It was hard to figure out who were the biggest losers at this week's Senate hearings on the oil industry and energy prices.
Was it the oil executives, five white guys dressed in what seemed like the same gray suit and red tie, mouthing the same unconvincing platitudes about supply and demand?
Or was it the members of the two Senate panels, embarrassingly ill-informed and ill-prepared for this dramatic showdown, full of populist sound and fury but in the end unable to elicit a crisp answer or land a single rhetorical punch?
Or maybe it was committee co-chairman Ted Stevens of Alaska, so cloyingly deferential to his corporate witnesses one had to wonder if he was auditioning for the job of head waiter at the grille room of the Petroleum Club in Houston.
Come to think of it, the big loser was probably the American public, which missed an opportunity to learn why energy markets behave the way they do. Here are a few simple truths that seemed to have gotten lost in the unsatisfying to and fro:
Fundamentally, the energy market isn't really a market -- it is rigged by nationally run oil monopolies that dictate the supply and prices of crude oil, individually within their own borders and globally through the OPEC cartel. In that system, private firms such as Exxon Mobil and Chevron are mere price-takers. But they are also willing free-riders who benefit handsomely from the price-fixing of others.
It is misleading for the industry to claim that high prices will lead to new capacity that will bring prices back down to more reasonable levels. OPEC and cooperating nonmembers such as Russia dramatically limit this effect internationally. As for U.S. production, any increase would be so small as to have virtually no effect on the all-important global price of crude.
By the same logic, opening the Alaskan wilderness or any particular offshore areas to drilling would provide very little price relief for U.S. consumers. It would, however, boost the profits of the companies that tap those new resources, which explains why "access" issues top the industry wish lists. (Natural gas is a different story.)
Rising crude prices are not, as the industry claims, the only cause of recent price spikes for gasoline and other refined products. Also a factor is a shortage of refining capacity, reflecting a decade of disinvestment after years of excess capacity and lousy profits. Although the industry boasts it is adding 1 million barrels a day of new refining capacity, that will barely cover the natural growth in the economy. And even if environmental laws were relaxed -- another industry priority -- it is not clear that companies would add any more refining capacity than already planned.
Indeed, in terms of refining, U.S. regional markets have become so concentrated that there is now little incentive for any company to add significant new capacity that would reduce prices. In fact, when markets are tight and small, changes in supply can result in large changes in price, and refiners with large market shares can actually do better by selling less, not more.
Pay no attention to those charts showing that oil industry profits, as a percentage of sales, are only "average." Operating margins vary widely from industry to industry, and as a seller of a commodity, the oil industry should rank near the bottom of the chart. What really matters to investors is return on equity, and by that measure, oil companies have gone from good to great. For the first nine months of this year, for example, Exxon Mobil reported profit of $25.4 billion on total shareholder equity of $107.9 billion, which works out to an annualized after-tax return of about 31.3 percent. It doesn't get much better than that.
This huge jump in industry profits represents a substantial redistribution of income from U.S. consumers to industry shareholders and employees. In theory, it is possible to construct a tax that would reverse some of that regressive redistribution without discouraging new investment. As we discovered when we tried it once before, however, such a tax would probably generate so many accounting games that it wouldn't be worth it.
Over the long run, a better idea is to raise federal taxes on refined products. Although some of the burden of higher oil taxes would fall on consumers, much of that could be offset by using the revenue to reduce other consumer taxes. Economists say the rest of the burden would fall on the oil companies, in the form of reduced sales and profit margins. That's why the industry has always opposed an oil tax whenever it has been proposed.
Steven Pearlstein can be reached at firstname.lastname@example.org.