Biden To Oil Industry: “I Don’t Understand Economics”

In discussing hurricane Ian, President Biden issued a warning to the oil industry not to ‘price-gouge’ or take advantage or short-term problems to raise the price of oil products. “Do not – let me repeat – do not use this as an excuse to raise gasoline prices or gouge the American people.” Blaming the oil industry for higher prices is more popular with the public than blaming Vladimir Putin so from a political point of view, this makes sense.

Other than the obvious pandering (also on full display in Massachusetts politics at the moment), there are two problems with his statement. First, oil companies don’t set, let alone raise, prices. They did historically, from John D. Rockefeller more than a century ago to the Seven Sisters and the 1928 Achnacarry Agreement. But U.S. oil prices have been market driven for decades, and especially after the 1973 Oil Crisis, when oil exporting nations began to set ‘posted prices’ and then ‘official sales prices’ on the world market—relinquishing that role in 1986.

The public sometimes seems to think that there are diabolical forces in the oil industry that gather together and decide what the oil price should be, but that they are only able to raise prices when some outside event like the Iranian Revolution or a hurricane given them “an excuse.” The recent outrage when gasoline prices hit $5 a gallon saw little or no mention of the point in 2020 when prices were below $2. Maybe there’s a cabal of consumers who conspired to take advantage of the pandemic to drive down prices—but I doubt it.

The other error in Biden’s remarks centers on the subjective term ‘gouging’ which is hardly unique to him or a new attitude. Complaints about hoarding and price gouging have a long history. For some reason, the Bible story of Joseph and the seven fat years and seven lean years in Egypt doesn’t have any reference to public accusations of hoarding and price-gouging, but I blame the editors for that. Certainly, there are many other instances when the public believed nefarious actors were taking advantage of bad weather and damaged crops to raise food prices, apparently assuming that even if supplies of grain dropped, prices should remain unchanged.

But farmers are rarely blamed for higher food prices, rather, the notorious ‘middle-men’ are said to be making all the money from the situation. Certainly, farmers receive only a small portion of the revenue from food sales, but they do profit when prices rise and suffer when they fall. Naturally, lower food (or oil) prices get much less attention than higher prices, because the latter affects all consumers and the former only affects the much smaller number of producers.

That said, producers do complain about wicked forces acting to deprive them of their just due. Certainly, this is true in the oil industry, where some complain about traders manipulating oil prices to drive them out of business, and one book argued that Reagan caused the oil price collapse in 1986 to undermine the Soviet Union. (Ignoring the historical market collapse that was occurring.) I still remember a senior oil executive visiting the M.I.T. Energy Laboratory and complaining that oil traders, usually with nothing more than a phone and a line of credit, were behind soaring oil prices: they would buy at whatever price, because they knew they could always resell the oil at a higher price. (Until 1981, when prices began declining.)

Will there be an investigation if gasoline prices rise? (Rhetorical question.) Congress has repeatedly carried out investigations into oil price increases in an effort to blame the industry for anti-competitive behavior, and every single one has failed to find evidence. One wonders if the committee staffers have simply got into the habit of trotting out a previous study and changing the dates.

The point is that because hurricanes have the potential to affect oil and gas production as well as refinery operations, traders react to news of a possible strike in the Gulf of Mexico by bidding up prices. Those higher prices are then passed on to producers and finally consumers, all of whom are in the same boat, tossed on waves of uncertainty. Producers benefit when prices rise, lose when they fall, but politicians think that producers should never win on the upside while always losing on the downside. (Farmers are treated differently, receiving assistance when prices fall.)

Unfortunately, few listen to the wisdom of the World’s Ultimate Authority Professor Irwin Corey who, commenting on the stock market, once said, “The market fluctuates. Sometimes it fluctuates down, but mostly it flucs up.”