"Most crude oil is moved
in the United States by pipeline. However, because of limited pipeline
infrastructure in North Dakota's Bakken region, oil producing companies there
rely on rail to move their barrels. Shipping oil by rail costs an average $10
per barrel to $15 per barrel nationwide, up to three times more expensive than
the $5 per barrel it costs to move oil by pipeline..."
"Argus Media reports
that rail rates for unit trains moving Bakken oil to major refining centers on
the Gulf Coast are about $12.75 per barrel to St. James, Louisiana and $12.25
per barrel to Port Arthur, Texas. The unit train delivery rate to New York
Harbor is around $15 per barrel.
BNSF is the biggest railway
mover of U.S. crude, transporting one-third of Bakken oil production alone with
unit trains carrying up to 85,000 barrels of oil. The company's carloadings of
crude oil and petroleum products increased 60% during the first six months of
Since Bakken is now producing
over 1 million barrels of crude oil per day, this equates to a significant
amount of revenue flowing through in the form transportation cost...if the
pipeline costs in the neighborhood of $5 per barrel, versus $7-15 per barrel
via train, who wins? If you owned the
rail associated with getting the oil to market, what would you have to say
about a pipeline? Who wins? Who loses?
Let’s move on…
The achievement of the goals
of theoretical welfare economics can only be achieved if vigorous competition
is present in the markets for goods and services and for the productive
resources that are combined in the production process to give us those goods and
The common good has a similar
meaning to the achievement of the goals or conditions of theoretical welfare
economics as you may recall from previous newsletters on this website. These welfare goals or conditions are
efficiency and equity on the microeconomic level and high employment and a
reasonable degree of price level stability on the macroeconomic level.
To refresh your memory as to the meanings of these goals, please review the
following articles from past newsletters on this website.
WHEN ARE WE EVER GOING TO LEARN THAT
FREE MARKET CAPITALISM, SO LONG AS IT IS COMPETITIVE, IS THE BEST POSSIBLE
ECONOMIC SYSTEM TO ACHIEVE THE ECONOMIC WELFARE OF ITS CITIZENS?
April 18, 2014
Separating the Light from the Heat: an
analysis of the income distribution and the endless clamor for its
redistribution; the whys, wherefores, and implications
February 12, 2013
…yet, we hear the term
cutthroat competition as one of the great evils of our time. The fact is that exploitation of consumers by
the use of monopoly power is the true evil of modern times and not its
antidote, competition. The
aforementioned monopoly power arises from either what are usually termed,
natural monopolies and natural oligopolies and/or the deliberate elimination of
competition by cartelization of markets.
The price for gasoline and
diesel is around $2 or so greater than it should be given the costs of
production. With the onset and continued
growth of fracking technology, those prices should steadily fall, assuming that
the firms producing crude oil and gas are not taken over by the traditional
firms. Remember the period from roughly
1993 to 2003, when the American segment of the crude oil industry was
effectively re-cartelized. That is an
example of the evil of monopoly power and the failure to preserve competition
which is the “good guy” and not the “evil one.”
A major case of the growth of monopoly power resulting from the growth
of cartelization is the failure by the well-funded government agencies to
enforce the anti-trust legislation already in existence.
WHAT IS HAPPENING IN THE CRADLE OF
July 26, 2011
“Case in point---–---from
lobbyist, pushing and prodding the legislative process to form policy to
benefit clients; to bureaucrat guarding the chicken coop; and then back into
the ranks of the foxes as a partner at a top tier Wall Street Mergers and Acquisition
First Chicago School, numbering among its members, George Stigler, was much more critical of
market concentration, using such terms as regulatory capture.”
A Failure of Antitrust Agencies
“Beginning around 1993 and
continuing to around 2003, the U.S. segment of the oil industry was being
re-cartelized as 13 large firms were remolded into 5 even larger firms
including the merger of Exxon with Mobil.
They let it be known that they would accept the prices in the
market. Those prices of course, were set
by OPE C so informally they became part of OPEC. A summary of this regulatory failure by the
General Accountability Office emphasized that the antitrust agencies adhered to
the Second University of Chicago School.
Their ideology is that the market cannot fail and the economic
performance of a highly cartelized market is nearly as efficient and equitable
as is a much more competitive market.
Does anyone really buy that baloney/malarkey?”
ENERGY MARKETS - Mergers and Many
Other Factors Affect
U.S. Gasoline Markets
“One of the many factors that can impact gasoline prices is mergers
within the U.S. petroleum industry. Over 2,600 such mergers have occurred since
the 1990s. The majority occurred later in the period, most frequently among
firms involved in exploration and production. Industry officials cited various
reasons for the mergers, particularly the need for increased efficiency and
cost savings. Economic
literature also suggests that firms sometimes merge to enhance their ability to
This is just one of the areas where the
lack of competition takes us far from the welfare goals of efficiency, equity,
high employment and a reasonable degree of price level stability. The cartelization of the crude oil market and
its downstream refined product markets is the enemy of the common good.
When Adam Smith wrote his
‘Wealth of Nations” in 1776, he eloquently pointed to the importance of
competition in achieving the ‘common good’.
He termed competition as the “Invisible
Hand”. To paraphrase him, do your utmost to maximize
your self- interest, and if the invisible hand of competition is present, you
will be maximizing the common good.
Absent the invisible hand of competition, the common good will suffer
from maximizing self-interest.
Both those on the extreme
left and the extreme right fail to understand the importance and beneficial
outcomes from vigorous competition in the markets. The far left are of the ideological bent that
the market can do no good and those on the far right of the mindset that markets,
even when not competitive, can do no wrong.
Ideologies should provide a
leavening agent in the analysis of economic activities. But just as is the case in the production of
good tasting bread and beer where baker’s yeast and brewer’s yeast are the leavening
agents, so should be the role of ideology.
Tasty bread and tasty beer are not primarily made of the yeast or a leavening
agent, but o many other elements such as cereal grains, hops, etc.
The lack of competition also
occurs in the markets for productive resources (labor, capital,
entrepreneurship and land). One such
example is the cartelization of the productive resource, labor, by labor
unions. One of the major reasons for the
bankruptcy of the American auto companies, Chrysler and General Motors was the
excessive compensation of labor through collective bargaining. This newsletter in past issues cited a well
researched article by the Heritage Foundation showing that a few years ago,
leading up to the bankruptcy of these auto companies, the average hourly
compensation for the typical auto worker averaged nearly $75 including both
wages and non wage benefits paid by the employers.
“According to briefing
materials prepared by General Motors, "The total of both cash compensation
and benefits provided to GM hourly workers in 2006 amounted to approximately
$73.26 per active hour worked."”
We already have the
legislation in place and the budget appropriations sufficient for the much
greater enforcement of antitrust legislation to bring us much closer to
competitive markets so needed to make the free market capitalism work and
achieve the common good. What we lack is
the will of the well-funded antitrust authorities. They clearly are failing in their duty to
promote the common good and to bring us closer to the achievement of the
economic welfare conditions of equity, efficiency, high employment and a
reasonable degree of price level stability.
In the U.S. since 2007 the
real median Household Income has fallen by $4,497, from $56,436 to
$51,939. In addition, the Gini Index (sometimes
referred to as the Gini Coefficient) has also shown significant signs of
increasing income disparity over the last several years. There’s little doubt that the monetary and
fiscal policies employed to combat the recession and the subsequent failure of
the labor markets to adequately rebound has led to lower incomes and increased
disparity. In a normal environment – in
this case, meaning a robust recovery accompanied by policies promoting
competition, those competitive forces would move to both increase the median
income level by drawing more people into the labor pool, which would in turn
reduce disparity (lower the Gini Ratio) due to those same competitive forces
working in a like manner in the labor (productive resource) markets.