Oil prices are elevated, economists and politicians are in a frenzy, and it's just another day in the market cycles.
For the past two years, business news has not stopped talking about the rising price of crude, and as soon as the price rises north of $60, mainstream magazines begin to run doomsday stories about the impending mayhem.
The public's mind has become riveted on every fluctuation at the pump, and the price of a barrel of crude has become as well known as a gallon of milk. With this increasingly scrutinous attention, often the true implications of events are lost in the frenzy.
The recent example of Exxon-Mobil's record profits is a perfect example. The company went to great pains to divert attention away from its phenomenal fourth quarter. Taking measures to diminish the impact of their extraordinary earnings, Exxon-Mobil went as far as running a full page ad in the New York Times highlighting the profit margins of other industries.
What the media frenzy misses however, is the economics of the situation. Oil prices are high because of increased demand from developing countries and the heightened tension in the Middle East. Oil companies have little control over the price that a barrel of oil will fetch.
Exxon-Mobil was able to sell its oil at a higher average price, and thus able to add big numbers to its bottom line. While many other factors such as a relatively lax tax code have helped boost their numbers, reformist cries are exaggerating the problem.
Speculators and oil traders are frequently demonized as the cause of rising prices. However, these parties are actually in the market to make it more efficient, and ultimately make the price of oil more accurate. This wisdom of crowds is frequently counteracted by ham-fisted intervention.
Current calls for a "windfall profit" tax on Exxon-Mobil are shortsighted. Markets are a reactive mechanism in themselves. If we constantly maintain a policy of reacting to markets and weaving the regulatory web to fit the current situation, hindsight will blind us. What needs to be done is to create a rational legal and political framework which will weather all situations.
One of the most egregious effects of narrow-minded regulation is the amount of profits these oil companies are allowed to make. While people vilify Exxon-Mobil for making money by providing a commodity that people desire, the problem actually lies within the system. Because of meager times under the Clinton administration, oil companies were able to successfully lobby for a number of benefits, such as pumping billions of dollars royalty free.
What makes more sense than another reactive piece of legislation would be the construction of a tax code which allows for flexibility in weaker moments of the business cycle, yet reaps the benefits during prosperous periods.
In addition, more must be done to increase oil efficiency, as opposed to increasing oil quantity. The problem of expensive gasoline will be solved by implementing strong fuel efficiency measures, not by proposed administration measures to free the US from Middle East oil. Nixon made the same promise nearly 25 years ago, and nothing's changed.
America's oil problem is a dubious one that will not be easily solved. However, the only feasible way to address it is to develop long-term solutions. Hasty reactions to record profits or rising gas prices will only further compound the problem in the future.
