FUNDAMENTAL TRUTH #63: “There is no such thing as a monopoly in free market capitalism.” -Old Pithy

Posted by PITHOCRATES - April 26th, 2011

There is always Competition

Once upon a time, back in my youth, I sat in a seminar on venture capital.  I learned that venture capitalists are very wise.  And very careful about where they invest their money.  For them it’s not so much as making a return on an investment.  They could do that easier by just buying stocks and bonds.  No, the venture capitalist wants more.  They’re often people who went from rags to riches on a great idea.  And they want to recapture that feeling.  By taking big risks with their money.  On something that could be the next big thing.  And if you got the next big thing, they have that important seed capital you need.  But you have to sell them first.  Really sell them.

All these years later, I still remember this one example about a small startup company that had the next big thing in security systems.  Or so they thought.  Theirs took advantage of the latest in technology.  Motion sensors.  Glass-break sensors.  Sound sensors.  You name it.  If anything happened that shouldn’t be happening, the system would detect it.  But it did more.  It made noises. Flashed lights.  To scare off would be thieves.  Because thieves like to break into quiet, empty places.  Not places where lights went on and off.  And sounds moved around.  It was a pretty impressive system.  And costly.  It would set a business owner back quite a bit to install such a system.  But it would be worth it.  They knew they could sell it.  And, best of all, they would have a monopoly.  For no one else had anything close to what their system could do.  This was brand new.  And there was no competition.

 The venture capitalist smiled and thanked them for their presentation.  But he would not invest.  For they did have competition.  He said there is always competition.  They just failed to identify it.  They were sure there wasn’t.  They did their homework.  No security company out there had a system remotely close to theirs.  Then the venture capitalist smiled and said politely, “Perhaps not.  But I could buy a dog to do the same for less.”

High Gas Prices keep Gas Available

There is always competition in a free market.  If there is a market sector that is making high profits, other businesses will try to enter that sector.  To get a share of those high profits.  And when they do, there’s competition.  And prices come down.  That’s why gasoline prices are so close to each other at gas stations in the same geographical location.  One could raise their selling price by a dollar.  But if they did, their customers would just go to their competitors.  That’s what competition does.  Keeps prices down.  And makes people figure out how to sell the same thing for less.  Because if they can, they gain customers.  While their competitors lose customers.

Even oil companies feel the heat of competition.  High gas prices may hurt the wallet at the gas pump, but they are an incentive to them.  When the demand of oil grows greater than its supply, prices soar.  Why?  Because oil is becoming a more scarce commodity.  And the scarcer a commodity is the higher its price.  Simple supply and demand of economics.  These higher oil prices allow the oil companies to go after oil in the ground that was before too costly to bring to market.  Deep water drilling is more expensive than conventional drilling.  It simply wasn’t cost feasible before.  As was extracting oil from oil sands.  But high oil prices allow this extraction.  Bringing more oil to market.  Which ultimately will reduce the price of gasoline.  Or at least reducing the increase in the price of gas.  Simply by increasing the supply of oil to more closely meet the demand.  More importantly, even though prices may go up, gasoline will be available.  Unlike it was during the 1973 Oil Crisis.  Where OPEC cut oil deliveries to the U.S.  Instead of letting market prices rise to match the supply to the demand, the Nixon administration implemented price controls and rationing.  It seemed the kind thing to do for the consumer.  But by selling below the market price a lot of gas stations simply ran out of gasoline.  Resulting in further rationing.  Long lines at gas stations.  And scenes of people pushing their out-of-gas cars to the gas pump.

So, yes, even high gas prices can be a good thing.  It’s simply the market setting the price to make sure gas is available to buy.  We may not like the price.  And think the oil companies are gouging us at the pump.  But they’re not.  Even when they have record profits.  Though it is tempting to hate them after they post some of those record profits.  They sound huge.  And unfair.  But are they any bigger than other corporate profits?  Not really.  Oil companies have huge revenues.  So their profits are huge.  But as a percentage of sales revenue, they’re actually not that huge.  Here are some examples of net profit averaged over five years.  Chevron (8.22%).  BP (4.94%).  ExxonMobil (8.79%).  And how does that compare to other corporations?  Here are some from various sectors.  Home Depot (4.86%).  Sony (0.82%).  General Electric (9.93%).  Apple (17.60%).  Microsoft (28.20%).  If you look at net profit, the oil companies aren’t really making more profits than other corporations.  (For source of net profit information see YCharts.)

The Federal Government is a Monopoly

Of course, when gas prices go up we tend to feel that more than other commodities.  Because we use a lot of gas in our daily lives.  Which leaves us less money in the wallet to buy those other commodities.  Which are more expensive because of the higher energy costs to bring these other commodities to market.  Few things affect prices like energy.  And oil is the big player in the energy market because it is the energy of choice in transportation.  Ships, planes, trains and trucks all use oil-based fuels.  And no matter how green we get this isn’t going to change.  Because there is no other portable fuel with such a large energy content available.  And won’t be in the conceivable future.  You just aren’t going to replace any of these with electric versions.  And that’s just not in the U.S.  It’s in all of the advanced and emerging economies in the world.

This is why oil prices are going up.  It’s not the greed of a small cartel of oil producers.  It’s the exploding demand.  And the high oil prices are allowing these companies to bring oil to market that was simply impossible a decade or two go.  And there’s more oil out there.  But we have to get it out of the ground.  And we need to be doing this some 5 years before we need it.  Because it takes about 5 years to bring new oil onto the market.  And they would be drilling exploratory wells like there is no tomorrow in the U.S.  If it wasn’t for the hurdles they have to jump through to get a permit from the government.  An oil company can spend 5 years or more in the permitting process.  They can spend millions of dollars in the process.  And yet the government can still deny them the permit.  Without any compensation for their investment to date.

This isn’t unique to any one oil company.  They all go through this.  It is very difficult indeed to start drilling a new well in the U.S.  Which means it costs more to drill a well in the U.S.  So some oil companies eventually give up and go elsewhere to look for oil.  Taking with them good oil jobs.  Which reduces domestic oil supplies.  Making us more dependent on foreign sources of oil.  Which increases the cost of oil-based fuels in the U.S.   But it’s not any oil cartel doing this.  Although it is a monopoly.  It’s the federal government.  The oil companies will still go out there and find oil and bring it to market.  It’s what they do.  They just don’t do it here.  Because the U.S. government just makes it too difficult to do this in the U.S.

Getting Oil out of the Ground is not Easy

Only the power of government can interfere with the free market.  Because it takes legislative authority to restrict the free market.  Create cartels.  And monopolies.  It’s not one big oil company keeping the others out of the U.S. market.  It’s federal regulation keeping all of the oil companies out of the U.S. market.  And this is what is increasing the price at the gas pump.  And in commodity prices across the board.  Because the high oil prices are just begging for them to come in and find oil and bring it to market.  Even in sources once considered too costly (oil sands, deep wells, arctic climates, etc.). 

And just like every business has competition, so do markets.  Getting oil out of the ground is not easy.  It is a very costly and speculative industry.  And as oil becomes more costly to bring to market, fewer are able to do it.  You need deep pockets.  And deep experience.  Those who can and do so at a profit are in great demand.  So if they can’t drill in the U.S. they can drill someplace else.  And do.  Because of the big U.S. monopoly, the federal government, has shut them out of the U.S. market. 

But as people look forward to the summer driving season, they will curse Big Oil.  Not the federal government.  Even though the former fights to bring oil to market.  While the latter fights against it.

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