The Mixed and Vexed Subject of Oil Industry Profits

Abstract

Abstract The U.S. oil industry has come under widespread criticism for having earned excessive profits. Partly for this reason, the industry has also been subjected to increasing regulation by the federal government. It is widely thought that the industry's profits reflect the monopoly power of U.S. oil companies and that freeing U.S. producers from price controls would only producers from price controls would only allow them to share in additional extraordinary profits now being earned by OPEC. In fact, federal controls have denied to U.S. producers part of their "producers' surplus," the rewards they have earned for having pioneered new ways of doing business, taken extraordinary risks successfully, minimized their costs of production, and, perhaps most important, chosen, in the past, perhaps most important, chosen, in the past, to focus their investment in exploration and production in the United States and not production in the United States and not abroad. As a result, these controls are, in various ways, discouraging output of oil by U.S. companies and encouraging unnecessary demand by U.S. consumers. This is, in turn, increasing U.S. dependence on imported oil primarily from OPEC. primarily from OPEC Introduction In 1895, the American economist, Frank Taussig, declared profits to be "that mixed and vexed income" after surveying what had been written on the subject by the learned men of his profession. This description is equally appropriate today, especially when describing the current controversy over oil industry profits. The industry's profits have been condemned by one senator as "unconscionable" and by another as "obscene". Partly because of their alleged profiteering, Partly because of their alleged profiteering, the major oil companies have been called such names as "robber barons" and "unfeeling monopolists' in the press. What is at issue are abnormal profits in excess of the basic minimum level of payment to management or return to capital payment to management or return to capital necessary to keep a company in business. Economists have identified many reasons for abnormal profits—some bad, some good— and it is this that has made profits a "mixed and vexed" subject in both Taussig's and our times. Abnormal profits may reflect the presence of monopoly or an "unearned presence of monopoly or an "unearned increment" accruing to a landlord. Or abnormal profits may reward a businessman for profits may reward a businessman for extraordinary performance and successful innovation and risk-taking.