On Oil Company Profits

I'm not joining the chorus condemning the oil industry for “obscene” profits following the hurricane disasters. My view is that they performed a valuable service, and deserve to be rewarded.

First, let me explain the “valuable service” they performed. When hurricanes Katrina and Rita hit the oil platforms and refineries, they created shortages. If oil prices hadn't risen, there would have been no incentive for motorists to cut back on their driving and thereby reduce demand. The only way demand could have been reduced without price increases would be rationing, either through some government action or through the failure of gas stations to be able to refill their tanks (i.e., first-come first-served rationing). Any government rationing system would have required some time to implement, meaning it would have been unneeded before it ever took effect. So the best way was what happened - prices rose, demand fell, and everyone got to work.

When you get right down to it, what ‘liberals’ are most incensed about is the fact that the oil companies got the money rather than the government. And I'm going to predict that next quarter, the oil company profit picture is going to be much gloomier due to rapidly falling prices. You won't hear much about it, though - count on it.

(Posted Friday, October 28, 2005 )