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Breaking Up Is Hard to Do

May 02, 2006

By Max Schulz

As hysteria over $3 per gallon gasoline reached fever pitch, New York Senator Charles Schumer, one of the lead Democrats on energy issues, took to the Senate floor to offer a truly radical proposal to punish the major oil companies. Schumer was not content to settle merely for levying extra taxes on top of the already high figures the industry pays. Nor was he satisfied with just instituting price controls on retail sales of gasoline. On top of these schemes, Schumer floated the idea of "break[ing] up the big oil companies."

In doing so, Schumer brought to mind other episodes in our nation's history where the federal government used its powers to bring down corporations deemed to have grown too powerful. In 1984, for instance, the feds succeeded in breaking up AT&T and dividing it into seven regional "Baby Bells" providing local phone service.

Going back further, the federal government invoked the Sherman antitrust act against John D. Rockefeller's Standard Oil. In 1911, it broke up the oil giant into several dozen distinct, competing companies. A century later, following various mergers and consolidations, a number of those remnants have pieced themselves into present energy giants ExxonMobil, Chevron (formerly ChevronTexaco), and BP (formerly BP Amoco). It is these several major oil companies, along with Royal Dutch Shell and ConocoPhillips, whom Schumer suggests have too much power over the marketplace.

The idea is slowly picking up traction, and not just on the left. The Republican chairman of the Senate Judiciary Committee, Arlen Specter (PA), and Ohio Republican Mike DeWine, have co-sponsored legislation with Democrats Richard Durbin (IL), Herb Kohl (WI), Patrick Leahy (VT), and Dianne Feinstein (CA) to clamp down on perceived antitrust violations in the oil and gas industry.

It is highly unlikely the Bush Justice Department will pursue antitrust action against the oil companies, or that the current Congress will pass Chairman Specter's bill. But depending on the outcome of the 2006 and 2008 elections, the industry could very much find itself in the legal crosshairs in the not-too-distant future if the idea continues to fester.

The problem with this way of thinking is that the oil majors are not as all-powerful as their critics assert. They certainly do not hold a monopoly position in the marketplace. Big Oil is indeed big -- ExxonMobil, for instance, is the 6th largest publicly traded company in the world, and enjoys the highest revenues -- but it is not that big when compared to the entire world petroleum market, which is gargantuan.

The real giants are the state-owned oil companies in Saudi Arabia, Russia, Venezuela, Nigeria, and other OPEC nations. Compared to them, Big Oil seems like small fry. As Red Caveney of the American Petroleum Institute noted, "Nearly 80 percent of the world's reserves are owned by these national oil companies and a mere 6 percent are controlled by investor-owned companies."

That statistic alone shows why Big Oil is unable to dictate the price of crude oil, which has been the chief reason for the run-up in gasoline prices over the last several years. Those prices are dictated by supply and demand considerations, and informed by the instability that afflicts so many of the world's oil-producing regions (the so-called "risk premium" in the price of a barrel of oil). Demand is up in India, China, and, thanks to the booming United States economy, at home as well. Suppliers are having a tough time keeping up at present. Spare capacity is limited; as a result, prices have soared, from an average of $28 per barrel in 2003 to over $70 per barrel today.

The profits raked in by the large, privately-held oil companies are a consequence of these developments, not the cause of them. ExxonMobil announced recent quarterly profits of $8.4 billion. That number is huge, but in terms of the company's profit margin, it is a reasonable fraction (less than 10 percent) on an astounding $89 billion in revenues. The vast majority of those revenues and profits were earned outside the United States.

If Congress wants to address unseemly profit-taking, it would do no better than to look in the mirror. According to the Tax Foundation, since 1977 governments have collected "more than $1.34 trillion, after adjusting for inflation, in gasoline tax revenues -- more than twice the amount of domestic profits earned by major U.S. oil companies during the same period." Those "profits" earned by government have come without having to risk capital, to answer to shareholders free to take their money elsewhere, or even to satisfy customers. Sounds like a monopoly to me.

Original Source: http://www.tcsdaily.com/article.aspx?id=050206D

 

 
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