Sunday, April 30, 2006

Standard Oil, Part II?

Well, it was bound to be proposed sooner or later…

Senator Says Senate Must Study Breakup of Oil Firms

And not surprising, the anti-capitalistic Left is cheering.

Now, I know many people will point to the fact that there are only a few, ultra-huge oil companies in existence, and that fact alone serves to decrease the necessary competition to affect lower consumer prices. But, it is not the problem per se. Many times, public policy is to blame for the creation of tightly-consolidated, oligopolistic markets, and I’ve heard many commentators point out that if we were to focus on that, the natural incentives of the market would remedy the situation on its own.

Many others like to point out the similarity of today’s oil markets to the “monopoly” created by Standard Oil, which was eventually “busted” by anti-trust legislation. A couple of points need to be raised in response to any who want to draw such comparisons.

First, according to Burton Folsom Jr, in “The Myth of the Robber Barons”, John D. Rockefeller’s company may have had an overwhelming domination on the domestic market, but on a global scale, Standard Oil faced fierce competition from foreign companies in Russia, and other places, who had access to better quality crude oil reserves. If it wasn’t Rockefeller putting these Mom-and-Pop refineries out of their misery, it would have been foreign competition. Furthermore, because of Rockefeller’s superb business sense and his relentless consolidation of the domestic refinery industry, the price of kerosene dropped from 58 cents per gallon to 26 cents, between 1865 and 1870, so the claim that monopoly production was harmful to consumers just doesn’t bear scrutiny of the facts.

Secondly, Rockefeller’s success was the envy of his less-efficient competitors, who were the major forces behind the forthcoming anti-trust legislation. Indeed, anti-trust legislation has always been the tool of inefficient businesses to strike back at their betters, much to the detriment of consumers. Economic historian Thomas DiLorenzo explains this in an essay here.

Third, as just was reported recently, Iraqi oil production is at its lowest point in many years, this adversely affects world supply. Now, while I appreciate the Left’s anti-war sentiment, I’m surprised that they would fail to notice that the continuing war effort is the major catalyst behind the uncertainty in the oil markets, which has a tendency to make investors nervous. In fact, I recently read somewhere that trading in the oil futures market has been a bit subdued lately because of the uncertainty about war in Iraq, and the possibility of a new war with Iran.

If the left wants to really do something about gas prices, it would stop yelling about those damned oil companies, and focus its energies into stopping this war-mongering regime. The more supply stays restricted, and the uncertainty in the market injects higher levels of risk to the companies operating in those markets, then we will see higher profits to those companies, because, as any freshman finance student learns in his first week, risk and reward are positively correlated.

So, my friends on the left, what’s the deal? Do you want to continue proposing band-aid solutions, or do you want to strike at the root of the problem?

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