According to the Lundberg survey, gasoline prices are back to pre-hurricane levels, and they continue to drop. With only three refineries and 5% of the national refining capacity offline, lack of refined production no longer poses an immediate problem for the markets.
However, about once every decade, oil prices increase, and lawmakers feel it is their duty to trot out the oil executives to find out if any price gouging has occurred. Wednesday, the Senate is grilling executives from ExxonMobil (NYSE: XOM ) , Chevron (NYSE: CVX ) , ConocoPhillips (NYSE: COP ) , and the U.S. units of BP (NYSE: BP ) and Royal DutchShell (NYSE: RD ) . These executives will be asked to explain their companies' recent record profits and what they intend to do to lower prices for U.S. consumers.
In my fantasy world, this is how I picture the questioning (enter dream sequence):
Republican: Welcome, gentlemen. I think you all know why we are here today. The American people are outraged at record high gasoline prices. What is the oil and gas industry doing to reduce fuel prices for the American people?
Oil executives: We are in a commodity business and price is set by the market. In the case of recent hurricanes, 12% of the national refining capacity was put out of service, along with more than 2 million barrels per day of oil and gas production in the Gulf of Mexico. The two hurricanes exaggerated the tight supply situation that has been building for years. With little change in demand, prices increased. With production returning to near pre-hurricane levels, prices have retreated to pre-hurricane levels.
Democratic Senator Dorgan: As I suspected, your industry will do nothing to lower prices. What I am proposing is that you pay a windfall profits tax on the portion of the price of a barrel of oil that exceeds $40, with the proceeds going to the American people as a rebate. What do you think of that?
Oil executives: Obviously, we are opposed to your proposal because it will not solve the current tight supply in the marketplace. Increasing taxes on our industry will prove a disincentive for companies to increase production, reducing supply. Providing consumers with a rebate will artificially lower prices at the pump, increasing demand. Paradoxically, this will lead to even higher prices and likely fuel shortages.
Republican: Of course, Senator Dorgan is in the minority here, but you know we have to do something to appear as if we are doing something. Many people feel that the recent price increases were the result of price fixing and gouging by the industry. How do you respond to these charges?
Oil executives: We don't engage in price fixing or gouging. Oil, natural gas, gasoline, heating oil, and other refined products are all commodities whose prices are set by the laws of supply and demand. There are hundreds of exploration and production companies, dozens of refining companies, and thousands of independent retailers. It is only natural that in a period of tight supply, the laws of supply and demand will drive prices upwards.
Democrat: We are also debating another proposal that would require the oil industry to donate 10% of its profits to the Low Income Home Energy Assistance Program (LIHEAP). Don't you think that in this time of record profits, the oil industry should share its wealth with poor American families?
Oil executives: We certainly believe LIHEAP is a great program; however, we feel it is best funded and administered by the government. As members of the private sector, we already pay taxes. Plus, unlike most other industries, there are additional sales taxes on our product in the marketplace. The homebuilders have had record profits of late, but you haven't asked them to fund low-income housing programs.
Democrat: That's a good idea. We hadn't thought of that.
Republican: Now, let's get back to the point. We have to put on a good show for the American people, so they think we are defending their interests. I see that your companies have used tens of billions of your enormous cash reserves to pay dividends and engage in share buybacks. Wouldn't that money be better spent increasing capacity?
Oil executives: In addition to our dividends and share repurchase programs, we also spend tens of billions every year to bring more product to the marketplace. Our ability to increase capacity is limited by the amount of oil in the ground, access to attractive drilling areas, weather, and technology. It takes four years to bring a new well into production; therefore, the current supply and demand situation cannot be corrected overnight. With many of our most productive properties in decline, the industry is finding it very difficult to meet continued demand growth.
Democrat: I'm sorry, but since I'm not a economist, could you explain to me these laws of supply and demand that you keep talking about?
End dream sequence .
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Robert Aronen owns shares of none of the companies mentioned. He will not be running for public office anytime soon. Please feel free to share your comments with him at firstname.lastname@example.org.