Thursday, May 22, 2008

Oily liars

The other day, New Zealand’s TV One News reported on the rising costs of petrol, recreating almost directly an American CBS News report in which they played 2005 person-at-the-pump interviews about high prices. The report quoted—without a hint of irony—oil companies declaring that they weren’t gouging New Zealand drivers with high profits, but that they were subject to the same increasing costs as in other countries.

The same sick joke was played out in front of the US Senate. Dick Durbin, the US Senator form my home state of Illinois, was one of several Senators to grill oil company executives over their high prices. “Is there anybody here who has any concerns about what you’re doing to this country?” he asked.

Some oil executive (doesn’t matter who it was, since they all say the same thing) replied that it wasn’t their high profits driving fuel prices higher, but soaring worldwide demand. They stick to that line because—in a literalist sense—it’s true. But that doesn’t make it the truth.

The huge demand for petroleum in China and India, along with the continued high demand in Western countries, has been met with flat supply on purpose: The oil producing nations aren’t increasing production, but, if anything, suppressing it to drive up the cost of petroleum. In addition, refining capacity, especially for the United States, hasn’t increased. All of that has, as the oil companies say, driven up prices. That much is true.

However, as the prices soar, so, too, do the profits of the oil companies. As they reach ever more obscene profit levels, ordinary people have a right to wonder why they’re allowed to get away with that. After all, it’s not like they’ve done anything to deserve the higher profits, they just automatically go up as the price does.

So when the oil industry says their profits aren’t causing soaring prices at the pump, they may be accurate, but they’re not being truthful. They could very well cut their profits to slow rising prices, but their shareholders would sack them if they tried to act as if they had, you know, an ounce of humanity.

We all know that whatever the corporate propaganda says, oil company profits are, in fact, helping to squeeze ordinary consumers so that shareholders can get rich. Sometimes, it seems, it’s possible to tell the truth and still lie.


Anonymous said...

I can't help thinking this is a good thing -- instead of cost rising more subtly over time we get noticeable effect which would be more likely to force people into examining energy use and policies.

Oil cpys are doing what they're designed to do -- don't get mad at donkeys because they don't know how to fly.

Anonymous said...

I'm probably being a little harsh but it's because coming from the US South I know so many folks who feel it's the govt's job to make sure they can afford to drive single passenger commuter trucks that get 10miles/gallon 60 miles each way to and from their office jobs.

Jason in DC said...

I agree that the oil companies could take a little less in profit and lower the cost of gas a little. But that's not going to solve the long term problem. The US has to come to grips with the fact that we are addicted to oil. And I use that term on purpose because that is what we are addicts.

Instead of members of congress holding hearings to berate oil executive, how about coming up with ideas on how the country can kick the habit of oil. But that might actually be hard and they certainly wouldn't want to do that.

Arthur Schenck said...

Reed: In a perfect world, I'd agree, and images of America's "soccer Moms" moaning because their giant SUVs cost more to fill makes it hard to sympathise with ordinary people.

But this hits the poor and working classes much harder, particularly in areas where there is no--or very bad--public transport, like Auckland for example. Then, it also causes price rises in every commodity, like food and clothing, plus home energy use. The rich can absord these costs, but the further down the scale you go, the harder and harder it becomes to cope with soaring energy prices.

So while this crisis may have the beneficial result of forcing soccer Moms to ditch their SUVs for a real car, it will hit the poor and working classes very hard, with no identifiable gain for them or for society.

Jason: I agree with you. That's why I think the windfall profits tax should be directed completely to alternative energy research (with not one cent going to research biofuels made from food).

d said...

As always, this topic is a bit more complicated than "gas prices are high, and oil companies are making huge profits".

As a tax accountant - for an oil company (yes it's true!) - I have an insider's view on how money is spent and earned, at least in my company.

And it is truly complicated. I'll be writing up a blog post on the industry soon, so stay tuned.

In the meantime, I'll just point out that a company's tax return is a better gauge on just how well they are doing. Most oil companies operate in the red for years before making profits. If they did not pay taxes last year, it means they are still eating through losses created in prior years.

Arthur Schenck said...

I don't dispute the tax aspect, but my point is that their profits rise as the price of petrol rises without them doing a thing, assuming they maintain the same profit margins, which they do.

The modern business paradigm—which requires the maximum return to shareholders no matter what—is, as I've often said, what I believe is at the core of the problem: Business has no incentive to invest in the future or behave in a socially or environmentally responsible way (without government regulation) because it's against the shareholder's interest in maximising short-term profit over long-term profitability.

Without a new way of raising capital that doesn't reward greed, there's little hope this will change. So, governments must step in, and this is why I believe a windfall profits tax is needed, with the various caveats I've added before, including that the taxes not be passed on to consumers but rather come from the shareholders who are profiting.