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2008-08-03 BACK
They've "Got" Us Over A Barrel!!
They've "Got" Us Over A Barrel!! This article originally appeared in the Texarkana Gazette on August 3, 2008 Larry Davis, Ph.D. Professor of Economics & Management, College of Business, Texas A & M University-Texarkana When I was a graduate student as an economics major, one of my professors said to a class, "tell me the structure of an industry and I'll tell you how it treats its customers." He was referring to the four economic structures of industries: pure competition, monopolistic competition, oligopoly, and monopoly. Monopoly exists when a single company has sufficient control over a product to determine the terms of consumer access to it. Economic competition for that product is absent. Because a single firm controls the total supply, it is able to exert significant control over the product price by determining the quantity supplied to consumers which allows the possible exploitation of those consumers. An oligopoly, characterized by only a few suppliers, is very similar to a monopoly and often acts like one. In some situations, the firms of an oligopoly may collude to exploit consumers by restricting the product supply and raising prices in a similar way as a monopoly. Considering the circumstances of current retail prices for gasoline which are hovering around $4.00 per gallon and diesel fuel with prices exceeding $4.50 per gallon in this area, I have heard a mix of consumers, journalists and elected officials dismiss the matter by accepting that fuel prices are the result of the interaction of supply and demand. That, in itself, is true, but it appears that those making such comments do not understand the basics of supply and demand. The situation is complex at best. A starting point for analysis might be the OPEC cartel that has and exercises the power to influence the upward movement of the price of a barrel of oil by making the decision to limit their output of oil. That is fundamental economics. At the next level, consider the two sides of the fuel market. On the consumer demand side, there are millions who have neither individual nor collective power to influence prices. On the supply side, however, there are the few major oil companies including Exxon Mobil, Chevron, Shell, British Petroleum, Occidental Petroleum, Sunoco, and Valero that make up an oligopolistic industry with power to control the supply of their fuel products and, thereby, inflate prices to retailers that are passed on to consumers. Maybe these distributors, not the retailers, have crossed the threshold into consumer exploitation. One writer has referred to Exxon as "perhaps the most ruthless privately held energy company in the world." Looking back to 2005, Exxon, this country's largest oil company, posted a $36 billion profit, the largest for any U. S. company ever and its CEO, Lee Raymond, defended such profits by saying that "gas prices were high because of global supply and demand" while not mentioning that the OPEC cartel and the oligopoly industry that Exxon is a part of, exercises a significant control over the supply of fuel. In 2004, Raymond's bonus exceeded $3.6 million and, then in 2006, Exxon gave him a retirement package valued at almost $400 million, one of the largest ever given. This reminds me of the phrase, ". . . laughing all the way to the bank." Exxon's new record profits for 2007 were $40.6 billion and Raymond's successor CEO received an 18% raise to $21.7 million. For the same year, Chevron Corporation, the second largest oil company in the U.S., reported profits of $18.7 billion. Just recently, to add insult to injury to consumers and taxpayers, top oil company executives presented their request for $18 billion in tax payer funded subsidies to a committee of the U. S. House of Representatives. At a minimum, it seems that Congress should eliminate these subsidies. Historically, to discourage consumer exploitation, the U. S. Congress passed both the Sherman Antitrust Act (1890) the Clayton Antitrust Act (1914) that sought to prevent anticompetitive practices in business and outlawed practices considered harmful to consumers. For example, a provision of Section 2 of the Clayton Act is that "every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, . . . shall be deemed guilty of and felony. . ." Although several prominent companies have been fined and convicted business executives have served prison terms for violations of the Sherman and Clayton Acts, given the political and judicial climates in recent years, the Antitrust Division of the U. S. Department of Justice seems to not be inclined to pursue market manipulation or price fixing as possible violations of the antitrust laws as aggressively as it once did. Considering the elements at play in the current fuel markets, the resulting gasoline and diesel prices that greet fuel retailers and, subsequently, consumers at the pump, and the patronizing explanations coming from the major oil companies, I'm wondering if fuel price determination has moved beyond an interaction of supply and demand to consumer exploitation and even to extortion? That could be determined by a Justice Department investigation. Maybe, as a result, we could finally get some relief! As Dr. Ed Bashaw invited at the end of his last article, I, likewise, would welcome your feedback: larry.davis@tamut.edu.
TOP
They've "Got" Us Over A Barrel!!
They've "Got" Us Over A Barrel!! This article originally appeared in the Texarkana Gazette on August 3, 2008 Larry Davis, Ph.D. Professor of Economics & Management, College of Business, Texas A & M University-Texarkana When I was a graduate student as an economics major, one of my professors said to a class, "tell me the structure of an industry and I'll tell you how it treats its customers." He was referring to the four economic structures of industries: pure competition, monopolistic competition, oligopoly, and monopoly. Monopoly exists when a single company has sufficient control over a product to determine the terms of consumer access to it. Economic competition for that product is absent. Because a single firm controls the total supply, it is able to exert significant control over the product price by determining the quantity supplied to consumers which allows the possible exploitation of those consumers. An oligopoly, characterized by only a few suppliers, is very similar to a monopoly and often acts like one. In some situations, the firms of an oligopoly may collude to exploit consumers by restricting the product supply and raising prices in a similar way as a monopoly. Considering the circumstances of current retail prices for gasoline which are hovering around $4.00 per gallon and diesel fuel with prices exceeding $4.50 per gallon in this area, I have heard a mix of consumers, journalists and elected officials dismiss the matter by accepting that fuel prices are the result of the interaction of supply and demand. That, in itself, is true, but it appears that those making such comments do not understand the basics of supply and demand. The situation is complex at best. A starting point for analysis might be the OPEC cartel that has and exercises the power to influence the upward movement of the price of a barrel of oil by making the decision to limit their output of oil. That is fundamental economics. At the next level, consider the two sides of the fuel market. On the consumer demand side, there are millions who have neither individual nor collective power to influence prices. On the supply side, however, there are the few major oil companies including Exxon Mobil, Chevron, Shell, British Petroleum, Occidental Petroleum, Sunoco, and Valero that make up an oligopolistic industry with power to control the supply of their fuel products and, thereby, inflate prices to retailers that are passed on to consumers. Maybe these distributors, not the retailers, have crossed the threshold into consumer exploitation. One writer has referred to Exxon as "perhaps the most ruthless privately held energy company in the world." Looking back to 2005, Exxon, this country's largest oil company, posted a $36 billion profit, the largest for any U. S. company ever and its CEO, Lee Raymond, defended such profits by saying that "gas prices were high because of global supply and demand" while not mentioning that the OPEC cartel and the oligopoly industry that Exxon is a part of, exercises a significant control over the supply of fuel. In 2004, Raymond's bonus exceeded $3.6 million and, then in 2006, Exxon gave him a retirement package valued at almost $400 million, one of the largest ever given. This reminds me of the phrase, ". . . laughing all the way to the bank." Exxon's new record profits for 2007 were $40.6 billion and Raymond's successor CEO received an 18% raise to $21.7 million. For the same year, Chevron Corporation, the second largest oil company in the U.S., reported profits of $18.7 billion. Just recently, to add insult to injury to consumers and taxpayers, top oil company executives presented their request for $18 billion in tax payer funded subsidies to a committee of the U. S. House of Representatives. At a minimum, it seems that Congress should eliminate these subsidies. Historically, to discourage consumer exploitation, the U. S. Congress passed both the Sherman Antitrust Act (1890) the Clayton Antitrust Act (1914) that sought to prevent anticompetitive practices in business and outlawed practices considered harmful to consumers. For example, a provision of Section 2 of the Clayton Act is that "every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, . . . shall be deemed guilty of and felony. . ." Although several prominent companies have been fined and convicted business executives have served prison terms for violations of the Sherman and Clayton Acts, given the political and judicial climates in recent years, the Antitrust Division of the U. S. Department of Justice seems to not be inclined to pursue market manipulation or price fixing as possible violations of the antitrust laws as aggressively as it once did. Considering the elements at play in the current fuel markets, the resulting gasoline and diesel prices that greet fuel retailers and, subsequently, consumers at the pump, and the patronizing explanations coming from the major oil companies, I'm wondering if fuel price determination has moved beyond an interaction of supply and demand to consumer exploitation and even to extortion? That could be determined by a Justice Department investigation. Maybe, as a result, we could finally get some relief! As Dr. Ed Bashaw invited at the end of his last article, I, likewise, would welcome your feedback: larry.davis@tamut.edu.
TOP