Don't treat electricity, oil markets as equals

April 30, 2006|By JAY HANCOCK | JAY HANCOCK,SUN COLUMNIST

Readers ask: Why don't you attack the oil companies the way you do certain other energy providers?

Lefties believe the price restraints and heavy regulation I favor for electricity should be slapped on Exxon, Chevron and other petro purveyors.

Righties think I'm afraid to blast Big Oil because an honest discussion of price controls on gasoline would raise questions about government interference in any market, including electricity. But oil companies are different. Oil is to electricity as spaghetti is to helium. The oil market works. The kilowatt market doesn't.

Petro regulation is miles from perfect, but oil and gas prices are about where they ought to be based on the free forces of supply and demand. If the talk about "gouging" and "windfall profits" amounts to much more than blather in an election year, we'll pay in the long run.

Unlike electricity, gasoline is not controlled by a monopoly or oligopoly. There is a choice. You can probably buy gas from a dozen stations near your house, all competing for your trade.

Yes, recent mergers - Exxon with Mobil, Conoco with Phillips, etc. - have culled the herd. Regulators should regard further consolidation with a miserly eye. But the number of remaining players - including Exxon Mobil, Shell, BP, Conoco, Chevron, Citgo, Sunoco - provides sufficient competition by any economics textbook.

What about huge profits? Exxon Mobil said last week that it earned $8.4 billion in the first quarter. Isn't that damning evidence that something funny is going on?

No. The oil companies own the oil or the rights to it. Thanks to supply that has not kept up with booming demand, the price of oil has doubled in recent years, not unlike the appreciation of your home, if you are a homeowner. Should you pay a windfall profits tax on your house?

It's not out of the question that collusion exists among oil giants. But if so, it's a reason to prosecute them under existing laws, not write new ones.

Gasoline an elective

Electricity is necessary to modern life, affording a means of illumination and nourishment to which even the poorest household has a right. Gasoline, while important, is more an elective. Even if you need to travel to a job, public transport is often an option. This is another reason to treat kilowatts differently.

Oil and gas can be stored once they are produced. This yields inventories that cushion supply shocks and moderate price swings in any healthy market. Last week the Energy Department reported that U.S. crude oil inventories were 6 percent higher than stocks from a year ago and amounted to two weeks' supply.

Electricity, by contrast, must be used almost immediately once generated. Nobody has figured out how to bottle it. This evanescence, combined with the fact that your utility is the sole, sometimes unreliable provider, causes shortages, blackouts and even wilder price swings than with gas.

In the oil market, high prices are working their usual magic of getting profit-hungry businesses to seek, find, extract and deliver new product. Everywhere, $3 gas is inspiring companies to expand oil production, which eventually will boost supply and cause prices to be lower than they otherwise would have been.

In March there were 3,069 rigs drilling for oil around the world - up nearly a fifth from a year earlier, according to oil services firm Baker Hughes. U.S. rigs are up by a similar portion.

On the other hand, thanks to environmental restrictions and huge capital costs, new electrical plants will add less than 2 percent to U.S. generating capacity this year, according to the Energy Department.

That's less than projected economic growth, which means kilowatts are getting even scarcer. And nearly all the new plants burn natural gas, which is the most expensive way to make juice.

Yes, these facts could support an argument to weaken environmental laws and allow electricity prices to rise even higher, paving the way for more generators and the profits to pay for them. But environmental regulations save society from another kind of cost: pollution. And, as noted, the people least able to pay high electricity prices often have no choice in the matter.

Affected by market

Unlike electricity, oil has a track record of responding to market forces. High prices in the 1970s and early 1980s caused amazing increases in supply and decreases in demand that set the stage for nearly two decades of energy stability.

None of this is to say that oil companies are good guys or that their obscene CEO pay is OK or that they shouldn't pay much higher taxes and royalties on land leased from the United States and its citizens. (The New York Times called oil-giant "royalty relief" a $7 billion "giveaway.") But that's different from trying to cut prices by government order.

No matter what's causing $3 gas - jitters over Iran, Nigerian shutdowns or ethanol shortages - we should still trust the markets more than Washington to fix it. For electricity, however, there is no free market to call on.

jay.hancock@baltsun.com

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