Big Oil Has Been Vindicated

When oil was pushing well into triple digits earlier this year, U.S. Sen. Dick Durbin, D-Ill., ripped into a panel of Big Oil executives, asking, "Does it trouble any of you when you see what you're doing to us?"

I'm not entirely sure what he meant by "doing to us," but I assume he was suggesting they were saddling the public with high oil prices, as if the CEOs had a dial on their desks used to ratchet up prices, presumably while sipping brandy and using a $100 bill to light a cigar.

Now that oil has plunged by almost two-thirds since peaking, and a gallon of gasoline can be had for under two bucks, I've yet to hear Durbin thank Big Oil for "what they've done to us," in this case ratcheting that magical dial downward.

I'm kidding, of course. I'm just trying to mock how ridiculous it was to scold companies like ExxonMobil (NYSE: XOM  ) , Chevron (NYSE: CVX  ) , and ConocoPhillips (NYSE: COP  ) -- which combined make up a spit of world oil production -- for the surge in oil prices.

Now that prices have plunged, no one seems to argue what controls prices -- supply and demand. Demand drops sharply thanks to the all-too-apparent global recession and, voila, $50-a-barrel oil! OPEC said as much when cutting production by 1.5 million barrels per day last month: "The financial crisis is already having a noticeable impact on the world economy, dampening the demand for energy, in general, and oil in particular." Surprise, surprise, supply and demand truly are what cause prices to ebb and flow.

When people are faced with a dilemma that might force them to alter their lifestyles, anyone but themselves becomes the apparent villain. Perhaps you'll remember that a mob of protesters burned an effigy of then-Federal Reserve Chairman Paul Volcker on the steps of the Capitol when he ratcheted up interest rates to wring out inflation that he had nothing to do with. The terrible irony of economic hardships like we're facing today is that the ones who can actually help solve the problem are bombarded with blame that just hampers their ability to do what's needed.

Let's also remember that if Big Oil heeded public demand to stop pouring money into dividends and share repurchases, and invest more in drilling when prices were $150 a barrel, they would have ended up blowing through mountains of cash on what would now be recognized as terrible investments.

Investing tons of money in an inflated market on the basis of short-sighted consumer demand without giving much thought to the future … hmm …. sound familiar? Substitute "SUVs" for "drilling" and you've just described part of what's flushing General Motors (NYSE: GM  ) , Ford (NYSE: F  ) , and Chrysler down the commode.

So, come on, Sen. Durbin … where's the thank you?            

Related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Motley Fool is investors writing for investors.


Read/Post Comments (15) | Recommend This Article (24)

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  • Report this Comment On November 28, 2008, at 12:13 PM, oaklandraiders wrote:

    Great article. I sent a link to the Senator.

  • Report this Comment On November 28, 2008, at 12:54 PM, justgettingbytoo wrote:

    Morgan Housel is the problem. Not recognizing that the oil companies created this mess shows the favoritism that Morgan Housel has with the oil companies with trying to blame the working public. Why doesn’t the oil company, with their excess amount of profits, pay back the Government (the people) with all the tax breaks they were given over the years?

    The price of gasoline has to go down, not because of lack of demand, the demand is there, but by the number of people out of work with no income to buy gasoline.

  • Report this Comment On November 28, 2008, at 2:59 PM, wxmanremy wrote:

    ^give me a break. so you are saying that people had no problem pouring gas into their cars when it was $3-$4/gal in the past year, but now no one is filling up at $1.50/gal because all of the sudden no one has a job? unemployment has gone up 1% in the past YEAR. credit has been frozen so people and consumers are having to change their spending habits across the board. it doesn't get more of a SUPPLY AND DEMAND issue than that.

  • Report this Comment On November 28, 2008, at 3:08 PM, TMFHousel wrote:

    justgettingbytoo,

    Thanks for your comments. I'm not following your logic here:

    "The price of gasoline has to go down, not because of lack of demand, the demand is there, but by the number of people out of work with no income to buy gasoline."

    So you're saying there's no demand, but there's still demand? And for some reason, it's my fault?

    -Morgan Housel

  • Report this Comment On November 28, 2008, at 3:12 PM, TMFJoeInvestor wrote:

    I've heard that Morgan also killed the electric car, bellbottoms, and pogs.

  • Report this Comment On November 28, 2008, at 3:13 PM, TMFHousel wrote:

    I hear Joe's a Somali pirate.

  • Report this Comment On November 28, 2008, at 4:02 PM, justgettingbytoo wrote:

    A demand for gasoline can exist but it doesn't mean people can afford to pay the price specially when more and more people are unemployed. When you talk unemployed people you must include all the people that are still no longer receiving unemployment benefits. The oil companies sets the price by producing more or less oil. If there is little demand the oil companies product less oil trying to drive the price up. If the oil companies produce too much the price comes down.

  • Report this Comment On November 28, 2008, at 4:20 PM, TMFHousel wrote:

    justgettingbytoo,

    You stated:

    "A demand for gasoline can exist but it doesn't mean people can afford to pay the price specially when more and more people are unemployed."

    I think you're confusing "want" for "demand." If consumers can't afford something -- either because the price is too high or because they simply have no money -- demand falls. If consumers want something they can't afford, that isn't demand -- it's tough luck.

    "The oil companies sets the price by producing more or less oil."

    I think if anyone can be pointed to for having a hand in world oil supply, OPEC, not American oil companies, should be singled out.

  • Report this Comment On November 28, 2008, at 4:37 PM, TMFJoeInvestor wrote:

    "I hear Joe's a Somali pirate."

    Yar, I be a pirate, though I sail under a different flag: That of Ragnar Danneskjold.

    And there's your lame Rand reference for the day!

  • Report this Comment On November 28, 2008, at 4:38 PM, richardnogginn wrote:

    Don't forget that high gasoline prices was the instrument that pricked the housing bubble. After that it was all over.

  • Report this Comment On November 28, 2008, at 4:47 PM, skylanefool wrote:

    Why can't people realize that Big Oil cannot control the price of oil? OPEC has a heckuva time trying to keep it within their ranges...and they are openly trying to influence the market. The bottom line is that individual OPEC members love to keep production up while advertising production cuts because they hope to take advantage of increased prices without giving up revenue due to lower production. Big Oil combined doesn't have the production to attempt to sway market prices.

    As the author stated, good oil companies will only invest in commercial prospects that have a large margin of safety for oil price. Companies that bet the farm when oil skyrockets end up broke. Any oilman worth his salt knows not to get to excited when oil's up or too depressed when it's down...boom and bust is just part of the game.

  • Report this Comment On November 28, 2008, at 8:43 PM, PetRock235 wrote:

    Demand is not how much would be consumed if it were free, it is how much will be consumed at the price today. So when gas was $4.50, people stopped taking long RV trips, and demand fell. Airlines and truckers charged higher prices, and reduced their demand. Long distance commuters may have started carpooling. Some may have moved closer to work. Either way, demand falls. And the price of houses far from work also fell.

  • Report this Comment On November 29, 2008, at 3:37 PM, Brettze wrote:

    We keep getting into an oil shortage after other simply because capitalists keep on saying that we cannot be profitable in alternate energy. We swallowed their arguments ...sinker, hook and line every time and end up paying through our noses in ever higher and higher oil prices... Yet, the capitalists still keep on saying that we still cannot make money in alternate energy.. We are still swallowing their hook, sinker, and line once again... Big OIl is successful on managing our ever voracious oil demands without us stopping using too much oil... Now gasoline is belwo $2 a gallon,, idiots is back out and crusing around again... As you should know that oil cycles is getting shorter and shorter.... and the prices higher and ever higher.... We will keep on swallowing sinker, hook and line forever!!! Solar stocks are falling again... Utilities are dropping alternate energy programs for the most part as usual.. We NEVER LEARN!@!! We are aiming for 20% of energy with altenrate energy by 2020, but it is more like 2050 at today's rate... We dont have to tax for alternate energy.. We can invest and reap the profits... Any of you who are capitalists and are poohing and poohing solar stocks, can go suck eggs or gas nozzles!!

  • Report this Comment On November 30, 2008, at 8:45 PM, 1RuleNoRules wrote:

    I think we were saying speculation drove oil prices higher and although production was tight, there was plenty of oil. Demand for oil futures drove prices up. Followed by buying panic, followed by the predictable price drop( I made money on puts). Only oil shortages will make alternative energy profitable. We should be thankful that we are not there yet. And unfortunately when this global warming crisis hoax is discovered it will hurt alternative energy plans and prospects considerably. When its time for alternative energy there will be no stopping it. It is just not now, for the most part. Big oil will never be vindicated in the eyes of the American consumer, not until we fix our education system that doesn't understand supply and demand set price. Elasticity of demand determines OPEC's ability to set price, assuming they have the reserves they suggest. When the price of oil goes up because of supply they will dig deeper and swim farther. Go ahead buy an SUV, unless we need a windfall profits tax.

  • Report this Comment On December 01, 2008, at 12:56 AM, evergreen433 wrote:

    Demand for oil did not drop 65% from the $147 top.

    Nor did demand increase 150% from the early $50 to get it up to $147 in the first place.

    Somebody is manipulating the price big time with some minor 10% supply and demand changes.

    Who knows who the conspirators are....but the prices had to be purposely manipulated.

    Look at hedge funds and investment banks as a start.

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