Wednesday, March 26, 2008

Obama and the Oil Market

Since we're on the topic of the government solving problems caused by governemnt, this story from the Obama campaign seems appropriate:

WASHINGTON (Reuters) - Democrat Barack Obama would take an active role in U.S. oil markets as president, tackling concerns about the dominance of large oil companies and eyeing the Strategic Petroleum Reserve as a potential weapon to combat high prices, his top energy adviser said.

Another politician who wants to repeal the law of supply and demand. Geez, don't any of these guys take economics classes? From carbon trading to a windfall profits tax, Obama hits all the right notes:

Grumet, head of the Washington-based Bipartisan Policy Center in addition to advising the Obama campaign, said the oil industry had "concentrated incredible market power in a small number of companies" in a way that caused alarm.

"Senator Obama has a deep concern that the consolidation of the industry -- these national mergers, you know, that were allowed under both Clinton and Bush administrations -- are a cause for some concern," he said.

He said an Obama administration would examine "whether these mergers and consolidations have decreased competition in a way, concentrated market power in a way, that is undermining to consumers."

The power in the oil industry is not concentrated in the hands of private oil companies. The power in the oil industry is in the hands of governments - mostly ones that are not friendly to the US. Approximately 80% of the world's oil reserves are controlled by governments. Why would Obama single out the private companies for punishment?

With oil prices at record highs, Grumet said Obama would seek to tax the "windfall" profits that oil companies are making - a threat that Clinton has also made.

The oil industry has profit margins of less than 10%. Our governments (federal, state and local) make more off a gallon of gasoline than the oil companies. Why not reduce the tax on gasoline if you are worried about the price? How will taking profits from oil companies increase the supply of oil?

Oil prices are high primarily because the Federal Reserve has devalued the dollar. Oil producing countries will not just accept a lower price for their goods so they take actions to raise the price in dollars. Another consequence of excessive monetary pumping is that more money is available for speculators to spend in the oil market. The price of oil can be brought down by raising the value of the dollar.

Another reason oil prices are high and we have to depend on the kindness of foreigners for oil is that government will not allow US oil companies to exploit the resources we have here. We haven't built a new refinery in this country in over 30 years; of course gas prices are high.

The law of supply and demand cannot be repealed by politicians. If you want the price of oil to fall, increase the supply of the stuff (or alternatively, decrease the supply of dollars). You can't do that by taking money from oil companies and wasting it on government sponsored alternative fuel programs. We tried that back in the 70s with Synfuel which turned out to be a giant waste of tax dollars. And it won't work now.


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