This week, Senator Barack Obama and Fox News commentator Bill O’Reilly continued to demagogue the oil companies and blame them for all that ails the economy.  In a speech today in Youngstown, OH Senator Obama said:

 

While Senator McCain’s plan won’t save you at the pump anytime soon, it sure has done a lot to raise campaign dollars.  Senator McCain raised more than one million dollars from the oil industry just last month, most of which came after he announced his plan for offshore drilling to a room full of cheering oil executives

 

So to sum up, under Senator McCain’s plan, the oil companies get billions more, we don’t pay any less at the pump, and we stay in the same cycle of dependence on oil that got us into this crisis.  The oil companies have placed their bet on Senator McCain, and if he wins, they will continue to cash in while our families and our economy suffer and our future is put in jeopardy.

 

This is the big misperception made by the Left when it comes to economics.  They believe only through government or to a lesser extent non-profit organizations can any good come from providing people goods and services.  Private companies which provide goods and services do so because they are greedy and no one ever benefits from their actions.  According to Senator Obama’s thinking, the oil companies drill for oil and then some leprechaun appears and gives them money, stolen from the poor and middle class, and takes the oil to some fantasyland.

 

Oil companies drill for oil in order to sell it to refineries.  Refineries purchase the oil to make gasoline and sell it to gas stations around the country.  Gas stations purchase the gas because they know Americans demand gas to power their cars, RVs, and lawnmowers.  Gas allows farmers in Florida to transport oranges to Chicago and it allows farmers in Vermont to transport maple syrup to Arizona.  In other words, oil companies are in business to provide a good that is of great benefit to all Americans.  It is only through this demand that ExxonMobil and Shell drill for oil. 

 

Oil companies favor the candidate who will allow them to drill for more oil because they see prices for this commodity rising, indicating either an increase in demand or a decrease in supply.  Basic economics says when prices of a good rises, capital flows to this good to take advantage of the higher profits.  In the long-run the flow of capital helps to reduce prices.

 

Last night I was watching Bill O’Reilly’s show on Fox News.  As he has done in the past, he chastised the oil companies for their record profits.  One thing he said is he did not understand why in his neighborhood there are four gas stations on one corner and they all charge the same price for gas.  His only conclusion was they were in collusion with one another and they set the price to reap huge profits.

 

As I mentioned in an earlier blog, Mr. O’Reilly needs to take a course in economics.  Gas stations set the price of gas based on what it will cost to replace it when the tanks are empty.  Market forces outside the control of any one gas station or oil company sets the price.  The reason all four gas stations charge the same price is competition. 

 

Contrary to what the oil companies say, the gas sold at ExxonMobil, Chevron, and Shell stations are the same product.  If one station set its price lower than the nearby stations, everyone would go there for gas.  Another station would then lower its price to one cent cheaper in order to take all the customers.  The stations keep lowering prices until they reach an equilibrium price that equals the replacement cost of the gas.  What Mr. O’Reilly should do is compare the price of gas where there are multiple stations in a block with stations that have no competition within miles.  I bet the one without the competition has the higher price.

 

Next Mr. O’Reilly advocated the oil companies give 2% of its profits to organizations which provide money and fuel to those too poor to afford heating oil.  Just like Senator Obama, he does not understand the oil companies, in the course of doing business, provide heating oil to all Americans.  If the oil companies went out of business all American’s would be cold during the winter. 

 

All this would do is lower the incentive for the oil companies to provide heating oil or they would raise the price they charge to make up for the lost profit.  A better idea is for the organizations which provide assistance to low-income Americans to buy shares of stock in the oil companies.  That way when profits go up, they reap huge dividend checks to supplement the voluntary donations made by the public.  In other words it would do exactly what Mr. O’Reilly advocates without any need for government intervention.