Hurricanes Katrina and Rita, and oil profits

Updated: 21 May 2008, 23:09

Originally written: 09 October 2005

A report from the Canadian Centre for Policy Alternatives says that “the recent spike in gas prices constitutes nothing short of price-gouging on the part of the oil industry.” The Canadian Centre for Policy Alternatives argues that “the Canadian oil industry has been taking advantage of public fear prompted by the devastating hurricanes in the United States and charging more than was justified by the increase in raw material costs.” According to the author of the report, economist Hugh Mackenzie, the increase in oil prices should have resulted in a pump price increase of less than nine cents per litre, not the actual increases of up to 40 cents per litre. The report says that this resulted in $112.5 million in excess profits over the Labour Day weekend.

Nobody likes to pay more than they have to pay, for anything, so the report will strike a chord with most people. If we think about it rationally, though, nobody paid much more than they had to. There was no cheaper gas, so the choice was to buy gas a the high prices, or not to buy gas. It was not as if you could go around the corner and get a significantly lower price.

Business owners who do not stand to gain from the higher prices are also unhappy.

The rules of capitalism work as they must, and the oil companies did what they owed their stockholders. The stockholders have a right to expect that the company will ensure, in any situation, that it takes advantage of the situation to generate maximum profits. The oil companies apparently did a good job for the owners.

The Canadian Centre for Policy Alternatives has just as much right to take advantage of our dislike for high prices to convince people that the oil companies were gouging. The oil companies owe exactly nothing to those of us who are not stockholders. The oil companies, and all other companies, exist to generate profits for the owners. The rest of us might not like it, but we are willing to pay at the pumps and the oil companies are willing to let us pay.

There are all sorts of market regulators, all of which may resolve to supply and demand. In this case the demand was for “high priced” gasoline. That was proven, because people paid the prices. Eventually that demand subsided, but like it or not, it was real and the oil companies knew it.

The media reported that there are major oil import and refining facilities in the areas affected by the hurricanes. The pundits, and everyone else, decided that meant higher gasoline prices. The oil companies obliged.

The Canadian Centre for Policy Alternatives says that this resulted in “excess profits.” The justification appears to be that the profits were higher than the “normal” level. The normal profit level is just that: normal. It is not set in stone. It rises and falls. In the end, though, the “normal” profit is the result of each profit-making organization attempting to maximize its profit. That varies depending upon the many market regulators, including natural disasters.

Most of the time, the profit is strongly regulated by the oil companies attempting to capture a larger share of the market from each other. That tends to drive prices down. When beneficial (for the oil companies) situations, such as hurricanes Katrina and Rita, generate expectations of significantly increased prices, the oil companies can for a short time increase prices significantly. The Canadian Centre for Policy Alternatives, apparently believes that about a nine cent increase, on gas previously selling for about a dollar a litre, is a reasonable increase. It is also a very significant increase.

The Canadian Centre for Policy Alternatives is wedded to the profit system and accepts that profit is justified. It just argues about exactly what the profit level should be: the “return on investment.” It is much more important to consider whether any profit is justified.

Profit goes to owners who do not have any actual part in the production of the commodity (in this case, oil). Most people accept that it is the natural order of things that there should be owners who skim off value to which they do not contribute. The owners do not run oil wells, process the oil into gasoline, transport the product, or cause it to exist in the ground. They just leech. The profit system — capitalism — depends upon those of us who actually work, to support the capitalists.

The propaganda of capitalism is so powerful, and so widespread, that very, very few seem able to imagine a world without these capitalist leeches. If every capitalist in the world disappeared tomorrow, and nobody knew it, production would carry on exactly as before. Production would carry on for centuries until somebody noticed that all the capitalists were gone. Then capitalism might fall into a pit of chaos and production might cease. Maybe.

Exactly what level of profit do you feel is deserved by those who have no hand in producing that profit?

Business will continue to use every trick in the book to extract as much profit as it can for the capitalists. That is why the companies exist, and it is the managers’ jobs to facilitate that. As long as people acquiesce to capitalism, complaining about “gouging” is much like stamping our little feet. It does not, and can not, prevent capitalism from “gouging.” To end the gouging — forever — join the socialist minority and help to build it into a huge majority so that we can end this leech-oriented system.

Home Frequently Asked Questions News Perspective Literature Quotes Contact

Advanced Search