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Much Ado About Gas Price

Thursday, May 04, 2006

The continuing debate over gas prices and what's to be done about it gets more idiotic as the days go by. Uber-capitalists on the right continue to trumpet the free markets clarion call of supply and demand while Democratic senators continue to demand big oil's heads on a silver platter. So who's right, who's wrong and who's to blame? As Shakespeare wrote and Edward R. Murrow quoted, "The fault, dear Brutus, lies not in our stars but in ourselves."

Understand me when I make this statement. I am not saying that Big Oil, the American automotive industry and our "leaders" in government are blameless but, I am saying that our lack of concern regarding almost every aspect of what our elected officials do in our name and our reluctance to inconvenience ourselves even slightly when it comes to our economic choices has allowed this crisis to revisit itself upon the country.

However all is not lost and corrections can and should be made, but they must be made by government, the energy industry and the automotive industry and that will only happen if they are forced into it. The first step to power is knowledge so let's break this gigantic problem into bite size pieces. The links below are meant to be read in order but I hope that I have done each of them enough justice so that you can glean something useful from each in and of itself.



The Fall of Standard Oil and the Rise of ExxonMobil


Long before President Jimmy Carter forced the break up of AT&T, there was Standard Oil. Started in Cleveland by the Rockefeller brothers, John and William, the company set about demolishing their competition, first in Ohio then throughout the northeastern United States. In order to get around existing state laws which attempted to limit the size of corporations, Standard Oil came up with the trustees system, which put control of the companies in the hands of a board of trustees from which we get the term "trust" as in anti-trust legislation.

In fact, the Sherman Anti-Trust Act, enacted into law in July of 1890 and named after its author, Senator John Sherman of Ohio, was a direct result of the actions of the Standard Oil company. By 1890, Standard controlled 88% of all refined oil flows in the United States and when the anti-trust trial began in 1904, Standard 91% of production and 85% of oil sales. Ohio had successfully forced Standard Oil to spin-off Standard Oil of Ohio which many of you may remember as Sohio but it was't until the succesuful conclusion of the federal trial in 1911 that Standard Oil was split into 34 seperate companies. (information from Wikipedia's entries on "Standard Oil" and "Sherman Anti-Trust Act" )

I tell you that story so that I can tell you this one. While we were all looking the other way, those 34 companies have been reconsituted in the Big Five Oil companies we've been hearing so much about. BP, Chevron, Royal Dutch Shell, Conoco Phillips and ExxonMobil control, according to a posting on OligopolyWatch.com, control 62% of U.S. retail gas sales, 50% of refinery capacity and 48% of oil production. These stats may be understatement since the post is two years old, but it shows what has happened to our business world in general and the oil industry in particular. Business is no longer about competition. Instead the focus is on the consolidation of resources in order to eliminate competition. From a break-up into 34 individual companies, the formerly dismembered Standard Oil company has risen from the dead in the form of these five companies.

What does this have to do with the price of gas and the massive profits reaped by those five companies in the last fiscal year alone? Everything. Again according to OligopolyWatch.com, a 2004 GAO report found that the recent mergers of the oil companies were responsible for an average cost increase of 2 cents a gallon and up to 7 cents on the West Coast. Considering the report's date of publication, the statistical info was probably from as far back as 2002. As we have seen, the price of gas has only gone up in the following years.

Even Adam Smith, author of Wealth of Nations and the economist that every free-marketeer quotes as gospel, saw what oligopolies of the kind we are discussing here would mean to the average consumer. In Chapter IX of Wealth Of Nations, Smith writes "to narrow the competition. . . can serve only to enable the dealers, by raising their profits above what they naturally would be to levy, for their own benefit, an absurd tax upon the rest of their fellow citizens."

This is no proponent of communism, but one of the fathers of conservative economic thought who is telling us that concentrating any business into the hands a few ultra-powerful companies is a bad deal. That the business in question is one of the most important resources upon which our economy is based should be cause for alarm , no matter what Kramer from Mad Money has to say on the subject.