Energy Expertise

It's May, and you know what that means: it's that time of year when greed among oil executives is at an all-time high.

There's a new article up on CNN.com entitled "6 Ways to Lower Gas Prices." One is to pass a law requiring oil companies to "make more gas." The article cites one energy "expert," Judy Dugan, who asserts that oil companies "know very well they can make more money by making less gasoline." She then goes on to say that since gasoline is a commodity "essential for the public well being," government has a reponsibility to "require refiners to operate at a certain capacity."

There are so many flaws in the above 2 statements it's hard to know where to begin.

The central thrust of Dugan's first argument, that companies can and will make more money by making less of something, is more than just a policy statement on one issue - it's a complete indictment of the free enterprise system. So if her assertion is correct, then we have far bigger problems to worry about than just current high gas prices. What about food? Housing? Clothes? We better watch out: home builders, grocery stores, and factories everywhere might stop producing their goods and services so they can raise their prices and "make more money."

It is astonishing that a supposedly respected media source like CNN would cite as an expert someone who lacks even a grammer school-level understanding of economics, but they do, and they make no attempt to counter it by providing an alternative viewpoint from someone who actually does understand supply and demand.

The reality is that firms will always do what is profitable: which means they will make as much of something as they possibly can until the price of that product no longer exceeds its cost of production. This is true with everything: oil, newspapers, prostitutes, lampshades, X Boxes, miniature dachshunds, Honda Accords, you name it (the only exception being those unique products where the price is clearly "prestige-driven" like Lacoste shirts, Masters tickets, etc., but that situation is extremely rare and certainly doesn't apply to oil).

It doesn't take an idiot to realize anyone who can produce a barrel of oil right now will make a killing. No one in their right mind over at Exxon or BP would want to even consider cutting production right now when there is so much money to be made from increasing it, which is what they continue to do.

This is why prices and profit margins serve such a crucial funtion: they direct resources to society's most immediate needs and then tell entrepreneurs what to produce, how to produce it, and how much of it to produce. We sure as hell don't need federal laws to replace a system that's already working.