Thursday, July 27, 2006

Oil: Should we Regulate the Market?

NP: Agalloch - Falling Snow (<--- click on the link to hear them)

I was watching the news today, and it was reported that Shell has announced a rise of 36% in profits. Think of that - 36%. Thats a pretty big rise. Meanwhile, oil prices are soaring and we, the consumers, are paying the price, whether we like it or not. Whether we like it or not, we are paying for Shell's shareholders' luxuries. All in the name of market uncertainty. Boy, do they love uncertainty.


Anyway. It got me thinking, oil is the most important commodity in the world (probably even more important than water). Everyone needs it, and yet we let it be controlled by market prices. Its not even a pure free market - we have a cartel, OPEC, which has the power to raise or lower prices at will. And, because of this system, we end up paying higher prices on everything everytime theres uncertainty. And the shareholders of Shell, Exxon, etc. make massive profits. Surely this system is unfair. Surely theres a more equitable system we can put in place?

My suggestions fly in the face of every neoliberal and every capitalist. Market controls and regulation are the number one sin, and with an industry like oil, its unthinkable. But Im not a neoliberal or a capitalist, so lets think about it. What would be a better system?

Price controls? Setting a maximum price for oil, with taxation by governments to extract revenues that would otherwise go to the oil companies. According to economic theory, it doesnt matter who you tax, because in the end both consumers and producers will end up paying a certain amount. But if you set a price cap, that wouldnt happen I think. Price caps are apparently troublesome too, because they create shortages. At a lower-than-market price, people will want more, and they wont be able to get any. That is a problem, and a solution to that would probably lead to yet more problems. But its worth thinking about.

Another possible solution (one even more terrifying for neoliberals) would be to have a regulatory body which sets prices and outputs, and allocates how much each country is to produce, how much each country is allowed to buy, etc. Basically, a centrally planned market. This would be difficult and complicated, but would at least mean that companies like Shell wouldnt make record profits while everything gets more expensive for the rest of us.

Any opinions on this? Is the current system the best, or can we improve it at all?

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On another note, I seem to be having problems with comments on this blog. I dunno whats up, I'll try to get it fixed though.

Posted by illogicist at 4:03 AM

1 Comments

  1. Blogger Per Your Request posted at 7/27/2006 06:14:00 AM  
    I am surprised by your proposal. I am sure that the profit oil companies have experienced in the past couple of years has many sharing your thoughts. However, I’m not sure that regulation in any form, price caps, quotas or even an authority body is the answer. In fact I think the only answer here is new innovation in the energy sector.
    The demand for Oil has increased drastically with the Opening of China and the U.S consumers never ending need for Oil. The price of oil is bound to increase with a set supply curve. Therefore profit increases as well since Marginal cost remains the same. The profit here is the payoff for the risk the oil companies have taken. I ask you, if the oil companies had lost money and needed your support, would you support them?
    Is this system equitable? No, but I do think it is some what efficient. You mentioned OPEC, and yes that is the non-efficient part of the oil market.
    I see two answers to this increase in price, decrease demand or provide a substitute. I don’t see demand decreasing; actually it’s only going to increase further. Therefore substitutes are the answer, and to be honest since price of oil has increased I have heard more about "Alternative" energy then I have heard in the past.
    This is competitive economics at its best, when profit increases new agents enter the market and eventually profits return back to normal levels. the only problem is convincing the people of the world that our dear oil is not the best energy source anymore.

    ----Sorry for the long comment, obviously I like this post.

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