Record Profits by Oil Companies
Recently, Exxon Mobil, the nations largest oil company, reported profits of $8.4 billion. This number is up 7% from last year. Since Exxon Mobil is the worlds largest oil company, they are setting the price for other oil producers. Although Exxon is not the only oil company, they are setting output and price in a monopolistic way. Output will be set according the rule MR = MC. The price at this point will not be charged however. The price will be set off the demand curve, directly above the maximum output point. Doing this increases producer profit while decreasing consumer surplus. This seems to be exactly what Exxon is doing. Exxon is making record profits, while the general public is outraged that their consumer surplus is dwindling. The government is attempting to solve the problem. It has been proposed that tax breaks to big oil companies be repealed, and new laws against price gouging be passed. Due to the sheer size of Exxon Mobil, it will be difficult for other companies to come in and form a prefectly competitive market. Government intervention appears to be the only solution to the rising gas prices.
1 comment:
Is it really appropriate to think of Exxon as a monopolist? What share of the oil market does Exxon control? My guess is that Exxon is but a bit player in the world oil market. Most economists argue that rising gasoline prices are primarily due to the growing world demand for oil stemming from the economic boom occuring in China and India. As these nations continue to develop their economies, their thirst for engergy will only deepen.
Another factor behind rising oil prices are supply disruptions due to various natural disasters (Hurricane Katrina) and political uncertainty involving the Middle East and Venezuela--both large oil producers.
When demand rises and supply falls, there is only one way for price to go: UP.
I am amused at the calls for government to "do something" to reduce gasoline prices. If anything, government has actually worsened the situation by imposing costly environmental regulations on oil producers and trying to promote the use of an expensive gasoline additive (ethanol) at the expense of cheaper synthetic products.
Why not simply let the market do its thing? If the price of gasoline continues to rise then people will naturally respond by conserving on their use of fuel---no need for Big Brother to come up with all sorts of fancy government programs to tell us what to do. Furthermore, as price rises, producers will be encouraged to seek alternative energy sources. Both buyers and sellers will be led to conserve fuel as if led by an invisible hand.
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