Free market for oil runs very dry

Regarding “Public anger toward big oil is misdirected” (Op-ed by Jim Gustafson, May 6), Mr. Gustafson is quite correct that oil is a commodity whose price is set by the global free market. An efficiently operating free market may not be the best way to set prices, but no better means has ever been devised. I further agree with Mr.

Gustafson’s assertion that big oil companies ought not to be blamed for making huge profits. Corporations exist to earn profit for their shareholders, nothing more. Exxon and Chevron are simply doing what they are supposed to do, and, right now, they’re doing it pretty well.

It is impossible to meaningfully ascribe blame for the current oil price fiasco to any single source. However, maybe a look at the contributions our politicians have made is in order.

Bill Clinton vetoed drilling in ANWR. The million barrels a day ANWR could have supplied amounts to 5 percent of U.S. daily consumption.

Thus, were we now drilling in ANWR we could expect gas prices to be at best 5 percent lower than they are today. In practice, not all the economic benefit of the extra supply would be passed through to consumers in the form of a price decrease, so the actual savings would be less.

Iraq produced 2.5 million barrels of oil a day before the US invasion. Three years after the “end of major hostilities” in Iraq, oil production has not bounced back.

At the risk of seeming unaltruistic, once the mess in Iraq is cleared up we can expect to get 2.5 times the oil that ANWR would afford, and we won’t have to spoil any of our own wilderness. Once oil supplies get tighter, as they inevitably will, ANWR’s oil will still be there waiting for us.

Maybe if the CIA investigates whether the caribou living up there have weapons of mass destruction drilling would start sooner.

Free markets function efficiently when there is competition. Even Adam Smith recognized the need for regulation to ensure the smooth function of the free markets. In the past, Congress has also recognized this.

A good example, relevant in the oil context, is the break up of Standard Oil in 1911 into 34 smaller companies.

The Sherman Act sought to encourage competition in the free market in order to benefit the economy as a whole.

How have politicians (Congress is as culpable as the presidents) continued to ensure the efficient operation of the free market for oil?

Well, in the past decade Chevron was allowed to merge with Texaco, BP merged with ARCO, and Exxon merged with Mobil. Whereas 90 years ago there were nearly 40 oil companies, today in the US oil industry – with the government’s blessing – there are only five.

While these mergers have made the oil companies more competitive, this has been at the expense of oil consumers, that is, the motoring public and all other sectors of the economy.

Uncompetitive markets result in inefficient pricing as we are now experiencing.

This focusing of wealth in one sector is unhealthy for the economy as a whole. So, who’s to blame for rising oil prices? One answer is the government for permitting a regression back to near-monopoly in the oil industry.

However, there’s another aspect to this supply-demand equilibrium: the Chinese. According to the U.S. Energy Information Administration (EIA), Chinese oil consumption has increased from three million barrels a day in the mid-1990s to nearly seven million barrels today. The EIA estimates Chinese oil consumption will double by 2025.

By using more and more oil, paid for by the our massive trade deficit, fast growing economies like China and India will pursue a greater percent of the world oil supply, further increasing prices.

Blaming oil companies for doing what they are supposed to do is as pointless as blaming fish for swimming or birds for flying. By putting the needs of specific corporations ahead of the best interest of the economy as a whole, the government has subverted the function of the free market hurting everyone.

Oil is a finite, scarce, resource. Beyond the short term its supply cannot be increased.

Thus, the only way for prices to decrease is to lower demand. Maybe I’ll bicycle to work next week.

Andrew R. Vaino, Ph.D., is an assistant professor in the Department of Chemistry at the University of Maine