Wednesday, May 21, 2008

How Could He Possibly Know This?

"Normal supply and demand says prices should be around $55 to $60 a barrel," said Sen. Patrick Leahy, D-Vt., chairman of the committee. "Prices should not skyrocket like this in a properly functioning, competitive market."
How could Senator Leahy possibly know what the price should be? Supply and demand is based on the individual subjective decisions of billions of people across the world. He can't know, it is impossible, he made it up out of thin air or paid someone to make it up for him. If "normal" supply and demand did "say" prices should be $55 to $60 then that's is what it would be purely out of the greedy self-interest of oil companies. However, gas stations are not running out of gas nor are they left holding huge stockpiles of unsold gas, suggesting we are close to equilibrium given the institutional constraints. I have posted evidence on the supply and demand that says that the price is responding to it before, but even still nobody has enough information (including oil executives) to know precisely what the price should be, and much of the oil pumped occurs in parts of the world without markets (Venezuela, Iran, etc.). Nonetheless, it seems they are competitive based on their profit margin's:

BP 7.66%
Exxon Mobil 10.82%
Total S.A. 9.63%
Chevron 8.44%
ConcoPhillips 6.75%
Eni SpA (E) 11.39%
Repsol YPF SA 6.12%

6-11% for a risky business like oil (yes it is risky, natural disasters+congress=high risk).

1 comment:

Matt E. Ryan said...

I suppose he could subjectively determine what "normal" supply and demand curves should map out, and from there, determine what the price should be.

Of course, there's no reason to believe his "normal" is any more "normal" than mine. His might be based on historical precedent, but is there any reason to believe that the history of oil prices should be indicative of the future?

Of course, the larger issue is: What should the price of anything be? Isn't this moving down the labor theory of value path?