Oil in the US

            Its interesting to see the divide that exists between the public as exemplified by congress and the business world. In many cases, NAFTA for one, it seems that people love to jump at all the wrong places for solutions. In the case of NAFTA, the general public feels negatively towards a deal that benefits both them and others because of the displacement of jobs overseas. In many cases, people look towards those that benefit as the causation of the problem as opposed to looking towards the system and figuring out true solutions. This is what is happening now with the Oil fight, where individuals in Congress seek to blame corporations making exceptional profits as opposed to looking towards the fundamental problems within the industry from those which understand the industry best – the corporation.

            Within their testimony to congress, Oil Executives point out that the true problem of the price of oil is the input of Crude. In fact, after analyzing this issue for a Federal Reserve Project back in November, it was interesting that while the price of crude has in general risen, the price at the pump only just now has become a huge public issue. While summer does represent peak price at the pump, the problems with Oil have been ongoing for awhile. Interesting, executives point out that refining does not seem to be the huge problem that it is given that refineries are still not at a 100% capacity point (meaning that they can still take some crude and make it into gasoline) so that in reality it would be the price of crude that would be causing the increase in the price at the pump. Demand will continue to go beyond supply as time goes on…. The real issue here is just that, demand is too high and many Arab nations continue to hold a position of being able to enact influence on this problem.

 

            But beyond the politics of this issue, we can look towards what would in theory happen if the Arab nations did not have their control. We would continue to pump more and more from wells until it became uneconomical. The real issue with oil and energy in the US is lack of move towards renewables themselves. For years we have continued to price oil and other hydrocarbons so low that other forms of energy have been always untenable for research and use. In reality, we should as a nation be pushing towards independence in terms of energy and specifically in terms of automobiles.

 

            The fact is, Oil companies are not necessarily the problem. They exist in order to take inputs (like crude) and make outputs (like various hydrocarbon based items) and bring those outputs to market. I do think there are some issues with the profits. In some ways, you can view profits specifically as an allocation of resources from the individual to the corporation by way of price. In this case, high price at the pump in relation to cost would create the large profits, but it does not necessarily mean this pricing is wrong. In fact, if companies price their product at cost they create themselves an inability to operate going forward. In many ways, the government may want to look intensely into the specifics of the oil industry and figure out if free market economics is becoming an issue here. Perhaps deregulation and a push towards free markets has caused companies to have undue influence on the open market with pricing power, or perhaps the industry itself is not doing the best to allocate resources. This is definitely a problem that deserves a much more thorough look than to blame companies for making good profits.