As oil prices skyrocketed, companies such as ExxonMobil, Royal Dutch Shell, Chevron, TotalEnergies and BP more than doubled their profits in 2022 from the year-earlier period. That result spurred a backlash, though, with President Joe Biden calling the profits “a windfall of Russia's invasion of Ukraine.” He also criticized Big Oil for investing too little in domestic production. But industry officials countered, saying they found Biden’s message to be a paradox. On the one hand he was advocating for a move toward a society of lower carbon emissions while on the other hand he wanted oil companies to increase production.Now to be a good environmentalist and recycle one of my reactions to last month's post.
In addition to being callous, the advocates of "too much money chasing too few goods" usually aren't as vocal about making more goods, which leads directly to supply shocks, the second explanation for inflation. I've written about supply shocks to explain the causes and effects of the chip shortage, baby formula shortage, and gas prices. That works very well as an explanation for why specific goods increase in price, but other than energy prices, which affect the prices of everything else, it doesn't work as a general explanation.High oil prices are a major way that energy costs propagate through the economy, so they do have a general effect on inflation. The reasons for the supply shock and the oil companies' reactions to it also illustrate some of my other points.
I'm an environmentalist who thinks over-consumption is a problem, but deliberately increasing suffering to destroy demand is not the way I want to do this. I'd prefer greater efficiency to reduce waste and a more educated populace who will choose to consume more responsibly and sustainably. Inflation while keeping people employed might actually help that goal.Some of those advocating for "less money" to fight inflation might say that allowing inflation is also increasing suffering, but I think allowing moderate levels of inflation is both less deliberate and less cruel than causing a recession to reduce demand. Let prices send an accurate signal of costs to give people a reason to change on their own.
That leads to asking how accurate the price signal really is, especially if companies are not just passing their increased costs on to their customers, but increasing profits as well instead of increasing supply.
Companies investing in their factories or other facilities and hiring more employees and paying them better would also help with increasing supply of goods and services, as well as induce more people to join the labor force...Instead, they are engaging in massive markups, i.e., profiteering, and sending the increased profits to their investors and executives. This is normal capitalist behavior, but that doesn't mean it's desirable.The oil companies were doing exactly this last year. Their defenses are that their profits are driven by oil prices, which traders set, not the companies, and that they are just making up for low profits and outright losses during 2020, when Oil fell below $0.00 for the first time ever. Also, CNBC showed that oil production is increasing, so the oil companies are doing what President Biden has asked for, although U.S. oil production hasn't recovered to pre-pandemic levels yet. At least Biden did what he could to increase oil supply by releasing oil from the strategic petroleum reserve. Here's to oil prices falling enough that the federal government doesn't lose money when it replenishes the reserve.
The last point I want to recycle is that Democrats are returning to a favorite target by calling for windfall profit taxes and increased production at the same time.
PBS is showing both sides trying to score political points, Democrats against big corporations and Republicans against environmental regulation. It's no surprise that I'm on the Democrats' side on this. However, if CNBC is correct about gasoline and diesel retailers being reluctant about lowering prices at the pump so that they can recoup losses incurred on the way up, then gas station owners are to blame for the continued high cost of fuel. That would mean beating up on local small businesses. I don't think that would play well for either party's politicians, who would rather be seen as defending the public against big business or "big government."Republican politicians didn't show up in CNBC's video, but the American Petroleum Institute (API), which made a cameo in "An Inconvenient Truth," did a good job of expressing their position. Maybe that's because the API is feeding the GOP their talking points. Despite what Ron DeSantis has done to Disney, this is one way the Republicans are still the business-friendly party.
Enough of the economy for now. Stay tuned for World Wildlife Day.