Mirror, Mirror

"Is there anybody here that has any concerns about what you’re doing to this country with the prices that you’re charging and the profits that you’re taking?" Richard Durbin (D-IL) asked.

"People we represent are hurting, the companies you represent are profiting." said Sen. Patrick Leahy (D-VT).

"Yet you rack up record profits, record profits, quarter after quarter after quarter, and apparently have no ethical compass about the price of gasoline." - Diane Feinstein (D-CA).

These are actual, direct quotes from our elected leaders as they grilled oil-company executives in Washington yesterday. I don't know what's more appalling: their obvious contempt for, and derision of public companies actually making a profit; or their lack of humility, when it is the very policies they pursue that have us paying record prices for gasoline today.

First, anyone with even a smidgen of economics course-work in their educational background understands clearly the relationship of supply and demand. In economics, this relationship is a much a certainty as physical "laws", such as gravity. In reality, there are only three things that impact on oil, and derivative product prices: supply, demand, and (in the case of futures markets) investor expectations of future supply and demand. With the booming economies of China and India (China's people, alone, are putting 5,000 new cars on their roads PER-DAY!), global demand for oil, as a global resource, has never been higher. Unless and until the world's emerging economies stop, or reverse their growth, then future demand will be even greater. All other things being equal, these facts will push oil prices up.

Second, the dollar has been on a multi-year decline relative to other currencies. As oil IS a global commodity, the price-per-barrel in U.S. Dollars would increase REGARDLESS of the increase in demand. This economic fact is reflected in virtually every other imported good we consume. Why would oil be any different.

Third, supply is not keeping up with demand. And this is where we have our politicians to blame. Bowing to pressures from environmentalists (who often moonlight as anti-capitalists), Congress has imposed a moratorium on new oil exploration and development; they have blocked development of known oil reserves off our own shores, and in the ANWR; they gleefully cash donor checks from trial-lawyers and environmental "advocacy" groups who use the US courts to block, or at least drive up the costs, of nuclear energy alternatives, clean-coal initiatives, and even new oil refineries.

Regarding the profits of oil companies, our distinguished Senators need a course in finance. There is a huge difference between profit, and profit-margin. Yes, $10 billion in quarterly profits sounds large. However, in the case of ExxonMobil, it is less than a 9% margin. That is, they make only 9-cents for every dollar of revenue. One should also note that during the same quarter, the imperial US Federal government exacted $30 billion in taxes from ExxonMobil, 3-times the profit amount. Note that this tax-receipt windfall does not include the additional taxes levied at the federal and state levels on each gallon of gasoline sold at retail.

This low profit margin indicates abundant competition in the industry. Microsoft, by way of example, enjoys profit margins in excess of 40%. Or, think about it this way: what other business has, as their normal practice, the display of pricing on huge signs as a way to lure customers? Or this: if oil companies are gouging, and charging more than market-forces would indicate as reasonable, why don't they just charge $5.00/gallon? Or $10.00/gallon? If "big oil" has us at their mercy, as these Senators would have you believe, why stop at $3.80/gallon?

The answer is quite simple, and conforms perfectly with the law of supply and demand: an increase in demand without a commensurate increase in supply, will lead to an increase in prices. We can't control global demand, but we certainly can act to increase supply. If these Democrat Senators are serious about identifying the problem, and not just using an issue to demagogue for their sheep/constituents, their first task should be a look in the mirror.