About Freedom - Your Voice Counts
Voices For Freedom is a weekly column by Dan McLaughlin, which focuses on the themes of economic and political freedom. Voices For Freedom© 2008 Daniel J. McLaughlin
Those Benevolent Oil Executives
It is amazing how the executives at big oil companies could transform so quickly from greedy misers that charged more than $4.50 per gallon of gas to such benevolent saints as to offer it now for $1.89 in some parts of the country. A miracle must have happened. Maybe they got religion. Maybe they are being good so Santa Clause won’t forget them at Christmas time. Or maybe, just maybe, the market, made up of supply and demand, really does have an effect on prices.
People, in general, have the notion that business owners pick a price out of thin air and the buying public has no choice but to pay it. If you go to a restaurant, you either pay the price on the menu or you don’t get served. If you go to a grocery store, you pay a dollar for the can of soup or you leave without it. On a day to day basis, that appears to consumers to be the way business operates.
Did you ever stop to think why that can of soup sells for $1.00? One limiting factor is cost. No company will survive if they continuously offer products or services at prices lower than their costs. They will go bankrupt. Cost, in and of itself, however, does not determine the price. Customers decide if they think that it is worth the price. If not, they find substitutes or go without. If customers are not buying the soup, the sellers will have to either reduce the price to the point where they will buy it or they will have to stop producing it. If some other company is more efficient and is able to offer similar soup at a profit for a lower price, soup prices will probably drop in order to attract customers away from higher priced competitors.
Contrary to what anti-free market forces say, we do not live in a for-profit system but, rather, a profit and loss system. Businesses suffer losses when they don’t offer goods and services that customers want at prices they are willing to pay. Those that can’t produce efficiently enough to make a profit at the price that buyers ultimately set won’t be around for long. Current estimates indicate that 56% of new businesses fail in the first four years. They can’t find the combination that satisfies customers.
As energy prices are plummeting, oil company executives still want to maximize the profits for their companies. They really want to charge higher prices. That is what every private business owner wants. That is actually very good for us as consumers and aids the progress of civilization. Times of high prices and high profits attract more suppliers into production. Alternative sources of supply are found. Alternative technologies are developed. People use less. In other words, high prices cause the quantity supplied to increase and quantity demanded to decrease, lowering the price in the long run. That is the history of developed economies.
In our present situation, the global economic slowdown has caused a tremendous drop in demand for oil. The price must fall. The other side of the coin is that lower prices will curtail exploration and development of new sources. There have been tremendous new finds of oil and gas fields in the United States in recent years, and alternative sources of energy have come a long way. As prices drop, however, there will be less incentive to develop those resources. Supply and demand are in a constant state of adjustment through the price mechanism.
With that said, there is a lot wrong with business, especially energy companies. Corporate welfare is rampant, with billions of tax dollars subsidizing the profits of private companies. Money is donated from your pocket, as a taxpayer, to the pockets of oil company executives and stockholders, as well as those of extremely inefficient alternative energy companies. Government interference in energy and other markets does nothing but distort the normal incentives and transfer wealth to the wealthy.
Some people say we need the government to ensure that we have adequate energy in the future. That belief rests on the grossly mistaken assumptions that politicians are free from the protectionist influence of established energy companies, that they actually know what is best, and that they truly are interested in improving our lives. It shouldn’t come as a shock to anyone but, no, politicians don’t have our best interests at heart, any more than oil executives want to reduce energy prices for us beleaguered consumers.
|
