Big Oil and the Price at the Pump

[Posted on Huffington Post, April 24]

Well, you have to credit them for their doggedness, over at the American Petroleum Institute.

They’ve never seen a gas price increase that can’t be explained away.
There is this strange fact about the market for gasoline, however: When the price of the key input (oil) goes up, so the does the profitability of the sellers.

This doesn’t happen in competitive markets. If the price of steel goes up, for example, the auto companies suffer. It’s not a profit-raising opportunity for them.

Ask American Petroleum Institute representatives about this, however, and they’ll tell you that industry profits are not particularly high. Their profit-to-sale ratio, they say, is healthy but somewhere in the middle of the range for all industries.

The problem is, that ratio is irrelevant to assessing whether the industry is price gouging.

One more relevant fact is the industry’s absolute level of profits — more than a quarter of a trillion dollars for the top five oil companies since George W. Bush took office, calculates Public Citizen’s Critical Mass Energy Project.

Also relevant, notes Public Citizen, is that the industry doesn’t talk about profit-to-sale ratios when it is bragging up its performance. Rather, they say, return on capital is the relevant metric. And here, they are doing amazingly well. ExxonMobil reports more than a 31 percent return on average capital employed.

Push on the point, and American Petroleum Institute spokespeople will say, “Hey, we don’t control profits. We sell a product at a price in the competitive marketplace and look afterwards to see if we made money and how much.”

But the oil companies don’t operate in a competitive market. There has been massive consolidation over the last decade, capped off by the merger of Oil Company Number One, Exxon, with Oil Company Number Two, Mobil, in 1999. There has also been major consolidation on the refining side. The top five refiners have gone from a combined 34 percent market share in 1993 to 56 percent in 2004.

You don’t have to get very far in your introductory economics class to learn that this kind of consolidation will create anti-competitive conditions and the likelihood of price spikes.

There may or may not be overt anti-competitive activities that are making gas prices jump so fast. But in a concentrated market, there doesn’t need to be any collusive activity. The few dominant companies have the power to price gouge on their own. The historic trend, on display right now, is for the price at the pump to rise too quickly — so that the oil companies pass on costs to consumers before they have absorbed them — and then to be sticky once high — so that the companies are slow to pass on decreasing costs.

Push the point with the American Petroleum Institute, and they’ll caution that the worst thing that could happen would be for the government to intervene in gas markets. (Hah! Like the government doesn’t already intervene with its endless subsidies, including at least $4 billion packed into the 2005 Energy Bill.)

If you suggest a windfall profits tax, the petroleum lobby’s talkers will say that you’d be taking money away from the American people, who through their pension funds own big chunks ExxonMobil, ChevronTexaco and the rest.

To which we can safely reply: Don’t do us any favors by ripping us off at the gas pump to help us out as shareholders.

Moreover, the biggest potential benefit of a windfall profits tax is not just that we can curb the predatory oil industry, but that monies can be directed into renewable energy programs that will help end what even President Bush calls America’s oil addiction.

And, oh, by the way, where are the Democrats in all this? More on that in my next post.

Good News From USTR

It’s rare for good news to come out of the Office of the U.S. Trade Representative.

Yesterday, it happened twice.

First, the Bush administration announced that USTR Rob Portman would be leaving to take over as head of the Office of Management and Budget. This announcement was widely interpreted as indicating that the administration was deprioritizing its trade agenda. In the world of trade negotiations, where posturing and positioning have very significant effects on final outcomes, if everyone believes the Portman move means the US will be placing less emphasis on forcing through new trade deals, then the US will lose some of its negotiating power. If other countries anticipate the US will be less forceful and engaged, they will be more ready to stand up to US demands. And, to the extent that the administration has made a conscious decision not to spend its waning political capital on trade agreements, that’s a very good thing for people everywhere.

Second, negotiations over a free trade deal that would encompass the United States and the Southern African Customs Union (South Africa, Botswana, Namibia, Lesotho and Swaziland) appear to have hit a brick wall. Notably, the SACU countries have refused to capitulate to US demands on patents and intellectual property issues. Among other things, the US demands would raise the price of HIV/AIDS and other essential medicines.

About the prospect of a trade deal with the United States, Tanya Van Meelis of the Congress of South Africa Trade Unions (COSATU) said, “As the largest trade union federation in South Africa with two million members we are concerned about a Free Trade Agreement modeled after other U.S. agreements and its potential negative impact on levels of employment, poverty and government’s ability to meet basic needs. In a country that faces 26 percent official unemployment and 40 percent when using the broader definition that includes those too discouraged to seek work,” continued Van Meelis, “if an FTA cannot contribute to these goals, we would not support it.” A press statement from groups opposing a US-SACU trade deal as harmful to the interests of Southern African countries is here: SACU.release.doc

Tax Day and the Corporate Predators

The BBC World Business Report recently aired a slightly revised version of this commentary:

In Washington, D.C., like other American cities, a strange ritual occurs on the evening of April 15.

As the sun sets and the clock ticks towards midnight, more and more cars converge on Washington’s old central post office.

Lines of cars form, waiting to hand envelopes and packages to postal workers who stand in the street and take their parcels.

What explains this unlikely ceremony? April 15 is tax day in the United States, the deadline to file your income tax returns for the previous year.
For perhaps millions of procrastinators, the familiar protocol is to wait until the last moment to prepare your tax forms, and then dash to the post office. I know this routine very well. I’ve done it more than once myself.

But for millions of other Americans, there is a different rush — to file their tax forms as soon as possible. These Americans are eagerly seeking refunds for overpayment of estimated taxes during the course of the previous year, or payment through a supplemental income program for low-wage earners. This program, known as the Earned Income Tax Credit, is probably the most important American anti-poverty program of recent decades.

Unfortunately, a booming segment of the financial services industry sees this hunger for refund checks as an opportunity for exploitation.

Quite large tax preparation companies — among them, H&R Block, and Jackson Hewitt — have innovated a deceptive scam. They offer “Refund Anticipation Loans,” that make loans to consumers for the amount they will get back from the federal tax authorities — at the cost of steep fees. Because the loans are for a very short period — typically 7 to 14 days — fees for these loans translate into super-high interest rates, in some cases as high as 700 percent on an annual basis. The U.S. National Consumer Law Center and the Consumer Federation of America have documented how such loans in 2004 drained $1.4 billion from the wallets of more than 12 million U.S. taxpayers — mostly lower-income working Americans.

These Refund Anticipation Loans are only one of a growing number of predatory lending schemes directed at lower-income people in the United States. Because mainstream financial institutions under-serve poor and minority neighborhoods in the provision of standard forms of credit, working people are often left with dismal options for short-term loans, low-cost borrowing or standard banking services.

Into this financial services vacuum come the predatory lenders — not infrequently connected to the very banking institutions that under-serve low-income communities.

In addition to Refund Anticipation Loans, predatory lending includes “subprime” mortgage loans with both high interest rates and extensive extra fees attached, and “payday loans” — short-term loans in anticipation of a paycheck, that may charge interest rates over 1,000 percent on an annual basis.

Led by the national community group ACORN and allied organizations, affected communities are fighting back against this organized theft from poor people. And they have achieved some considerable success in demanding changes by the largest predatory lenders, and winning local and state rules to curb predatory lending abuses.

But the United States has a long way to go to achieve real and comprehensive reform in this area — and low-income Americans don’t have time to wait.