"Obscene" Oil Company Profits, and Is Government Responsible For Lack Of Competition In Oil Industry?

Two questions:

1. Could anyone help me out by giving a better explanation of how "obscene" profits by oil companies actually help consumers at the pump and don't hurt them?  I understand how higher profits equal more savings, which equal more investment, which equal more capital, which equal more efficient arrangement of factors of production, which equals lower prices for consumers at the pump.  But could anyone give a more indepth answer?

2. I hear a lot of complaints about how there is a lack of competition in the oil industry with a few big corporations running the show and keeping prices too high for consumers.  I guess this is a two-part question: A). Is it even true that the oil industry is closer to oligopoly than perfect competition, and B). In what ways is government responsible for creating this situation (I have a hunch it is, but I don't know in what ways.)?

Thanks!

Freiheit:

But could anyone give a more indepth answer?

The first question to answer is "What are profits?" What does a person mean when they observe that a company has reaped profits?

• Man, Economy, and State: Entrepreneurial Profit and Loss. Particularly the "Do profits have a social function?"
• Human Action: The Ultimate Source of Profit and Loss on the Market.
• Kirzner's Competition & Entrepreneurship.

Kirzner also carefully takes apart the device of 'perfect competition' -- a state from which no competitive activity can arise.

For a defense of market oil production, see Murphy's Oil Prices at LibertyFund.

• | Post Points: 5

I think the question is a bit backwards.  If it weren't government created, I wouldn't care about any profit level, nor would I classify it as "obscene" - nor would I justify the profit by some reference to helping consumers.  Trade would be voluntary.

On the other hand, if government interferes in the market, then helping consumers is no excuse for the obscene profits. 

Now, on the substance of your question - I don't grant that "obscene profits" which I'll use to refer to the actual present situation, help consumers.

How did government create it?  First, consider what a "record" profit means.  It means higher than previous profits.  Is that a meaningful figure?  Not in the face of inflation.  So in a technical way, we can say that government creates the higher profit through inflation, even if the company isn't getting more value.

There's more to it, though.  Throughout their corporate history, the oil companies have made use of EHMs and jackals, who were at all times backed up by the promise of government intervention.  This produced cheap oil, and hence our oil-dependent society - which meant we didn't reduce volume all that much as the prices skyrocketed.  Inflation helped here also, but that's mainly reflected in the (much greater) harm done outside the country, not inside it. 

Government also puts in place efficiency and environmental standards, which favor bigger firms by imposing certain fixed costs on all producers.  These help to lock competition out of the field.  Regulation in general also does this through regulatory capture.  There's also that small matter of bombing and killing anyone who tries to sell oil in Euros.

The profits the oil companies make were voluntarily given to them by their consumers, so it must be good for them.

I wrote a post on this.  When massive inflation occurs, this shows up as huge profits for anyone holding tangible assets, especially if they're leveraged.  Oil and oil futures are tangible assets, so they receive windfall profits when the oil price sharply increases.

The fundamental problem is a corrupt monetary system.  The oil corporation executives are merely exploiting a corrupt system for their personal benefit.

Why are we still using theories of how a free market works to defend conditions brought about in an unfree market? One need not be a mutualist to see the problem here.I think that JAlanKatz came the closest to making a reasonable response.

Brainpolice:

Why are we still using theories of how a free market works to defend conditions brought about in an unfree market?

The popular attacks on the oil industry do not come from an awareness of its unfreeness. They attack its profits because it has profits at all. It's fine and good to also elaborate on the market distortions of energy, so as to rebase these people's correct sense of unjustice (and this will not simply give them better reasons to despise only oil companies), but their attacks would apply as well to a world without theft. "How dare a company have profits when we consumers are suffering?!" is self-contradictory. To explain this is not to be one of Chodorov's false friends of free society.