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Should Oil Executives Be Strung Up?

Mises Daily: Tuesday, July 22, 2008 by

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In Greed We Trust

The oil industry is everybody's favorite whipping boy, and indeed it is tempting to criticize them for their acceptance of past government largesse. However, the lion's share of criticism of the oil companies consists not of criticism of their violations of libertarian principles but of their status as exemplars of the alleged excesses of free market capitalism.

Climate scientist James Hansen has called for oil industry executives to be tried for "high crimes against humanity" for working to defuse criticism of oil's role in propagating global warming, comparing their denials of the role of oil in climate change to denials by tobacco companies of the role of tobacco in causing lung cancer. We need to examine this with a more critical eye.

Record-high gas prices have provided excellent grist for political mills as both Democratic presidential candidate Barack Obama and Republican presidential candidate John McCain have denounced the "obscene profits" enjoyed by oil companies in recent years. In a speech excerpted on the Independent Institute's Beacon Blog by David Beito, McCain goes so far as to question their citizenship and patriotism, arguing that they are abrogating their duties as citizens by failing to properly work toward weaning us off of foreign oil.

This raises three particularly interesting issues. First, why do the oil companies have a duty as citizens to help wean us off of foreign oil, and what would our rights be with respect to the oil companies' apparent dereliction of duty? Second, what do profits do in a market economy? Finally, where do we draw the line between "obscene" and "nonobscene" profits?

One might be tempted to employ the cliché that great power is accompanied by great responsibility with respect to oil companies. As Milton Friedman has famously argued, however, the social responsibility of corporations is to increase their profits because in so doing they increase the amount of value that they create for the world. The decisions made by oil executives answer screaming global demand for more energy, and it is important to note that gas remains only slightly more expensive than it has been historically, adjusted for inflation, even though the industry has been hamstrung by regulations, taxes, and the international political economy of a commodity that is controlled in large part by hostile governments.

Let's suppose that in response to these criticisms Atlas shrugs, so to speak, and the oil companies disappear tomorrow. Some might be ecstatic (California Congresswoman Maxine Waters, for example, has gone on record expressing support for possible nationalization of the oil companies) but historical experience in Great Britain and the United States should temper our enthusiasm for nationalization. It is by no means clear that ExxonMobil would be more efficient and responsive to consumer demand if it were run by the same people who have brought us Amtrak or the US Postal Service. If oil company employees have a "duty" to provide us with oil, then it follows that we have a right to compel them to perform this duty. Fortunately, this inhumane practice — slavery — was abolished in the United States in the 1860s. I have no desire to go back.

Second, statements vilifying the oil companies for earning "obscene profits" do not recognize what profits do in a market economy. They also fail to appreciate how markets correct the apparent problems associated with very high oil prices. Profits are entrepreneurs' rewards for rearranging factors of production into patterns that are more valuable to consumers than they would be in other patterns. The high profits being earned by oil companies suggest that they are correctly anticipating consumer wants and doing so perhaps better than are other concerns. Profits and losses are also the market's way of correcting maladjustments to the structure of production. The massive amounts of money being poured into alternative energy technologies by Silicon Valley venture capitalists bear witness to this fact.

So even if the oil companies are earning "obscene" profits, the market is correcting it. But how do we define one level of profitability as "obscene" and another as "not obscene"? It is widely recognized that everyone is in some sense entitled to a "reasonable profit," but it is never clear exactly what level of profit counts as "reasonable" and what is instead "obscene." Defining "obscene profits" the way the Supreme Court once defined pornography ("I know it when I see it") is totally arbitrary and casts a pall over the energy-investment environment, reducing future investment and therefore leading, however unintentionally, to even higher prices and slower innovation.

Where we should be enjoying civilized discourse, debates about oil markets are often shot through with unthinking fanaticism and sloganeering. If we are to make progress, we need reflective understanding and civilized conversation, not vapid talking points. Trends in gas prices reflect changing market conditions rather than a clash between the forces of good and evil. On this I quote Thomas Sowell's assessment of the situation:

The problem is not that supply and demand is such a complex explanation. The problem is that supply and demand is not an emotionally satisfying explanation. For that, you need melodrama, heroes and villains.

Refusal to substitute dispassionate analysis for moralistic anticapitalistic crusading is unfortunately likely to lead us backward rather than forward.