French vs. Smith
Inside Liberty Watch Today - Aug. 15, 2005

John L. Smith thinks he is paying too much at the pump and believes there must be a conspiracy being perpetrated by evil oil gangsters to steal his money. The idea of supply and demand evidently escapes the wounded wordsmith. 

Smith lashed out in his August 3rd Review-Journal column at OPEC and private oil companies for making profits and thus adding to his fiscal misery. But, profits provide a vital signal to the marketplace. If businesses are losing money, the market is saying less of that product is needed. Smith is right; ”Record profits don't lie.” Thus, if record profits are being earned—as in the case of the oil companies—consumers are crying out for more product—in this case petroleum product. 

Exxon Mobil just announced second-quarter profits of $7 billion, a 33 percent jump, which has Smith distraught. But, Exxon’s net profit margin is only 10.1 percent. So, out of the $2.50 a gallon, Exxon is netting a quarter. At the same time, in Nevada, the government takes over 51 cents of each gallon for itself and for what? 

Smith contends that oil companies and OPEC are withholding reserves to jack up prices. However, it makes no logical (or business) sense for a supplier to keep supply off the market to raise prices and give consumers the incentive to seek other alternatives, not to mention the time value of money. The fact of the matter is OPEC and the oil companies are pumping oil as fast as they can. 

“Prices rise due to increased consumption -- and decreased consumption,” the scribe contends. “Prices rise when oil is plentiful -- and when it's scarce.” 

Then why have gasoline prices fluctuated over the past decade? In August of 1992, the average west coast price of regular gasoline was $1.25 a gallon. Six years later the price per gallon had fallen to $1.14. In August 2001, the average price was $1.50. Two years later, a gallon was pushing $2.00, now it’s $2.50. 

The trend is clearly up, but the reason is that there has not been an oil refinery built in the United States since 1976. So when there is an explosion at a refinery in Texas or an oil platform off the western coast of India bursts into flames, oil prices and what Smith pays to fill his tank are going to change. There is no new supply and no new refining capacity. 

Also, instead of demonizing Exxon and OPEC, Alan Greenspan deserves blame. The money supply, as measured by M-3, increased from just under $3.6 trillion when Greenspan took over as Fed Chair in 1987 to over $9.7 trillion as of June of this year. By its correct definition, that’s inflation on stilts. But, of course, the Fed Head continues to tell us that inflation is “tame” and “well contained.” 

Smith, like more than a few of his readers, believes he has a god-given right to cheap gasoline. But, with OPEC running out of the black stuff and oil companies not allowed to extract new supplies or build new refineries due to environmental concerns, the days of cheap gasoline are likely over. 

Doug French, Liberty Watch