Big Politicians Ought to Start Their Own Oil Company

Published August 22, 2008

Major oil companies are currently targets of both political parties. High oil prices are the reason. Everyone in Washington is blaming big oil and speculators. If all politicians agree on who causes the high prices, can everyone be wrong?

In a word, yes. And it really makes me angry.

I worked as an economist at Amoco for 18 years. It was a good experience. My colleagues were smart, hard-working, and creative. Moreover, they were successful at finding new ways of satisfying customers and reducing costs, thereby conserving natural resources. Those are socially useful results.

I also worked a decade in Washington, where, well, things were different.

Here’s my proposal. If the politicians are so smart, why don’t they start their own big oil company? After all, the politicians all seem to believe oil companies can and do raise prices all the time. Never mind that in 1998 the crude oil price was $10 a barrel and gasoline in the United States averaged a couple of pennies more than $1 a gallon. We can also ignore the fact there were no Congressional investigations or television stories about consumers price-gouging the oil companies.

But oil companies, helped by speculators, supposedly have complete control over energy prices. So they must have been responsible for both high prices and low prices. In addition, consumers are apparently helpless. They get lulled into consumption complacency during times of low prices, which makes them vulnerable when prices are high. This theory is too clever by half.

Is there insurance against the conspiracy? Yes, there is. It even works against ordinary market movements. There are exchange-traded futures and options contracts for crude oil, gasoline, distillate, natural gas, and many other fuels. Speculators help these markets by arbitraging and providing liquidity. Many companies use the speculator-assisted contracts to hedge their energy price risk exposure.

Southwest Airlines is a prominent example. However, most of the other airlines do not, at least to the extent that they should. They are the airlines that have been in Chapter 11 bankruptcy or will soon be.

The other airlines are not the only companies that lack an effective risk management program for energy prices. Steel, autos, agriculture, retailers, trucking, and real estate are other examples of industries with large energy price risk exposure that do not hedge to the proper extent. They apparently hope for a government bailout as a way of hedging. In the process, they squander their shareholders’ savings and their workers’ jobs. That is a loser’s bet.

The implications for the Big Politician Oil Company seem ideal. Big POC would supposedly have market power over energy prices and customers who do not hedge, at least not yet. It is an ideal opportunity. The only thing I ask is this: The politicians should use their own money, not the taxpayers’ money, to pay for the substantial exploration and processing costs.

Jim Johnston ([email protected]) is a policy advisor to The Heartland Institute. His views are his own and not necessarily those of The Heartland Institute.