Wed Sep 6th, 2006 at 09:36:25 PM EST
The price of oil in today's market has little to do with supply and demand. There is no disputing the real effects of supply demand when they are real and when there is no real control over the marketplace by suppliers, in other words a real free market. However, there are other sides of economics that are not widely discussed at universities and in economic circles. They are not much discussed because the field of economics focuses on free markets. The other sides of economics are not economics at all but market control and market manipulation. What I am talking about is not free markets or markets controlled by governments, but markets controlled by suppliers.
When I write economic pieces I sometimes cringe at the thought that I have to delve into a subject that is mysterious and sometimes difficult to understand for many people. You can imagine how I feel when I have to talk about a much more complicated subject with a much higher degree of difficulty in understanding. What I need to talk to you about in this piece requires me to talk about the factors that lay outside the core of basic economics. There are two areas that effect basic economic principles so that they may not respond based on typically understood economic assumptions and principles. These are "Effecting Variables" and "Supplier Controlled Markets." Effecting Variables is a branch of economics that when studying economics gets touched upon lightly when we read in our books about "the likes and tastes" of consumers. Basic economics talks about the car market, this branch would then explore things like red cars, sports cars and the like. When talking about the oil market, however, we are talking about Supplier Controlled Markets.
Supplier Controlled Markets are markets in which the suppliers have the ability to manipulate the market price by withholding product in order to increase prices, they may have greater elasticity in pricing because alternatives are at a minimum. The cost of production is low, so when the suppliers desire they may reduce prices to discourage the development of alternatives. The suppliers may own all of or tightly control the entire supply chain. The suppliers are wealthy enough to buy possible game changing alternatives or manipulate government and sources of supply to preclude or control their entry into the market. They may even pay for the scuttling of alternatives.
Supplier Controlled Markets may have suppliers who partake in the practice I call patent shelving. Patent shelving is to do the research and development to find innovative alternatives, patent them, and then not put them into production. The reason for not putting the new innovation into production would be because it would require them to build a new factory and render their previous investment in the older technology obsolete, thereby negating the benefit from their original investment. They may patent shelve to keep competitors from introducing game changing technology that competitors could possibly develop.
Other activities that Supplier Controlled Market suppliers may take part in are manipulation of the news media to fabricate reasons for price increases and decreases. These price increases or decreases would be unrelated to actual supply and demand since the control and elasticity of price gives them a wide area to operate within. Supplier Controlled Markets don't operate under the principles of Monopoly because pricing at monopoly pricing would have a profound effect on the economy and would most likely bring government regulation to the very market that the suppliers currently hold all the controls to. They don't act like Oligopolies because all the suppliers benefit from the market manipulations that keep the market supplier controlled.
It is a complicated concept but think of it this way. Let us say you are in a pond. The pond represents the motive fuel market. It includes all those who are trying to make alternatives, government and other industries. The lake is fed by krill pockets that only Great White sharks have the ability to drill holes for. The alternatives are minnows using resources other than krill to keep alive. The government is represented by whales in the lake, but at this point these are only baleen whales with no teeth. The major oil companies are Great White sharks. They control the krill. The other industries here are the smaller sharks, they are distributors of krill, and industries that rely on krill to make or operate their products. If the alternative minnows get big enough to be noticed then the sharks quickly eat them before anyone can see that there was an alternative to krill. We, the consumer are the fisherman on the lake. We basically have no choice but to choose krill fed fish, there are virtually no alternatives. The Great White sharks have various ways to control the market. They can hold back on krill, they can not drill for new krill and others. What they don't want is for the whales to take away their control of the lake. The whales will and can take over control of the lake if the fisherman and the krill fed fish push them to do so. So the Great White sharks make sure that the whales are fed and that the fisherman sees some growth of alternative minnows just enough to keep the fisherman from pushing the whale to take over the lake. The Great White sharks hold back on the production of krill to get the most money for their supply just long enough for there to be a visable growth of alternative minnows and the fisherman to feel that there is a free market economy. As long as that is in place the Great White sharks are in control. When the alternative minnows become better established and look to threaten the krill market, the Great White sharks suddenly discover large amounts of krill and release it into the marketplace at low prices thereby destroying the more expensive alternative minnow market and leaving investors reeling from the experience of having tried to bolster alternative markets. Once all the alternative minnows are back to only holding the smallest part of the market, the backyard tinkerer and the do-it-your-selfer, krill prices will again begin to rise and the cycle of the Supplier Controlled Market begins once again.
The factors of the Supplier Controlled Market are that consumers don't have ready access to competitively priced alternatives, that government plays a hands-off roll in the marketplace, that the suppliers act in consort for the benefit of the group, but are careful not to show their hand as a Monopoly by consort, which is to say that to the public they look like separate companies but in reality they act as one to control the market place. The only effective way that Supplier Controlled Markets can be made free markets or fair to the consumer and to alternatives is through government intervention. The sinister side of Supplier Controlled Markets is that they know this and in response they will attempt to manipulate government, public opinion, and politics to maintain government officials in power that will continue a hands-off policy towards their markets.
In the United States the motive fuel market is a Supplier Controlled Market. In the last two weeks while I was away on vacation in the mid-west I saw the price of gasoline go from $3.15 a gallon to $2.65. That is roughly a 16% decrees in price in 1/26th of a year. A price collapse of that magnitude in the housing market would be considered a crash of unprecedented proportions. If coal, or corn should see such a drop there would be alarm bells ringing in all commodities markets and all of Wall Street. Why is this kind of price drop not considered a disaster for the major gasoline producers? Why is this kind of price drop not being followed up by firings of executives and announcements of major expenditure cutbacks and layoffs? Because the margins for oil companies on gasoline products are tremendous. The industry knows that this unprecedented drop in prices is not due to a sudden extreme overproduction anomaly or the miss calculations of inventory creating a mammoth over supply situation, which would have surprisingly occurred in only a two week period. Wall Street and the media clearly understand that such price drops are merely price manipulations by the oil companies for the purpose of securing a favorable government that will not regulate this Supplier Controlled Market.
If there was any example about how clearly the vocation and the public trust has been eroded from our media, and how ineffective our government has become in protecting the consumer from nar-do-well industries, it is this one. If we really want to see alternative fuels take hold against oil, if we really want to free ourselves from funding terrorist, if we really want to have an impact on global warming, we are going to have to vote for people in our government that will take the oil companies to task and regulate this industry. We will have to push legislators to stop market manipulation by oil companies and provide room for alternatives to grow. We must also make sure that there is legislation in place that will prevent oil companies from grabbing hold of these alternative fuel companies and controlling them. There is much to do, but first choose your political representatives wisely. Make sure that they are committed to you and not to the Great White sharks providing them with krill.