Oil, oil everywhere and not a drop to drink...
April 18, 2008 9:25 PM   Subscribe

What fundamental differences keep the US from nationalizing and/or heavily regulating the oil industry as a whole, much like electricity has been regulated?

Is it in large part because of the volume that is imported in oil versus electricity? The typical story speaks to the price that the "market will bear" but when demand elasticity is as low as it is for oil, doesn't the impact on every other industry oil touches (from manufacturing to transportation to shipping to plastics to air travel, etc, etc) as well as the depleted discretionary income people have to spend on everything else disproportionately and in a very damaging way benefit the shareholders and tycoons of the oil companies?

I don't typically take that tact, but the amount of influence the oil industry has has to be comparable to the electricity industry's in being able to affect people's discretionary income, spending patterns and the cost of goods in general...

So what's the argument against doing what's been done for electricity? Is it just too politically messy? Is it impossible considering the overseas/import-based presence? Or is it just because of powerful lobbyists and lovers of capitalism? (Which I consider myself, really.)
posted by disillusioned to Law & Government (17 answers total) 1 user marked this as a favorite
 
Amendment V to the Constitution: "...nor shall private property be taken for public use, without just compensation."

Which means that the US can't confiscate companies, which is what "nationalize" usually means in most of the world. It would have to perform what amounts to a hostile takeover, and purchase all the outstanding stock at approximately the market rate.

The term for that is "market capitalization"; it's the product of the current price-per-share multiplied by the number of shares outstanding. For Exxon-Mobil right now it's something in the range of about $400 billion, plus or minus. (I'm sorry, but I'm too lazy to go dig up the current numbers. According to this google hit, in 2005 Exxon-Mobil's market cap was $383 billion.) The other big petroleum companies are equivalently expensive.

Of course, in a case like this, just as is always the case on hostile buyouts, the stock price of the target company would skyrocket. You can figure on paying a surcharge if not even more.

It isn't likely that the US government could scratch up a couple of trillion dollars in order to purchase those companies. It's extraordinarly unlikely that anyone in Congress would even seriously propose doing so, let alone convince a majority in both houses to go along with it.

That's just one of many reasons why.
posted by Class Goat at 9:39 PM on April 18, 2008


that should have been "...on paying a 50% surcharge..."
posted by Class Goat at 9:41 PM on April 18, 2008


As to electricity, the reason the government is constitutionally permitted to regulate them closely is because they are what is known as "natural monopolies". It doesn't make economic sense to invest in parallel competing wiring of a community so that every home and business has the ability to choose to take power from one of two competing companies. So power delivery companies are granted charters, legal monopolies, over certain areas. And because of that, they're also regulated closely to prevent monopoly abuse.

The courts permit that because it doesn't make economic sense any other way. But the big petroleum companies are not natural monopolies, and my understanding is that therefore the government's constitutional power to regulate them is more circumscribed.
posted by Class Goat at 9:47 PM on April 18, 2008 [1 favorite]


First, I assume that most US governments aren't interested in regulating big business any more than they have to. I've only seen the regulation of utility companies when some individual company has a monopoly, or to prevent a return to monopoly.

Utility companies frequently have regional monopolies. And the regions that don't have monopolies regulate the owners of the infrastructure to ensure that they can't price competing providers out of the market.

The oil companies do not have the same monopoly. Several oil companies trade in the US, at market rates, and many different organizations operate filling stations (buying their gas from many different refineries).

I think the difference comes down to the fact that the oil companies are operating in a legitimate market. There's collusion, of course, but not enough to really notice. An electrical company doesn't operate as part of a market, since nobody's allowed to go out and run more power line for their own distribution network. Any competition that exists is therefore somewhat artificial, since ultimately somebody is providing a service to a competitor... left to their own devices, they'd simply refuse to provide and put the fuckers out of business.
posted by Netzapper at 9:49 PM on April 18, 2008


Penn Central Test is relevant here. When does that heavy regulation = a taking, which would mean the government owes $$$$? The government, at this point, can't cross that line for the reasons Class Goat mentions.
posted by melissam at 9:50 PM on April 18, 2008


Electricity is a lot different as a commodity than oil. Electricity (with limited exceptions) can't be stored, and it can't be transmitted over intercontinental distances. Basically, suppose the price of oil were regulated as electricity is in most places, if the regulated price were much lower than the global market, no oil would be delivered, and if the regulated price were higher, consumers would pay more than they ought to. Simply because oil can be stored, and can be traded around the world, it operates more like a textbook economic good, and so regulation is less useful than a good like electricity where markets have more of a propensity to fail.
posted by cameldrv at 10:24 PM on April 18, 2008


It's all about the distribution network. Electricity, natural gas, telephone, cable etc. are all regulated to some degree because of the fixed network and the inefficiency of installing parallel networks for competitors. When you can put electricity on a truck and ship it to the consumer then you can deregulate the power industry. As things like satellite TV come on line it allows regulation of the hardwired network to be relaxed a bit. Ideally, for economic efficiency, you want the minimum regulation necessary to protect the consumer from the monopoly power inherent in controlling the distribution network.
posted by caddis at 10:48 PM on April 18, 2008


The oil companies had and have better lobbyists and lawyers than the electric companies, and 1952 Iran was an unspoken lesson to politicians around the world (and in the US) about the risks of nationalizing American economic interests. 9/10ths of law is historical precedent, so that's the system we have.
posted by Blazecock Pileon at 12:15 AM on April 19, 2008


It's not just an "overseas/import-based presence." Royal Dutch Shell is (as its name implies) incorporated in the Netherlands. Total is French. BP is British. That's three of the six "supermajors." That's got to complicate things.
posted by kindall at 12:36 AM on April 19, 2008


kindall, point taken.

However to be precise the Shell part of Royal Dutch/Shell is largely British, Total has a large Belgian component (Petrofina), and BP has a large American component (Amoco). Where an organization is incorporated is not always equivalent to its national identity, as we know well with so many American companies held by a Bermudan parent the sake of tax sheltering.
posted by randomstriker at 1:21 AM on April 19, 2008


You're also dealing with the fact that the Supermajors (aka International Oil Companies - IOC) are now facing severe competition for resources from the National Oil Companies (NOCs) such as the PEMEX and StatoilHydro.
Something this globally distributed can't be nationalised. As we're aware, sovereign states do odd things like nationalisation and fight wars over resources. But in the case of oil and gas, there's not enough resources in the US to supply consumption so nationalisation won't solve the problem.
posted by arcticseal at 1:28 AM on April 19, 2008


As Caddis said, above, it's all about the distribution network. I found this history of natural gas regulation on net. If home heating oil were distributed in pipes to homes in Massachusetts, its price would be regulated too. In my town, we already have two separate hi-speed cable (tv, internet, and phone) providers (Comcast and Verizon) in separate, parallel networks, and I believe they are still subject to regulation, although they both compete for my business, so there isn't much need for price regulation.
posted by thomas144 at 5:26 AM on April 19, 2008


It might be worth reading Alan Greenspan's "Age of Turbulence" for a more general perspective on the role of legislation on US economics.

Greenspan talks a bit about the efforts in the 70's to fix prices (WIN and gas rationing) as well as federal efforts to highly regulate business (supposedly down to the level of regulating flight attendant uniforms) - both of which were generally bad for the US economy.
posted by cr_joe at 7:48 AM on April 19, 2008


The oil industry pumps mostly from publicly owned wells in the US, usually offshore. These rights are given away due to political influence. Protecting these giveaway contracts has always been job one. Some have claimed that it costs the US taxpayer over $125 billion per year in royalties, which was an estimate from when gasoline was much cheaper.
posted by Brian B. at 8:47 AM on April 19, 2008


The more apt a customer is to be screwed by market forces, the more likely there is to be regulation. An absolutely free market usually excludes people. Because of that and our desire to level the playing field for all citizens, businesses get regulated.

In addition to the examples others have given, another issue is the "cream skimming" problem.

If I'm a phone company, why in the world would I charge the same to a customer in a high density area as a rural customer? I have to lay miles and miles of wire, and maintain that wire, to get service to three farms down at the end of the road. I will want to charge them more. And if I can't, I won't provide service to them at all. Why take a loss? It doesn't make business sense. Because the government believed that phone service to rural communities is important, they mandated that they get coverage and price guarantees.

But in situations where there is a finite commodity being consumed (like gasoline/oil), price regulation ultimately leads to supply problems. If the price is fixed too high, supply builds up because the high profit encourages suppliers to get in on the action, and discourages consumers from buying. If it's too low, it dries up for the opposite reason.

This is what happened in the late 70s and early 80s. There was a gas crisis (because OPEC reduced production and drove up the price), and so speculators all over the world wanted to get in on that and started pumping oil like it was going out of style. So by the mid to late 80s, there was so much supply that the price plummeted and many wells were capped because it cost more to produce than the market would bear.

Regulation *can* work if those doing the regulating are really, really smart and able to see all the market forces at play. An example of that is the Federal reserve under Alan Greenspan. This chart isn't perfect, but it's a good example. The Fed knows that keeping inflation low, but slightly positive, is the best scenario for everyone. Greenspan had a talent for it, and if you look at the years he was regulating it, you can see that it was pretty tame in comparison.
posted by gjc at 9:15 AM on April 19, 2008


The oil companies are publicly traded corporations. At the end of the day the oil company executives don't stuff their trunks with all the money they made and drive home to mama. Shares of their companies are owned by institutions and individuals all over the world. Got a pension, or know someone who does? Chances are their pension is partially funded with oil company stocks. Did you go to college? Chances are your school's endowment is invested in some oil stocks (and they should have hit you a little harder with Econ 101). And, after research, exploration, and infrastructure have been paid for, guess who claims the oil company profits? Wait for it…right, the investors.

So, if you think "the man" at the oil company is keeping all the profits for himself, buy a share, or a hundred. Then you're "the man".

You say you can't afford it, or it's not worth scrimping a little to buy a piece of the action? Well, then you must not really be convinced that the oil companies are reaping outlandish profits. And you'd be right.
posted by dinger at 10:53 AM on April 19, 2008


For a recent example of this happening, you might look into Venezuela's PDVSA. Many of the major international oil companies lost assets in this nationalization.

As a sidenote to all of this, if the US government was to nationalize Big Oil, you'd quickly be wishing that you had the current gasoline prices back. Finding and processing oil requires significant resources and talent, which generally requires good management and oversight. My experience thus far indicates Congress / the President lack the skills to handle complex situations like these. Anyone want to talk about the regulations revolving around the impossibility of ethanol or air traffic delays?
posted by conradjones at 8:52 PM on April 19, 2008


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