Multinational Monitor Editors blog

[posted on Huffington Post, April 26]

So now everyone is worked up about gas prices.

The Republican leadership in the Congress has called for Federal Trade Commission investigations into price-gouging, and President Bush amusingly has done the same.

This all reflects what the Washington Post concisely said in a Tuesday headline: “Cost of Gas Puts Pressure On GOP.”

The Democrats, understandably, are very happy. People don’t like high gas prices, and everyone understands the Republicans are the party of Big Oil, and thus get blamed for high prices.

But the Democrats are positioning themselves to blow the political opportunity, not to mention failing to advance a policy that would actually help consumers and the environment.
The main Democratic response has been to call for … Federal Trade Commission investigations. OK, to be fair, what the Dems want would give the FTC power it does not now have, and perhaps would result in a more serious effort than what the Republicans have in mind.

But by way of contrast, consider this: three decades ago, when the oil giants profiteered in the wake of the first oil embargo, almost half the U.S. Senate voted to break up the integrated oil companies.

While it would make even more sense on the merits now than it did then, asking the Democrats to support such a move today is perhaps asking too much. (Beyond political cowardice, one reason the Dems may be uncomfortable going into this territory is that the oil industry consolidation that facilitates price gouging and other abuses occurred largely on Bill Clinton’s watch.)

What is not too much is to ask the Democrats not just to blow hard about price gouging, but to support measures that would directly do something about it. And the simplest thing would be to enact a windfall profits tax, which would take Big Oil’s ill-gotten gains, and re-direct it to consumers and, most critically, investments in renewable fuels.

There are such proposals in the Congress, made after the gas price spikes of last year, including the huge jump following Hurricane Katrina. However, just 40 members of the House of Representatives were willing to co-sponsor the leading legislation calling for a windfall profits tax on the oil companies (H.R,2070, the Gas Price Spike Act of 2005, introduced by Representative Dennis Kucinich of Ohio). Only eight members of the Senate co-sponsored the leading windfall profits bill there (S.1631, the Windfall Profits Rebate Act of 2005, introduced by Senator Byron Dorgan of North Dakota). (To his credit, Senate Minority Leader Harry Reid was one of those eight).

The Democratic chatter inside the beltway is now all about delivering a “vision” and moving away from laundry lists. No doubt vision is important, though most of the discussion is really akin to commercial branding (Toyota is “moving forward,” Chevrolet is leading “an American Revolution,” Ford is “Built for the Road Ahead,” etc.) than setting out real points of principle.

Lost in the discussion about “vision” is the absolutely vital discussion about line drawing – as in, how do the Democrats meaningfully distinguish themselves from Republicans.

Calling for better FTC investigative power doesn’t meet the test.

[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.

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