Third and most important, the government should nationalize Big Oil. That would allow the government to manage the industry’s drawdown, a process the private sector is ignoring. A coalition of climate-action groups showed the world’s 60 largest banks financed nearly $4 trillion in fossil energy projects over the last five years, investments that could be stranded and lead to more requested taxpayer bailouts when the carbon bubble pops.
— The Hill: Why we must nationalize Big Oil

The author of this opinion piece doesn’t even understand the words he uses. He calls “Big Oil” a monopoly. For some reason, companies that compete with each other for profits seem to set prices that are close to one another. According to my understanding of economics this price reflects the costs of producing the product including all labor, taxes, transportation, facilities and raw goods PLUS the profit.

In most cases, the costs of goods is pretty close from company to company. Sometimes one company is able to get their raw goods a little cheaper or their labor costs are lower. Over all it balances.

Once that is done, the company looks at how to maximize their profits. The greed part of capitalism. Profit is not calculated on an item by item bases but as the value of number of items sold multiplied by the amount of profit.

A widget costs $1.00 to manufacture. As long as the price of the widget is greater than $1.00 there is profit. If the company expects to sell 1000 widgets and they want a profit of $1000 then they will set the price of the widget at $2.00. If they are able to sell 1000 widgets then great. They made their profit.

But what if people aren’t willing to pay $2 for the widget and they can only sell 100. Then the company only makes $100 in profit.

This is the balancing act. Trying to find the price for a good that will sell the most goods with the most profit per item.

As soon as there is profit in widgets, people will create competition. The competition wants people to by from them instead. They have only a few ways of accomplishing this. They can get people to believe that their widget is better so that the people believe they get more value for their dollars or they lower the price at the same quality level.

As an example, cheap imported gear cutter set from China, $159 from Amazon. Same 8 cutters from McMaster-Carr: $712. I know the the McMaster-Carr gear cutters are better quality than the ones from China. The ones from China will work for what I need.

When the price of goods goes up so much that the people start complaining, there is always a group of people that will promise to make prices better (lower) if they can take control. The idea is that a single group of people overseeing an industry will balance not just the profits of the company but also the social profit of the company.

In this case these author believe that all oil companies will be gone in 30 years. If they are going to be gone in 30 years nobody should invest in them today because they are going to be ripped off. If the companies continue to produce goods that people want and in a way that people want them to do it, that is cheating and the companies should be punished.

Thomas Sowell talks about price signals in terms of the Soviet Union. The Soviet Union had a horrible time with their trains. A large part of that was that they forced their rolling stock to carry more than it was rated for. This caused the cars to wearout faster and fail. Engineers and the experts that explained this were punished.

Thomas looked a bit deeper into what was going on and found that in the Soviet Union, different government bureaus created verticals. Thus a bureau responsible for making a tractor might have mines to get coal, iron and other metals. It might have a factory that made plastic parts and so forth. This was because nobody trusted anybody in the Soviet Union to delver what was promised on time and at the quality needed.

This lead to the interesting situation of trains carrying coal and wood from the west all the way to the east where they were unloaded at factories of one bureau and then loading up with wood and coal at the mines of another bureau to transport them back across the same rails with the same goods.

Socialism fails. It fails every time. It is impossible for any small group of people to know everything that the population knows. There is no way for a government bureaucrat to know that the soil just proved to loose and that the road work is going to need a few tons of sand and stone to stabilize it by next Wed.

Socialism, just say no.

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By awa

6 thoughts on “Socialism: Big Oil Version”
  1. Socialize the Oil Industry?

    Within three winters we will be starving in the dark. No food, no heat, no jobs.

    Venezuela is supposed to be warning, not a how-to manual.

    1. If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.

      Milton Friedman

  2. “For some reason, companies that compete with each other for profits seem to set prices that are close to one another.”
    .
    Your write up is 100% correct, but it also seems to miss out on one, semi-intangible fact. If company A is selling their product for X, why would you sell yours for anything less? It is not like petroleum is a buyers market. Every drop you lift from the ground gets sold. Maybe not today, but soon enough.
    .
    If Exxon raises their price by 5%, and is still selling their full day’s worth, is there any reason why BP will not do the same? The market drives the price as much as the parts/labor/overhead, etc….

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