As you probably have already seen, Exxon Mobile posted a record profit the other day, in the amount of $36.2 Billion for 2005. Given the huge increases in prices at the pump recently, there is considerable outrage over such huge profits. It is understandable, then, that executives at Exxon were trying to keep a low profile in recent days.

Then the other shoe dropped - yesterday, Arlen Specter (R-PA) said that perhaps it was time for congress to do something about the situation. He cited research showing “excessive” mergers and acquisitions that created several very profitable giants over the last decade or so. He even went as far as to say “it just may be time to legislate in this field”. There has been considerable clamor to “do something” about the high gas prices and what are seen as excessive profits. If I may, a few observations:

1) Congress could start by not handing out so much money to oil companies. In addition to Exxon’s $36 billion, Conoco raked in $13 billion, and Chevron made roughly $14 billion. Yet, our government still was nice enough to hand them $14 billion in 2005.

2) A lot of people may claim that the government should not step in and should instead allow the “free market” to sort itself out. This is a flawed argument for a few reasons. First, demand for oil is very inelastic. Second, the oil market is basically an oligopoly right now (many would argue a collusive oligopoly). This means that, over the short run at least, the oil market does not behave the same as the market for most other goods and services. I personally do not find myself attracted to the “free market” argument as much.

3) It can be argued that high gasoline prices are good for the long term, for practical reasons. Many have argued that gas should cost $5 or more per gallon in the US (similar to what it costs in Europe), so that consumers are making decisions based on the actual cost of gasoline (it is argued that the cost consumers realize is distorted downward by subsidies and not taking into account external costs). Over the long run, higher gas prices would encourage consumers to demand more efficient vehicles or even alternatives to gasoline. This may seem in conflict with my 2nd point, but it isn’t - we are talking about short run vs the long run. The effect of this argument is desirable, but I don’t think price gouging and massive profits are the way to achieve it - I would argue for fewer oil subsidies and more taxes instead.

Despite political grandstanding and significant support among the citizens of our nation, I doubt much will happen. Indeed, coming up with a solution to the “problem” of such high profits will be difficult, if not impossible. I would instead argue for getting rid of any handouts to energy companies, and significant investment in alternative fuels, more efficient uses of current fuels, and better public transportation. Remember - if there are alternatives in the short run, elasticity is increased, and former oligopolies will be forced to be more competitive.