Mary Catherine Hamm at Wizbang points out Maria Cantwell's total ignorance of economics, in particular her inability to understand that lower supply coupled with steady demand will increase prices. Cantwell's pre-Senate job was Vice President of Marketing at Real Networks, so perhaps she feels that it is more important to say something popular than logical.
Thanks to the three readers that brought this to our attention.
Posted by Andy MacDonald at April 28, 2006 03:19 PM | Email ThisI didn't see anything at SP about this, but The Stranger covered the anti-war "siege" at Cantwell's downtown Seattle office earlier this week.
Cantwell's recent appearances at gas stations would seem to corroborate your point Andy. She's great at attacking things for public opinion gain--but she's a terrible leader when it comes to being successful for her constituents (unless you're talking about the lobbyists and lawyers supporting her campaign). Look what her picking a fight with Ted Stevens has done. Why did a Senator from Washington State have to lead the fight?
All of that political capital spent for no good reason other than to further her own political careerist goals. Seattle MSM needs to wake up and start calling her what she is: a partisan hack, and not even a good one at that.
Posted by: Patrick on April 28, 2006 03:40 PMShe is going to end up Chairman of the UW economics department.
Posted by: Huey on April 28, 2006 04:31 PMFrom each according to his abilities, to each according to his needs.
Karl Marx
Drivers need gas, oil companies make gas. Therefore he who can make gas out of his abilities should give it to those who need gas.
Those of us who live in the real world:
[The man of system] seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single pieces has a principle of motion of its own, altogether different from that which the legislator might choose to impress upon it.
Adam SmithThe Theory of Moral Sentiments, Part VI, Section II, Chapter 2
Or the dear Senator, cannot change market forces.
Posted by: JCM on April 28, 2006 04:40 PMPerhaps the refineries are not able to get the gasoline additives. The Dems in Congress refused to give liability protection to MBTE producers, so that product is being with drawn from the markets. Ethanol is difficult to transport, and the production capacity is not there yet. We could reduce the tarrifs on Brazilian ethanol, but ethanol is produced in Iowa, and Iowa selects presidents, so those taxes won't go away.
Then when you must produce 17 different botique blends it's very difficult to balance the needs of the different regions, and you just can't ship gasoline from one region to another, it's against the law.
We haven't built a refinery in over 20 years. Enviro wackos have the Dems in the pocket, so no new refineries, no drilling in ANWAR, off the coast of CA or FL (OK, Jeb Bush gets the blame for that one), etc.
The American people whine too much. They want to drive SUVs, get 14 MPG, and expect the government to subsidize their gas. FDR fought WW II very well, but he was a disaster at home. His socialistic utopian dream has made the public expect government handouts and free stuff all the time. The constitution does not guarantee cheap gas.
Posted by: Obi-Wan on April 28, 2006 04:58 PMGas taxes do not affect the SUPPLY of oil. Demand, and demand alone, is the determining factor of whether or not the price per barrel rises or falls. Basic econ 101, supply and demand, is why people will pay more for caviar than for chicken eggs.
When the commodity is scarce, prices are high, and resources go toward getting "more" to sell or finding an alternative. The market will always correct itself. Keep the politicians out of it...they only screw things up more!
Posted by: SeaRep on April 28, 2006 07:10 PMConservative pundit Charles Krauthammer of WaPo wrote an op-ed along the lines of your argument. More about that here.
I agree, this is case in point for supply and demand economics, and market reaction to high demand. Cantwell, on the other hand, needs to be stripped of her illusions.
Posted by: Patrick on April 28, 2006 07:43 PMAnd a lot of idiots in this state, voted down I-912, so they've only got themselves to blame for Gregoire's share of each gallon.
This is much ado about nothing.
Posted by: Jeff B. on April 28, 2006 09:46 PMAnd won't traffic nightmares simply go away if there are 10-20% less cars on the road?
and Jeff B, you obviously never met the clerk at my local 7-11, the one who has a firm understanding of Supply and Demand!
Posted by: Brent in Ferndale on April 29, 2006 05:20 AMAnd as for the "record profits" argument, does anyone else see how ridiculous it would look to see an oil exec look at his quarterly statement and say, "Whoa guys, we made WAAAY too much money last quarter. We better drop the price; we're charging way too much. We only need to make a little profit." 8 billion is too much? Would six billion be ok? 4? What's a good number?
Posted by: The Dude on April 29, 2006 08:36 AMThe gas company gets to keep and use 8.5 cents per gallon and the government gets 50 cents (or more) per gallon, all the while saying maybe they should raies taxes on the gas companies. Who's gouging?
If alternative sources are so important, and if higher pump prices help push alternatives forward, why are the Dems not campaigning on how higher gas prices are "better" for us?
Oil companies (O.C.) "windfall" profits: 8.5 cents per gallon.
Federal gas tax: 18.4 cents per gallon (216% of O.C.).
SayWA gas tax: 31 cents per gallon and climbing (365% of O.C.).
What should oil company profits be? 4%? 2%? 1%?
Should it be a dollar amount? 500 million?, 1 billion?, 10 billion?
Would all those congresspersons please clarify what a "windfall" profit is?
By the way, in order to have billions of dollars of revenue by selling gallons of gas, you have to sell lots of gallons of gas - i.e. consumption is still high.
Posted by: SouthernRoots on April 29, 2006 08:53 AMAmazingly enough this is the clearly dumbest statement on this blog Obi-Wan. Have you never heard of cartels? Have you never cracked open and economics book other than an Ann Ryand Book? Have you never heard of OPEC? Marginal pricing? The entire history of mankind is littered with examples of cartels restricting supply to drive up prices and make greater profits.
Please, tell me again how dumb our 2 senators, and evryone but you, is - it's just too rich.
Posted by: philip on April 29, 2006 10:57 AMMKH (also blogs at HughHewitt.com) has an extremely enlightening post up at Whizbang regarding Cantwell and her non-sense "anti-gouging" proposal.
MKH actually met up with Cantwell in D.C. and attempted to ask her several questions about her position; I don't think I have to tell you the response was negative...
Posted by: Patrick on April 29, 2006 12:51 PMThanks for re-emphasizing the need for oil companies to find alternatives to middle east sources (yeah, that means ANWAR) along with equal opportunity to drill in the oceans like the countries run by prancy little dictators.
Posted by: SeaRep on April 29, 2006 02:09 PMI was merely using OPEC as an example of a cartel that restricts supply to drive up prices and create greater profits. It's actually not even that complicated if you understand the least bit of economics, I believe and introductory micro course would cover marginal costs and its relation to the profit maximizing price and quantity.
So maybe next time I should use the Debers diamond cartel so that you cant result to simple RNC talking points about ANWAR, etc.
You're clearly overmatched here, but thanks for playing!
Posted by: philip on April 29, 2006 02:35 PMYes, I have cracked open an economics book. Several, actually. I took a couple of economics courses while earning my BS. I had to take several more economics courses to graduate from business school with an MBA. Heck, we even covered a few economics principles in a couple classes I took in law school where I earned my JD.
You are correct in your example of a cartel such as OPEC, or Debers (sic) manipulating markets. BTW, it's De Beers. That one's on me. OK, here's another freebie from the same paragraph: you said, "cant result" when I believe you meant "can't resort."
As to the topic at hand, it is you - my little friend - that needs the lesson. You're talking about cartels, a group of independent companies (or countries in the case of OPEC), which are illegal in this country. In case you haven't noticed, the examples you cite are not US corporations. By raising the issue that cartels operate in much the same way as a monopoly and manipulate the price of their product, which is true, you would lead us to believe that oil companies in the US are a cartel, but you don't offer any proof to support your accusation.
Understanding my comment about the oil companies requires one to realize that it's true if there is competition. The oil companies may be an oligopoly, in which case may be some less than pure market pricing taking place, but even so, why would one company restrict supply when another company can fill the supply? The company providing the supply wins, the company withholding the supply loses. Unless the oil companies are a cartel, my statement is true; that's how markets work.
You accuse the oil companies of acting as a cartel. For what you say to be true the oil companies would have to engage in collusion or price fixing, which is illegal. If they are, I hope some executives go to jail.
What proof do you have that we are seeing monopolistic pricing in the oil markets? Demand for oil is highly inelastic, but do you have any proof that the absolute value of the price elasticity of demand is less than one? Technically that's required for a company to profit by reducing supply to drive up prices. Only then does the company gain more from the increase in price than it loses from a slight reduction in demand. In plain English this means that the percentage increase in price is greater than the corresponding percentage loss in demand.
Anyway, the oil companies do not set the price of oil. It's set by traders on the spot market.
Class is over, I hear the bell. Time for recess. Go outside and play.
One last free bit of advice before you go. Don't try to debate me, it's like throwing spitballs at a battleship.
Posted by: Obi-Wan on April 29, 2006 05:46 PMYes, if it was similar to what Enron did, it can be illegal, expecially it if creating the shortage is done in a coordinated effort with other suppliers.
It actually goes against good business practices. Companies make money by selling products, not by not selling product.
Sometimes profits can be increased by 100 percent by simply reducing the supply by 10 percent. With the electricity crisis, it turned out that supplies were intentionally taking capacity offline to do just that.
It doesn't work with products which there is an easy replacement or alot of competition. However, if the demand stays nearly the same due to price, the product cannot easily be replaced and there are few players in the market, manipulation is not that hard to pull off.
Posted by: Erik on April 29, 2006 05:54 PMI cannot believe that all those vehicles were on necessary, important trips, so obviously the cost of gasoline is having no impact on the travel plans or habits of people.
Oh, maybe they go to the Safeway station to save a few cents, instead of the Chevron or Shell, but in point of fact, no one is concerned about the cost of fuel for their vehicles, if the amount of traffic on I-5 is any indication.
Posted by: Clean House on April 29, 2006 06:41 PMMoving to the sub-discussion of oil companies that appear to be ripping us off: I'm reminded of my 10-year old son's observation about the evil protaganists of James Bond movies. He asked me what they expected to gain by destroying the earth, i.e., why would they want to destroy the very planet they inhabit?
Applying this analogy to the oil companies: why would they want to intentionally destroy the U.S. economy? What would they gain? About the only logical explanations would be that they are from another planet or share a common death wish for themselves and their families.
My theory: The war against terrorism is being funded by what Tony Soprano would call "skim." We are paying for the war at the pump. So the next time you fill up, take pride in knowing that you are performing your patriotic duty.
PS And go see United 93. Awesome.
Posted by: Organization Man on April 29, 2006 06:55 PMI was never arguing whether or not Cantwell was any dumber than any other federal government official R or D (for example what do you think the effects of a republican $100 tax refund for gas prices will do to the market? - while theoretically the math would say the outcome on the overall economy (GDP) would be indeterminate, I can tell you that it WILL NOT reduce demand or lower the price of gasoline.) I was merely pointing out htat it is quite wrong of you to assert that Cantwell is dumb because “companies make money by selling products, not by not selling product.”
We all know that there is not a shortage of gas in the pumps at the local Chevron, Exxon, etc., but there may very well be evidence that the vertically integrated companies have diverted some crude from the exploration and production divisions away from the US refineries divisions thus creating the shortage at the refinery level and thus making excuses to “tap the demand curve” at the pump a little bit (or possibly “creating” disturbances, maintenance, etc. to reduce the refining capacity.) Due to the inelastic nature of oil in our economy, the hypothesis is they are restricting supply (or restricting refining capacity) and raising prices enough to insure that those who can pay more for the same level of consumption will do just that. I don’t think anybody believes that these are the types of supply reductions that will significantly reduce demand in the short term. With the similarities this may have to what the energy companies (not just Enron) did to the west coast, I don’t think it’s idiotic to at least ask the question and try and find the answer.
So I would hope that you will defend the statement, “Companies make money by selling products, not by not selling product. Only someone .... as dumb as our two senators would believe that oil companies are not selling a product to make more money.” over beating your chest about your academic credentials (i.e. tell my why Cantwell is dumb for simply asking the question and broaching the issue of whether or not there is some refinery restrictions and damand curve tapping going on?)
As to the grammar police, I would hope they would attack my argument with rational thoughts and analysis of their own over simply attacking me over typos.
Posted by: philip on April 30, 2006 11:18 AMSay, wasn't it AL Gore who wanted $5.00 a gallon gas? So why is the left so shook-up about three buck gas? Oh, I forgot . . . it's George Bush three buck gas.
Posted by: G Jiggy on April 30, 2006 11:25 AMRemember being good "Progressives" they will not be selling any of that "junk" food at their stop and robs, only whole grain, organic stuff. The Progressive gas will be certified environmentally friendly, no "KerryBoo" coitus interuptus. The market is wide open and there is apparently no end to the people who profess the ability to improve on the current industry marketing and refining models in the existing regulatory environment. Remember Phillip it only takes one rogue company to smash this immoral industry.
Posted by: Huh? on April 30, 2006 03:01 PMThe woman is useless.
I don't recall using the term "excess profits”, and if this is the term that politicos are using I can’t presume to know what they mean when they use the term. In economic terms excess profits are those that are achieved when a company, monopoly, oligopoly or cartel, can price above the point where marginal costs = marginal revenue (or produce a quantity at a point other than where marginal costs = price if they are price takers). Economic theory posits that in the long run all firms in an industry should produce no economic profits (which are different than accounting profits.) The belief is that if a firm can price above MR=MC and make abnormal profits, then there is incentive for other companies to enter the market, produce at the same costs and price slightly below the other firm and capture the market share, and then another firm would enter and undercut the second, etc, etc. until the price of the good is bid down to MC=MR and all firms make zero economic profits in the long term.
A great example of “excess profits” are patents. Patents and patent enforcement are so important in our economy because they essentially grant monopolies to companies that allow them to make abnormal, or excess, profits for a period of time to cover the research and development costs and make a “reasonable” profit. (Gasp! Government intervention producing economic good – blasphemy on this site). Think of drugs – lots of time and money to develop test and get approval, but very little money to produce each pill. If the generics could come out a month after the name brand, then they cold undercut the price and bid it down to MC=MR, but if that was the case the original company would never have invested the billions in the first place.
That’s my understanding of excess profits.
Huh? said:
"Remember Phillip it only takes one rogue company to smash this immoral industry."
(Only one L for future reference)
I don’t make normative judgments on morality of industries. But I will tell you this, you don’t hear me complaining about the high price of gas and crude. Why? I invested in a number of smaller exploration, development, and production companies over 2 years ago and have enjoyed large capital gains and some dividend payments that have more than offset the increases I’ve seen at the pump. :)
I recall reading a textbook definition of profit as "excess earnings." Interesting description.
Patents provide an incentive for investment into original thinking. Witness the fate of countries that do not participate in providing patent protection. China or Brazil.
There are many companies yielding greater percentage of returns than Exxon and their competitors.
Politicians are doing nothing more than grandstanding. The election season brings out the best in all politicians.
Posted by: Snuffy on April 30, 2006 08:04 PMThe great book BASIC ECONOMICS by Thomas Sowell should be required reading in school. And we should demand that every politician read, and understand it, as well.
Posted by: Jefferson Paine on May 1, 2006 08:21 AM