Oil Economics for Dummies

Saw an article on Yahoo about President Obama insisting that we get rid of tax subsidies for oil companies because they're already making big enough profits and obviously don't need the subsidies.  As he said:

"It's like hitting the American people twice. You're already paying a premium at the pump right now. And on top of that, Congress up until this point has thought it's a good idea to send billions more of your tax dollars to the oil industry," Obama said in the White House Rose Garden.

"It's not like these are companies that can't stand on their own. Last year, the three biggest U.S. oil companies took home more than $80 billion in profit. Exxon pocketed nearly $4.7 million every hour. And when the price of oil goes up, prices at the pump go up, and so do these companies' profits," Obama said.

And since Yahoo's commenters are often populist rightwingers who simultaneously believe that the powerful are too powerful yet also hate liberal government for trying to stifle the powerful, I was wondering how they'd respond.  Could they possibly side with Obama and realize that multi-billion dollar companies probably don't need tax subsidies to keep them going?  Sadly, no.

Who's the Idiot?

Here's the first comment I read, which was the most popular comment at the time and representative of most of the ones I saw:

Does this idiot not know that if they stop the tax breaks, the cost of gas will go up. The way to do this is to let them start spending the money on drilling for oil off our shores an up north. Where in the world did this guy come from. I wish I could pull his strings for a while.

And well, no.  That's absolutely NOT how things work.  I mean, this is just basic economics.  Supply & Demand 101.  Because businesses do NOT base their prices on how much they pay to buy or produce a product, or whether or not they get tax subsidies.  Prices are determined by the market, period.  That's it.  And if a product costs more to produce than they can sell it for, then people just won't sell it. 

And that's because ultimaetly, it's the buyer who sets the price, not the seller.  Something's worth is determined by how much someone is willing to pay for it.  I could offer to sell my car for $1 million, but if someone's only willing to pay $10,000 for it; then that's what it's worth, regardless of how much I want for it.

And to think otherwise is just mind-boggling.  I mean, are we seriously to imagine that a business can arbitrarily set its own prices, regardless of the market?  Taxes go up on me so I'm going to increase the price of my widget from $10 to $15?  That's nuts.  Because if I could sell it for $15 and still make good business, I would do it REGARDLESS of how much it cost me.  Why would I sell it for $10 if I could make more money selling it for $15?  Because I'm generous?  No, I sell it for $10 because that's what I think is most profitable for me, and think it'd hurt my business to sell for $15.

Don't Know Nothing About Economics

Same goes for oil companies. If they could sell gas for $10 a gallon and still make good money, they would. But they'd rather sell it for $20 a gallon. Why don't they? Because people wouldn't pay it and would immediately rush out to buy the first electric car they could find. And if there's something defective with the oil and gas markets (which there is), it's that the sellers have TOO MUCH influence on their price, because they're not really in competition with one another and get to set their prices higher than they would be if the markets functioned more freely.  So getting rid of the tax subsidies wouldn't increase the price of gas; it'd only make their current profits more in line with reality.

And what really bugs me is that this basic economic fact is completely lost on these boneheads, yet they imagine themselves to be business gurus.  Like the person above who called Obama an idiot for thinking that businesses with record profits could afford to pay more taxes.  Sure, they never attended a real economics class or at least never understood the one they took, but they've heard from someone they trusted that this is how it works, and that makes them an expert.

Yet generally speaking, conservatives know less about economics than liberals do, and the majority of liberals know very little.  And even the smart conservatives keep their mouths shut about this sort of thing, as they feel no need to correct people for making basic mistakes of this nature.  Conservatives know that they're aligned with Big Business and that makes them automatic experts on the business world, so there's no need to actually learn this stuff or bother understanding it. 

All they know is that oil companies are being attacked by Obama, and that's good enough for them.  And while they clearly see that some people in this world have more power than others, their ideology simply can't provide them with a solution to this problem.  So their best answer is to tell government to step out of the way, even if that means continuing government tax subsidies of an industry that obviously doesn't need subsidizing.  I mean, if oil at $100 a barrel isn't motivation enough to keep drilling, then nothing is.