Oil Company Execs Deny Price Gouging to Congress

The top executives from the oil companies were hauled before Congress today to defend themselves against price gouging charges.

Oil Company Execs Defend Huge Profits (AP)

The chiefs of five major oil companies defended the industry’s huge profits Wednesday at a Senate hearing where they were exhorted to explain prices and assure customers they’re not being gouged. There is a “growing suspicion that oil companies are taking unfair advantage,” Sen. Pete Domenici, R-N.M., said, opening the hearing in a packed committee room. “The oil companies owe the American people an explanation,” he declared.

[…]

Together the companies earned more than $25 billion in profits in the July-September quarter as the price of crude oil hit $70 a barrel and gasoline surged to record levels after the disruptions of Hurricanes Katrina and Rita.

[…]

Sen. Barbara Boxer, D-Calif., made the issue personal, noting that the executives were reaping multimillion-dollar bonuses on top of multimillion-dollar salaries as “working people struggle” to pay for gasoline and face the specter of soaring home heating bills this winter. “Your sacrifice appears to be nothing,” Boxer told the executives.

The head of the National Association of Manufacturers, former Michigan Gov. John Engler, criticized lawmakers for the way they handled the hearing. “Demagoguery and demonization will not reduce energy prices or solve supply problems in the long run,” he said. “Our energy supply and infrastructure have suffered from 25 years of increasingly restrictive government policies that have made it almost impossible to access and refine the resources we have. The Senate should dispense with the theatrics and get serious about Americas energy supply.”

The White House said that President Bush, too, is concerned about energy prices. “Energy prices have been too high and energy companies have realized significant increases in profits,” said spokesman Scott McClellan. “It’s important that the private sector be good corporate citizens and invest in the energy infrastructure and support those who are in need.”

What nonsense. It is not the responsibility of industry to build infrastructure and help the needy. Their job is to make profit for their shareholders.

The only thing sillier is the notion that CEOs of major companies should “sacrifice” because some people are having trouble affording $3 a gallon gasoline. What sacrifice has Sen. Boxer made?

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. anjin-san says:

    Nothing wrong with making a profit, but perhaps we should ask why the oil companies need multi-billion dollar tax breaks when they are reaping record profits and the federal govt is a sea of red ink.

  2. Dodd says:

    I would say that Sen. Boxer had sacrificed her brain but for the lack of empirical evidence that she ever had one.

  3. Herb says:

    James:

    For the first time I am in disagreement with you.
    While it is the duty and responsibility for company executives to make a profit for their shareholders, it is also their duty and responsibility to be responsable citizens. I don’t think anyone is or would deny any corporation the right to a reasonable and rsponsible profit, but the profits posted by the oil companies are nothing less than obscene. With the oil companies having full control over the supply side of the energy they produce, it is impossible for the average man on the street to have the clout to do anything about it and the oil companies know that.

    We are always told the gasoline prices are based on the futures price of crude. About 4 to 5 weeks age, I sent Steve Verdon an atticle that came from a big oil meeting, where the Saudi Oil Minister stated that the Saudi’s were producing 1 million barrels a day over demand and there were “no takers for the excess” There was little or no disruption of produced oil folllowing the Katrina and Rita disasters. In other words, there was no reason for 70 dollar oil and $ 3.00 gasoline. There is and was “supply control” that took over and Americans paid the price and will continue doing so.

    I ask you, can you do without you automobile today? or can you do without you telephone? the answer is most likely NO, Oil today falls into the same catagory as your car and telephone. They have become necessities today along with many other products.
    As for Senator Boxer making a sacrifice, you bet she didn’t, but many millions of Americans did and are still diong so.

    The sacrifice Americans are asking for is fot the oil companies to be “responsible” and reduce their profits when their profits become obscene like we have seen over the past few months.

    We say we are a supply and demand society, but when the supply is controled by only a few, as with oil, we ceace to be that society.

    And lastly, sure the oil company executives defended their profits. What else would you expect them to do. If the admitted their profits were excessive, that would be admitting they wer gouging the public.

  4. Steven Plunk says:

    I would sure like to be in a business where the costs of the raw material shoots up then my profits shoot up. I don’t understand that.

    However, having said that, where does the congress get the idea they have the high ground on this issue? Federal fuel taxes add to the price regardless of how it hurts the little guy. Federal rules have slowed the building of refineries if not stopped construction altogether. Tough air quality standards have forced older refineries to close. We can’t drill for oil off the coast of California, the coast of Florida, the ANWR, and countless other tracts of federal land.

    The problem is not simple and the solutions are not simple. Grandstanding elected officials do nothing to help any of us.

  5. James Joyner says:

    Herb,

    Your argument would seem to lead, logically, to the nationalization of petroleum resources on a not-for-profit basis. Or, at least a public utility like local phone service. Is that your position?

    Otherwise, it strikes me that the market is the best indicator for what a “reasonable” level of profit is.

    Now, even Adam Smith acknowledged that free trade only works in an enviroment with competition. But there are five major oil companies and tens of thousands of gas stations. Stations within site of one another post different prices, which they adjust at least daily to maximize profit. There seems to be no lack of competition.

  6. Steve Verdon says:

    I would sure like to be in a business where the costs of the raw material shoots up then my profits shoot up. I don’t understand that.

    You forget that many oil companies are vertically integrated–i.e. they drill, pump, transport, and refine the oil and often sell it.

    There seems to be no lack of competition.

    While there is some competition, there is undoubtedly market power on the part of the oil companies and gas stations. If you have two gas stations with prices $2.559 and $2.539 you wont see the cheaper gas station serving everyone. There are two factors at work:

    1. People value their time–hence long lines will induce people to go to the more expensive station.
    2. Each station has a finite amount of gasoline in its tanks. When that is gone the other gas station will have market power until the tanker tops of the cheaper stations tanks.

    This means that competition isn’t as vigorous as we might like. Same thing with refineries, boutique blend requirements, and so forth. These create an atmosphere that reduces competition and increases market power for incumbents.

    But as Steve Plunk notes, Senators whining about this when they created it is truly ironic.

  7. DL says:

    If there is any gouging going on, it is the tax gouging that these very same clowns do.
    I’m going to think biblical though. They need to take the beam out of their own eyes before they pick on the oil execs for having a splinter here and there.

  8. DL says:

    “The sacrifice Americans are asking for is fot the oil companies to be “responsible” and reduce their profits when their profits become obscene like we have seen over the past few months.”

    Okay, if all of you oil company enemies can show a similar letter you wrote when they had to scrape to make a buck.

    Those Senators were just doing their usual grandstanding in preparation for the next election. How many have put in bills to drill Alaska? (before this price run-up?)

    Nothing is sillier than an over paid, tax-gouging, budget busting politician, pretending to be concerned about our money.

  9. It sure does seem that oil companies have been price gouging for quite a while now. But what is Congress gonna do about it? (aside from grandstanding)

  10. Herb says:

    James, The answer is NO, I do not want to see the nationalism of the oil companies. I want to see profitable companies thrive on reasonable profits nad not on excessive obscene profits, I don’t think that is asking for to much.

    Suee ther is some competitonn at the street corners with gas stations, but when a profit margin of 2 to 3 cents per gallon at the gas sations, there is not much room for “competition”

    Let me put it this way James, If you went to purchase a couch or a car, you would “Price compare” and purchase the one that fits you budget or is priced lower for a like product, or both. With the oil companies, the American gas consumer does not have that “buying power” because the supply is completely controled by the oil companies.

    Your argument of the gas stations providing the “competition” is reaching.

    Please tell me, what is wrong with the American consumer wanting any company to post a reasonable profit? as with the oil companies rather the getting the excessively high profits the oil companies are getting now. Especally when gasoline, home heating oil and gas are a necessity as they have become?

  11. Herb says:

    Steve:

    You are right when you place a lot of the balme on our “leaders” and the botique blends”, but you forget that right after Katrina, there was a 60 day moritorium put on the botique blending of gasoline. This should have created a leveling off or reduction of gasoline price, but it increased the price as we have all endured

    One oil company executive stated today that ” we do not need to build more refinerys, we can increase capacity at those we now have.

    My question is, Then why the hell didn’t they increase the capacity long ago when oil and gasoline consumption was predicted to increase?

    I contend the didn’t because of a “why should we” attitude and to do so would keep prices in line and profits down from what they could get if crude prices increased.

    Another thing bothered me with todays hearings, that is we were told constantly by the oil companies that it takes 15 years to build a refinery from start to finish. Today, every oil company executive testified that it takes 6 to 8 years to build a refinery. In other words, the oil companies were feeding everyone BS prior to todays hearings in their attempt to “create the shortage” and justify their prices.

  12. Steve Verdon says:

    James, The answer is NO, I do not want to see the nationalism of the oil companies. I want to see profitable companies thrive on reasonable profits nad not on excessive obscene profits, I don’t think that is asking for to much.

    Unfortunately Herb, you seem to want to define reasonable via the political process. This would lead to private ownership, but with central planning.

    What is wrong with that? Prices are signals about need for resources. Higher prices means more resources needed. Profits tend to rise with prices. Now, does that mean that there is nothing to be done with regards to the high prices? No, I don’t think so. Coming up with a nationwide fuel blend would be a great place to start. But to look for a political solution that limits profits will not help, but could exacerbate the problem. It could lead to shortages and lines. Basically, you’ll pay one way or the other. You’ll either pay via the wallet or wasting moments of your life sitting in a line.

  13. Steven Plunk says:

    From the comments posted it seems more competition would go a long way to solving this problem. The question is how do we create that competiton?

    I don’t think government intervention will increase competition but will instead stifle it.

    The web of rules, regulations and mandates leads us to this point where competitors are locked out. Small producers and refiners cannot prosper or even live in this environment.

    I agree with Herb that business should be responsible, but, that responsibility extends only to obeying the law. Let’s face it, corporate charity is really just another form of advertising except it makes you feel warm and fuzzy.

  14. Steve Verdon says:

    From the comments posted it seems more competition would go a long way to solving this problem. The question is how do we create that competiton?

    By removing as many barriers to entry as possible and still take into consideration things like air quality. The standarization of fuel blends/additives would be one obvious place to start.

  15. Herb says:

    Steve:

    I don’t see where you arrive at the term “reasonable” as being via the political process. If you take it that way (political process) then you are wrong.

    The only political process in order is for Congress and the EPA to pass legislation that promotes more competition within the oil industry. ie: fewer EV regs, less paperwork and get rid of the botique blends.

    I ask that you again read the first paragraph addressed to you and provide me with you rcomment. I think that would provide a greater insight to the degree that our “leaders’ should take.

    As far as “higher prices bring more resources” please recall the excess of oil the Saudis were offering to the marketplace (1 million barrels) and there were “no takers” statement I refered you to a short few weeks ago.

    Once again, Every company has the right to make a reasonable profit on the products they produce. But, the profits the oil companies are posting not only excessive, they are obscene and extremely greedy at the expense of the consumer.

    Steve. look at the airlines, their costs have increased due to increased fuel costs. are their profits increasing, No, because there is competition and they will lose business if their prices increase to much. With the oil companies, there is no competition and they know it. Hense they can charge what the want and get away with it.

    As for the need for more resources, the CEO of Exxon/Mobil just issued a statement about the oil reserves in Saudi Arabia, He stated that there are an estimated 3 Trillion barrels in the reserves and another 7 Trillion more yet to be discovered. 3 Trillion barrels is more oil than that has been produced in the history of oil production. So, your argument that “prices are signals for the need of resources does not hold water, or oil as the case may be.

  16. Fred says:

    I remember the Carter years and the mess he made of energy. Lets not go back there.

  17. bruce says:

    Okay, if all of you oil company enemies can show a similar letter you wrote when they had to scrape to make a buck.
    Those Senators were just doing their usual grandstanding in preparation for the next election. How many have put in bills to drill Alaska? (before this price run-up?)
    Nothing is sillier than an over paid, tax-gouging, budget busting politician, pretending to be concerned about our money.

    It was the politicians who gave the tax breaks et. al. when the oil companies had to scrape to get a buck. The situation, it seems, is different now and possibly needs to be rethunk?