worth? The answer: whatever your friend is willing to pay for them. America has drunk its beer. In fact, America drank its beer way back in the 1970's - that's when domestic oil production peaked, and has been in gradual decline ever since. So all those domestic oil fields that Big Oil gets for cheap from Uncle Sam don't add up to much anymore. And, for the most part ever since the U.S. peak, OPEC (that would be the Organization of Countries America Has Invaded, Would Like to Invade, or Won't Get Around to Invading On Account of They Own Our Asses) has set the price of oil. In the old days, if OPEC wanted oil to be cheap to, say, weaken the Soviet Union in the late 1980's ... oila! Oil drops to below $10 a barrel, and the oil-export-dependent Soviet economy collapses. If OPEC gets pissed about American policy toward Palestine, or Venezuela has a revolution, or a Nigerian dictator farts, or Dubai needs to build a new half-million-square-foot, indoor, artificial ski slope for the kids to play in, oil prices climb. BUT ... the days of two-way (i.e. up & down) OPEC price control are quickly coming to an end. (Please go read Jerome's countdowns for all the cool charts, fun facts and fancy numbers and stuff). OPEC can't make the price of oil come down anymore. Sorry about that, but it's true. My Parent's House So how does this relate to Exxon or Chevron or Texaco, your pain at the pump, and why there's no gas price gouging? An explanation, by way of another analogy: My parents bought their house in Washington, DC's Cleveland Park neighborhood in 1972 for about $40,000. Back then, the city was sort of a mess, and the neighborhood - while it had some tony areas - was mostly inhabited by middle-class government civil-service types, small-time lawyers, artists, school teachers etc. Skip to 2006. DC has undergone a major real-estate boom. That medium-sized house in Cleveland Park is now worth well over a million. What did my parents do to earn this windfall? Not much. My mom still complains about the hideous, browning (but original!) 1960's linoleum in the kitchen. The bathrooms are falling apart. The yard is smallish but nice, and they finished the concrete-walled basement when I hit high school so we could go nuts without driving them nuts. But, with the exception of a few new coats of paint, a heat pump and a walk-in closet, they haven't really done enough work to justify a 3000-5000 percent appreciation of their home. That house is worth what it is worth because so many people want to live in Cleveland Park, but so few people are selling homes there.
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