With crude oil supplies at an all time high, why are many refineries in America sitting idle long after the normal spring maintenance period? Could this be an indicator of price manipulation by the major oil companies doing business in our country?
When I heard on NPR while driving home yesterday that oil supplies are at an all time high in America, it seemed inconsistent with the Laws of Supply and Demand — prices for gasoline being so high. Then the commentator said that a large number of refineries are still shut down long after the usual spring maintenance closings. Ah ha! Now it made sense to me. Reacting to projections about Americans planning shorter vacations closer to home this summer, or not traveling at all, oil companies are limiting production to sustain prices at artificially high levels. Is this price fixing, or is it just smart business? I believe that it’s the former and, in a free market econ- omy like we’re suppose to have in this country, it shouldn’t happen (recent Houston Chronical business article on gasoline prices).
As a teacher of World Geography for the past five years, and now Economics, I tell my high school students that it’s impossible to separate government from economics even though they are taught as separate subjects. This is because the state of our economy is a major concern for voters, even if they don’t understand it; they feel the consequences of its ups and downs. Accordingly, the politicians who run things in Washington want to keep things on an even keel. Better yet, they want to be able to claim credit for measures taken to stabilize the economy when it’s their time to get re-elected. Even better, they want to be able to claim credit for improving the economy.
Things like our current trade deficit, inflation, interest rates, the value and supply of the dollar compared to foreign currencies, the unem- ployment rate, government spending, and consumer confidence, all of these are vital aspects of our nation’s economic health. But Politians don’t always listen to the economists that they hire to analyze trends and forecast the results of fiscal and monetary policies. Case in point — the1999 merger of the Exxon and Mobil oil companies.
Claiming that the merger would enhance our nation’s ability to effectively compete in a volatile industry and an increasingly competitive world economy, the chairmen and chief executive officers of Exxon and Mobil signed an agreement to merge and form a new company called Exxon Mobil Corporation. This occurred after months and months of negotiations to obtain shareholder, U.S., and international regulatory approvals. Today this corporation is the largest publicly-held company in the world, both in terms of proven oil and gas reserves and revenue produced. Although the largest among corporate oil producers, it’s still eclipsed by several foreign, state-owned petroleum producers.
You can learn all you might want to know about Exxon Mobile, as I did, from http://www.exxonmobil.com/corporate/, the corporation’s own website, and from http://en.wikipedia.org/wiki/Exxon_Mobil. The Wikipedia address is particularly revealing in details about Exxon Mobil’s foreign business practices, it’s human rights contro- versies, it’s record of contributions to Republican Party candidates and organizations critical of climate change science, and it’s slow response to the Valdez oil spill disaster of 1989. What I have not been able to find, although I’m sure the information is out there somewhere, is what share of the U.S. energy market Exxon Mobil controls. So, suffice for now to hazard a guess… forty percent maybe?
In my book, when a company gets the size of Exxon Mobil it has too much power, economic power to influence prices and supplies for critical resources, and political power in terms of its ability to influence government decision makers through political contributions and political action groups (PACs). Exxon Mobil isn’t a monopoly, which is defined as a single supplier of a good or service. But, big as it is, it does have the power to easily form a cartel or oligopoly with the remaining number of smaller suppliers. When this happens, the group can control supply to maximize profit for all of its members, which is easy enough to do when the product or service has a relatively inelastic demand such as gasoline and fuel oils. Without getting into a lesson on economics here, elasticity has to do with demand or supply responsiveness to changes in price.
“But wait a minute,” you say, “what about the Sherman Antitrust Act? Doesn’t that prevent companies in America from growing too big and having too much control over things?” The answer is — yes and no. It does give the government the power to prevent trusts, which, by one definition, are agreements between large companies that limit free trade. Government has the power to prevent mergers, but the law does not compel the government to restrict trusts or other- wise prevent companies from merging to form larger and larger companies. Government does what government wants to do, even in America, or so it seems lately Learn more about this at Wikipedia.com.
Mulling all this over after hearing the NPR news report, I began to wonder at the logic of allowing Exxon and Mobil to merge. So I decided to discuss this with an economics professor friend of mine, Dr. Christopher Wreh. Knowing that the U.S. Department of Justice rules on merger requests like this one, I asked Dr. Wreh what model economists working for the government use to determine whether large companies should be allowed to merge. The answer was the Herfindahl index, also known as Herfindahl-Hirschman Index or HHI. It’s a measure of the size of firms in relationship to the industry and an indicator of the amount of competition among them. It is an economic concept but one that is widely applied in competition law and antitrust. Here’s the formula:
It works like this… the higher the HHI, the closer a market is to being a monopoly (the higher the market’s concentration and the lower its competition). If, for example, there were only one firm in an industry, that firm would have 100% market share, and the HHI would equal 10,000 It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers. The HHI number can range from close to zero to 10,000.
Typically, the U.S. Department of Justice considers a market with a result of less than 1,000 to be a competitive marketplace; a result of 1,000-1,800 to be a moderately concentrated marketplace; and a result of 1,800 or greater to be a highly concentrated marketplace. As a general rule, mergers that increase the HHI by more than 100 points in concentrated markets raise antitrust concerns.
If I had the market share information from back in 1998/99, I think I could plug-in the numbers and see whether, at that time, it made economic sense for Exxon and Mobil to merge, but I don’t need to do the research. Dr. Wher has already done it. As a doctorial candidate at Utah State University at the time, the issue challenged him to do the study. The number he said he came up with, after checking the result many times, was 2300. In other words, the HHI for a combined Exxon Mobile corporation was nearly twice what the Justice Department would normally approve for merger requests.
So, what have I learned from all this? I’ve learned that economic decisions, whether they turn out to be right or wrong, always need to make sense and they always need to be based on some rational relationship of factual data. Political decisions? Well, maybe they don’t need to make sense at all. I’ve also learned that busi- nesses listen to their economists even if government doesn’t, and that maybe the checks and balances that we learned about in high school don’t work as well today as our Founders intended.
The U.S. Senate is currently considering the Ten-in-Ten Fuel Economy Bill (S-357), which includes a provision to preclude Big Oil from “price gouging.” This Bill would require U.S. auto makers to improve fuel economy by an average of ten miles per gallon across model types over ten years, thus reducing our dependency on foreign oil along with greenhouse gas emissions. But of course, we can expect Big Oil to lobby furiously against the passage of this Bill in it’s present form. Learn more about this Bill here.
Do us all a favor, contact your congressional representatives to express support for this Bill, and make certain to mention how important the provision against price gouging is. It could one day lead to breaking up this mega-corporation and the cartel that they seem to be leading. This, I believe, would help to restore democracy and free enterprise in America. Who represents Me?
To post a comment, click on the tiny COMMENTS word below.