Well after reading this post, it must be the case that Big Oil is run by a bunch idiots.
At the start of this month, I joined others in predicting that U.S. gasoline prices would soon be below $2.50 a gallon. The price has already dropped 20 cents to $2.60 a gallon since then, and it now appears likely to go down at least another 30 cents from here.
Now, if as many commenters here have implied and stated outright, that Big Oil was responsible for the run up in gasoline prices and that market conditions played no part, then the conlusion at this point is that Big Oil are fools for letting the price of gasoline fall so low and crimp their massive profits. Of course, the truth of the matter is that Big Oil doens’t have nearly the control that the commenters have implied. As Radley Balko notes,
But who exactly is “Big Oil?” Believe it or not, “Big Oil” is actually “Big Socialism.” The Economist recently looked at the largest oil companies in the world, and found that the thirteen largest oil companies in the world are all state-owned, where all profits go to national governments. These thirteen companies control 90 percent of the world’s oil.
Exxon Mobil, the largest publicly listed company in the world, comes in a measly fourteenth, and controls only a tiny share of the world’ oil reserves.
In other words, “Big Oil” like Exxon Mobil really isn’t all that big in terms of revenue, profits or oil itself. Oooops.
From the article in The Economist,
The NOCs will gradually become even more dominant as oil production dwindles in areas which are open to all comers, such as the North Sea and the Gulf of Mexico. New oil is most likely to be found in the NOCs’ territory, precisely because it is largely out of bounds to multinationals such as Exxon and BP, and so has not yet been thoroughly raked over. In the future, therefore, oil production will be even more concentrated in the hands of the national firms of Russia and the Persian Gulf.
So all the fulminating against the evil Exxon Mobil, BP, et. al. is not only a waste of time, but short sighted and naive.
As for the idea that it isn’t market forces at work here, lets return to James Hamilton’s post on the falling price of gasoline,
So why are gasoline prices coming down so dramatically? There are important seasonal factors in U.S. gasoline prices, which are higher in the summer due to summer fuel requirements and greater gasoline demand. Everyone always seems as shocked when prices go up in the spring as when they come down in the fall, even though to some extent that same pattern is repeated every year. However, much more than just the usual seasonal is in operation this fall. The drop in crude oil prices, down $14/barrel over the last month, has now become the dominating factor.
[snip]
So what is going on? I’ve argued that speculation in oil has in part been driven by the asymmetric payoff structure in a tight market. With limited excess capacity, any supply disruption had the potential to produce quite a spike up in prices, and that possibility may have been regarded as sufficient compensation to speculators for the risk of a price decline that would be expected to occur if none of those events took place. But we’re now operating on the flip side of that same calculation– hurricanes have so far failed to disrupt this season’s production of oil from the Gulf of Mexico and the conflict with Iran seems to be playing out as an awkward standoff. The absence of bad news means prices had to drop.
Furthermore, there is some evidence that petroleum demand is finally starting to be tamed, which is of course one way to create more excess production capacity in the world oil market. My concern here is that the incipient economic slowdown may be the most important factor responsible for declining petroleum demand. And to the extent that’s the story, the oil price declines are not exclusively a harbinger of good economic news.
In economics we call all of this, market forces.
