Sunday, May 25, 2008

Tyranny of The Large

I have absolutely no doubt that the continually rising gas prices are caused by supply and demand. Countries with emerging economic prosperity, like China and India, are increasing the demand for oil and are competing with us for a dwindling supply of this non-renewable resource.

It's also probably a good thing that the markets are working to encourage greater conservation. For too long, the United States has been a major beneficiary of low energy prices and has gobbled up precious resources.

All that said, the record high profits of the oil companies cannot just be attributed to greater supply and demand on a free market. There's good old price gouging and an attempt to run their own gas stations out of business to create an even greater sense of scarcity and to create even more demand artificially. In short, big oil is working hard to eliminate competition at the retail level by leaning hard on their franchisees, who are small business people, as this article in today's Washington Post shows.
Every time Sohaila Rezazadeh rings up a sale at her Exxon station on Chain Bridge Road in Oakton, her cash register sends the information to Exxon Mobil's central computers. If she raises the price of gasoline a couple of pennies, chances are that Exxon will raise the wholesale price she pays by the same amount.

Through a password-protected Web portal, Exxon notifies Rezazadeh of wholesale price changes daily. That way the oil giant, which is earning about $3.3 billion a month, fine-tunes the pump prices at the franchise Rezazadeh has owned for 12 years.

Now, however, Rezazadeh says she cannot stay in business. Credit-card fees are eating her profit margins. Exxon, which owns the station land, last week handed Rezazadeh a new lease raising her rent about 30 percent over the next three years. She stuck a copy on the window of her station to show customers who are angry about soaring pump prices. Rezazadeh has told Exxon that she cannot make money with the rent that high. Her territory manager's reply, she said, was simple: When you go, leave us the keys.
The article goes on to describe how Exxon is nickel and diming the small businessmen in mom and pop gas stations who sell their product.
Rezazadeh, who fled to the United States from Iran in 1979, is part of the long chain that links motorists with the big oil companies. Major integrated U.S. oil companies -- which produce crude oil, own refineries and sell gasoline -- have been reaping billions of dollars in profit from high oil prices over the past two years, but they are still working to extract every penny they can from the marketing end of the business. Exxon Mobil doesn't break out its earnings from marketing alone, but its 2007 profits in worldwide refining and marketing -- known as the downstream part of the oil business -- reached $9.6 billion, 43 percent of that coming from the United States.
Although Exxon owns and operates few stations anymore -- less than 10 percent of the 12,000 Exxon outlets in the United States -- it uses franchise agreements to maintain tight control over stations that bear its brand. The company dictates everything from the number of pumps to hygiene practices to the placement of food on convenience store shelves. "They monitor everything," Rezazadeh said.
It's obvious that the only people growing rich on the oil shortages are the big companies, the stockholders, and the CEOs. Not only don't they share the profits down company with ordinary employees, their greed is causing them to even the squeeze the profits from their own franchisees. They are not pro-business. They are simply in favor of themselves with no sense of accountability to the public, the consumer, or the small businessman who is supposed to be their partner. This isn't free enterprise, it's galloping greed and extortion.

Ironically, in the same edition of the Washington Post, there was an op-ed about the role of sensible regulations in helping law abiding business people with integrity. It's by Tony Perez, Maryland's Secretary of Labor, Licensing and Regulation. Here's how he begins.

There is a pervasive belief peddled in the halls of Annapolis and on Capitol Hill that regulation is inherently bad for business. In Maryland, we heard it from the previous administration during clashes with state lawmakers. And we've seen it at the federal level for seven years.

But recent regulatory breakdowns at the state and national levels, and even globally, have shown that effective regulation and a positive business climate are not mutually exclusive. Inadequate regulation is not only dangerous for consumers but also detrimental to the health of entire industries and our economy as a whole.

Take some recent events at our nation's airports. After years of regulatory negligence, revelations about potentially unsafe planes led to increased scrutiny of Southwest, United, American and Delta airlines, causing flight cancellations and delays nationwide. The chaos that ensued was a public relations nightmare for an already struggling industry. Certainly the years of nonexistent regulation that led to the mess did not improve the climate for the airlines.
He then goes on to cite other failures, like last year's fiasco over unsafe products from China, which broke the consumer's trust with major companies, especially toy corporations. We came to fear every product from dog food to toothpaste. Other regulatory failures, which he didn't mention, include all the cases of food borne illness caused by unsanitary conditions in food processing plants that went unreported due to lack of support and resources at the USDA and FDA. Meaningful regulation of our nation's food supply just isn't a priority for our federal government under the Bush administration.

As Secretary Perez points out, there are many honorable business people who want to conduct business honestly and with integrity but when other firms cheat or cut corners in unsafe ways, it puts them at a competitive disadvantage. Proper regulation levels the playing field for the good guys.
Effective regulation is critical to building a sound business climate -- a fact illustrated during the recent session of the General Assembly. In response to foreclosures in Maryland, Gov. Martin O'Malley called lenders, brokers, real estate agents, housing counselors, consumer advocates and government officials to the table last year to find consensus on aggressive yet necessary reforms for the mortgage industry. The resulting legislative package received overwhelming bipartisan support.

We've seen the consequences of allowing industry to operate like the Wild West. O'Malley recognizes that it is possible, and imperative, to adopt policies that are both pro-consumer and pro-business.

We do no favors to the business community, or to our broader community, by neglecting our responsibility to protect workers, consumers and law-abiding businesses.
Kudos to our neighbor to the north, Maryland. What we can learn from them is that unregulated markets do not produce freedom and prosperity for the average person any more than lawlessness and anarchy in the streets promote freedom for the majority of people. To be truly free, people need to be safe. Without law and order, people aren't free to leave their homes, the most basic of liberties. Likewise, without proper regulation, there is anarchy, not freedom, in the markets.

The trick is to get the balance right between too much regulation and too little. Right now, that balance has tipped towards tyranny by the large corporations under the guise of free enterprise.


Teddy G said...

"Free Markets regulate themselves to everyone's benefit," a sacrosanct motto of Republicanism and the Harvard business school's dominant economic philosophy. What utter bunk. First, there is no such animal as a true free market; second, every human endeavor requires Rules of the Game; third, unregulated avarice, greed, and ego inevitably distort and ruin any human endeavor if there is no accountability; and finally, homo sapiens apparently won the battle for primate supremacy because we freely cooperated for the common good (true, often following individualistic and driven pioneers, but emphasis on 'freely' and 'cooperate'). In other words, the current form of capitalism, termed "Disaster Capitalism" by Naomi Klein, is destroying itself ---- and us.

I read the same two articles; thanks for the analysis. Makes one wonder why small business people still cling to the Republican Party, which is anything but pro- SMALL business.

AnonymousIsAWoman said...

Thanks Teddy. As a business woman with real world experience, not just theoretical beliefs, your comments on this mean a lot. I'm glad you added to the discussion.

The unexamined ideas about totally unregulated markets being good for business and the country need to be examined and challenged.

Nobody is talking about ending the free market system but only about sensible regulations that protect consumers, increase faith in business products and so help corporations in the long run. The aim is to improve the business climate and provide needed protection to consumers, investors, and workers as well as to those companies that want to conduct their business with honor and integrity.

tx2vadem said...

Oh, pick on Exxon! =P That is all gas station owners/operators. They hardly make any money on the gas no matter what the price is. The most money is made off of the convenience stores at the stations.

Exxon runs a tight ship because it has to. It competes against everyone else out there plus a bunch of big state owned enterprises (think PDVSA aka Citgo in the states); so, yes it needs to squeeze every cent out of its product. Most of the product they sell is in countries that have state owned oil companies that have less and less interest in allowing the majors to play in their backyard. And thanks to the Wall Street gurus in the 1980s that told the oil companies that had to lay off their big exploration staff, these countries don't need Exxon, BP, Chevron, Total, etc... anymore. They can go to Schlumberger or Halliburton to find and drill the oil for them, which can involve zero profit sharing on the production. That's why every cent has to be squeezed out of it now. Because in the future, margins are going to be squeezed by the location of the oil. It's just good business that they do everything to maximize the margin. That is why Exxon is ahead of its peers. That is why they were in the position to buy Mobil.

I agree with you on the regulation points though. We certainly need good market regulation to ensure a fair playing field for all. We want to encourage competition, innovation, and entrepreneurship. And that can't always be done without regulation. Some markets require transparency that only regulation can bring. And other areas require regulation because they provide an essential service or operate as a monopoly. And regulation is necessary for safety. We have seen the world pre-OSHA and it is not pretty.

In addition to regulation, we need to focus on the economic incentives government creates through the tax code and subsidies. Correcting those will go a long way towards achieving our objectives, whether they are a fairer tax code or promotion of green technology.

Last point, I know the oil companies make themselves easy targets. And Lee Raymond did much to help stir the pot there. But I think our collective focus should be on the Healthcare Industry. Insurance and Drug companies are, in my mind, the greater bad here. And dealing with them should be our highest priority. Support HR 676!