Ben Stein on oil & gas (2 years ago)

(A good understanding of the oil and gas markets)Who's to Blame for High Oil and Gas Prices?Yahoo FINANCE, Posted March 17, 2006 - by Ben Stein

Executives of the big oil companies have been hauled before the U.S. Senate recently to defend their industry's recent mergers and record profits as American consumers face high oil and gasoline prices. I'm going to defend the big energy companies in this case, since I think they're not the reason for high prices.

Before you write me angry e-mails, dear reader, let me first lay down some street credibility. Yes, I'm a gray-haired guy now. But I've spent a lot of time in my life as an antipoverty lawyer in New Haven, Conn., and in Washington, D.C., helping very poor people with their legal woes. I also spent years as a lawyer working on prosecuting false and deceptive advertising.

Probably the lion's share of my adult life was spent writing about financial fraud for financial publication Barron's, and I helped put a number of fraudulent entities out of business. I also testified against a number of fraudulent managements in lawsuits, both state and federal, and I still often write about injustice in the boardroom.

That being said, I also know how a lynch mob operates. After all, if there's a problem, some cause has to be found. And it's really lovely if the cause can be someone rich and powerful so that we can work off our envy and also take the intoxicating drug of anger. Anger organizes our emotions, lines them up, removes ambiguity, and feels good.

Urge to Crack Down
So, the mob goes after someone to lynch, even if that person is innocent. After all, as the immortal Bob Dylan sang long ago, "A lot of people have knives and forks, and they don't have nothing on their plates, and they have to cut something."

This comes to mind because of the recent actions in the U.S. Senate that attempt to "crack down" on energy companies because the price of oil is so much higher than it used to be and because one large oil concern, Exxon (XOM), is reporting very large profits (after many years of modest earnings).

The crackdown takes the form of preventing oil companies from merging or at least making it much harder for them to merge. The idea is that the energy companies have been fixing prices at artificially high levels, and if they merge, they'll just do it more.

This idea is apparently backed even by someone as wise as Senator Arlen Specter (Rep.-Pa.), Chairman of the Judiciary Committee and a fellow graduate of Yale Law School.

No Conspiracy
The only problem with this idea is that it's based on a totally false premise. The energy companies don't set the price of oil or of gasoline. The prices you pay for heating oil or gasoline aren't set in boardrooms in Texas but in trading rooms at commodities markets all over the world.

Gas prices aren't set in shadowy conferences in shooting lodges, but in rooms of people shouting or punching computer keys in London, New York, and Tokyo. Oil is a world commodity like tin or copper or rubber or coffee. The price is set by traders anticipating supply and demand.

Rumors of war in the Mideast, terrorism against oil platforms in Nigeria, warmer weather in New England, bitter cold in London -- these are what set energy prices. Even the biggest U.S. energy companies are tiny pawns in the game compared with the world market, flotsam and jetsam in the ocean of world oil trading.

So, when prices go up or down, it's not a conspiracy. It's panic or confidence in the market. It's just like what happens on the stock markets every trading day -- greed or fear at work, not at the companies being traded but on the exchanges. The oil companies can either lose or gain from this trading.

Hobbling the Oil Companies
I know this is hard news to digest because who do we hate then? Well, some think we solve the problem by just hating and blaming the innocent -- in this case, the oil companies, dragging them from their beds, and lynching them. So what if they're innocent? Someone's got to pay.

The only problem is that if we keep punishing the companies that in good faith give us the energy we need to power our lives at market prices -- which sometimes give them a big profit and sometimes give them a small one -- eventually, they'll go away. Or they won't have the ability to do their jobs as well because of all the restrictions we've put on them.

Never mind, some think. A lot of people have knives and forks, and they don't have nothing on their plates, and they have to cut something.