Tuesday, April 11, 2006


Eminent Objectivist and Austrian economist George Reisman had a post over at the Mises Institute a while back. It addressed the profits raised by oil companies. The response to oil companies' tremendous rates of profits and soaring prices amongst environmentalists was rabid,

The article goes on to note that “New York Sen. Chuck Schumer and Rep. Edward Markey, a senior Democrat on the House Energy and Commerce Committee, were others who quickly piled criticism on Big Oil. `The Bush policy of subsidizing wealthy oil companies has proven to be wildly effective in boosting oil company profits, but it continues to harm American consumers and threaten economic growth,’' Markey said in a statement.”

It then proceeds to give the environmentalists their say: “ExxposeExxon, a coalition of 15 environmental and other groups that banded together a few months back, used the record results to launch a fresh attack on Exxon and its policies. `A company like Exxon Mobil that is making record profits, and is making those profits off the back of American consumers, has a responsibility to invest those profits into responsible energy policies,’' said Shawnee Hoover, a campaign director for the coalition. `And that is precisely what Exxon is fighting.’''

Such statements demonstrate breathtaking disregard of facts, logic, and the science of economics.

True. However, it was at this stage that I responded:

Come on! Are we supposed to believe that the brave oil companies are the helpless victims of these environmental laws?! George Reisman writes,

"Let us begin with the fact that oil prices would be lower if the supply of oil were greater. The oil companies, including Exxon Mobil, have been doing their utmost to increase the supply of oil, including reinvesting a major portion of their profits precisely for that purpose. But time and again, they have been prevented from increasing the supply of oil by the environmental movement and the maze of governmental regulations and prohibitions that it has inspired."

In other words, government has supplied to oil companies a means of preventing supply from being increased when they raise their prices - in effect, a monopolistic privilege, in the Rothbardian sense... and we are to believe that Oil companies are very angry about this and are trying to increase supplies inspite of it?!

Rothbard pointed out that, "... the government regulation monopolizes and cartelizes much of industry, thereby driving up prices to consumers and restricting production, competitive alternatives, or improvements in products (eg... oil proration laws)" (For a New Liberty, p159). Likewise, David Friedman notes, "Today, although oil still comes out of the ground, federal and state governments have succeeded [at reducing supply] where the oil producers of 1872 failed. Through federal import quotas and state restrictions on production, they keep the price of oil high and production low." (Machinery of Freedom, p40)

Environmental laws are just some of the monopolistic privileges that oil companies enjoy, and it is laughable to suppose that they aren't happy with that!

Anyway, Professor Reisman honoured me with an entire article dedicated to my response! It is nice that the responses to Reisman's second article seem to support me, too!


Anonymous Julius Blumfeld said...

Sorry Richard but you've lost me. The oil market is highly liquid and, with the exception of OPEC (which is mostly a failure) is not cartelised. So how can there be any question of "monopolostic privileges"? Where is the monopoly?

On a related point, why would any oil company rationally welcome the imposition of regulatory costs? Such costs merely increase the cost of doing business without any countervailing benefit to the individual oil company.

Artificial barriers to new entry and direct subsidies would be a different matter, but environmental regulation hardly falls into that category.


10:19 AM  
Blogger Richard said...

Reisman himself admitted that the environmental controls in question are monopolistic and so limit supply. I think Rothbard included conservation laws (which are what the laws regarding Alaskan oil are about) as grants of monopolistic privilege in Power and Market.

11:22 AM  
Anonymous Julius Blumfeld said...

I don't see the admission in the piece you cite. Anyway, he might have admitted it but I don't! A grant of monopolistic privilege is a law which legally restricts competition: "X and only X may produce widgets". How do environmental controls fall into that category? They apply across the board to all producers.

Do you have a page reference for Power and Market?


4:42 PM  
Blogger Richard said...

Reisman says, in the second post, the one dedicated to my response, "He is right, of course, to describe the environmental laws as monopoly legislation. They forcibly restrict the production of oil and thereby make its price higher." He denies, though, that this means oil companies haven't been trying to increase supply.

The page reference for Power and Market is page 63 to 70.

11:35 PM  
Anonymous Julius Blumfeld said...

Hmm. I'm still not persuaded. The relevant restrictions are presumably those that forbid drilling for oil in certain areas. This undoubtedly has the effect of reducing production and raising prices. But why does it entail monopoly? Monopoly is the conferring by the State of production privileges on selected producers. Why in principle are these regulations any more monopolistic in tendency than, say, planning regulations that prohibit factories from being established in certain areas?

10:00 AM  
Blogger Richard said...

I suppose that they are monopolistic in that they limit the land use to one particular type of user, i.e. non-industrial ones. People that want to use it to "conserve" some particular type of landscape (I put conserve in speech marks in memory of the excellent part in Crichton's State of Fear about "conserving" american wilderness) are privileged by the state in that regard.

However, surely property rights (enforced by the state or whoever) do the same thing?

In this regard, maybe Rothbard's claim was more accurate than my own, with his example of New York land speculaters funding the Sierra Club to pressure the Fed Gov into setting up National Parks so as to reduce the total supply of land. Even then, though, it ignores the issue of the itensity of land use.

11:41 PM  
Blogger Adem D. Kupi said...

Julius wrote:
"Why in principle are these regulations any more monopolistic in tendency than, say, planning regulations that prohibit factories from being established in certain areas?"
Well, those are too.
The relevance here though is that any government restriction of supply favors the producers at the top of the market.
It imposes a cost on them but the costs aren't usually progressive, though they may be proportional. Therefore it eliminates the marginal producers, increasing the market share of the super-marginally profitable producers.
Since these quasi-fixed regulatory costs provide a "barrier to entry" onto the market, it creates a closed system of suppliers, who are then able to pass some of these costs on to the consumer in the form of higher prices. If the marginal cost to the producer is lower than the oligopolistic price effect, then the remaining producers have benefitted from the regulation.

3:24 PM  
Blogger Adem D. Kupi said...

Also, on that note:

"Consumers are clearly made worse off by price floors. They are forced to pay higher prices and consume smaller quantities than they would with free-market prices. But price floors can also make suppliers worse off. Some suppliers can benefit from a price floor if they can sell all, or most, of the quantity they would like at that price, but then other suppliers will be even less able to sell as much as they desire.

Only if all suppliers of a product can sell as much as they want at the price floor is it possible for them to be better off as a group, and then only temporarily. Farmers favored price supports for crops because the federal government stood ready to purchase the supply that farmers couldn’t sell at the above-market price. But even in this case, the benefit to suppliers was only temporary since competition among farmers increased the cost of doing business. For example, the lure of above-market prices prompted farmers to bid up the price of land. That is, the price of land incorporated the benefits of the price supports. Those who owned good farmland before the programs started won windfall benefits, but those who entered farming afterward and paid inflated land prices did not."

From here:

According to Austrian Price Theory at any rate, prices move backwards from consumer goods down the capital structure toward natural resources...
So any artificial supply restriction/price floor will eventually knock out marginal and new producers from competing with those who can profit despite the regulation.

6:10 AM  
Anonymous Anonymous said...

Lmao, brace yourself Dr. Herpes, it really isn't all about you.

6:54 AM  

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