TJP

Is Big Oil the Next Enron?

By Byron A. Ellis - June 19, 2008

Like Enron’s executives and traders, Chevron’s Corp. CEO, David O’Reilly blames demand for the sky-high gasoline prices. Surely, demand cannot defend itself and for most Americans it is an abstract concept.

The rise in crude oil prices started at the onset of the invasion of Iraq and is still rising. Is it rational, therefore, to assume that suddenly at the dawning of the war there was an abnormal rise in demand for crude oil to be delivered a future date? Of course, it is not rational.

O’Reilly appears to be pulling an Enron. He is fully aware from his 2006 statement that higher gasoline prices are not about supply and demand, but rather profit margins for Big Oil. And, that is why the public blames Big Oil, their future traders, and the Republicans for jeopardizing the US and the world’s economy.

In Chevron's 2006 first quarter news release, Mr. O’Reilly stated that “Prices for crude oil and natural gas were strong during the period...” In Big Oil’s lingo, higher crude oils and gas realizations (Exxon’s) and strong prices (Chevron’s) implied that Big Oil was able to raise gasoline prices to obtain higher profits margins. These signals and Big Oil's significantly higher profit margins led consumers to validate that price gouging is occurring.

Price gouging was also occurring when Enron’s executives were blaming higher energy prices on supply scarcity and on high demand for electricity. However, without having access to Big Oil's books, price gouging is difficult to prove.

Nonetheless, whenever profit margins increase significantly often price gouging is occurring. Profit is the difference between revenue (price multiplied by quantity) and cost. Therefore, for Big Oil's profit to increase at such an unparallel rate, either price or quantity, or both must have increased significantly, or cost declined significantly.

We know that cost did not decrease; wartime crude oil prices are higher than pre-war prices. We also know, whether the demand curve is elastic or relative inelastic, that rising prices will reduce demand. So the quantity of gasoline purchased could not have increased significantly in the face of with rising prices. Therefore, as pointed out by O’Reilly in 2006, the only remaining culprit is strong (higher) prices Big Oil were able to pass on to the consumers. Thus, it is clear that Big Oil's insane profits are due to abnormally higher prices.

It is this abnormally high price for gasoline that has affected the income of the average American and led to resentment against Big Oil. And, many will rejoice if, or when, the truth is revealed and Big Oil executives suffer the fate of Enron’s executives.

[ Home | Comments | Search | Post ]

POST COMMENT

SAVE DARFUR