WASHINGTON -- Do my eyes deceive me? Am I reading that President George W. Bush has joined with the Republican leadership to call for investigation of the oil companies in light of soaring oil and gas prices? Oil hit $75 a barrel recently and apparently transformed the Republicans into Democrats, Democrats of the Charles Schumer and Jean-Francois Kerry variety.
Actually if they are going to haul in the oil executives for investigation I suggest they get to the root of the matter and haul in famed economist Milton Friedman. Let him bring his Nobel Prize along for display. Prof. Friedman is the fellow who, roughly 50 years ago, revived the world's awareness of markets, and he has been explicating the consequences of markets ever since, first from the Department of Economics at the University of Chicago, and more recently from an office in the Hoover Institution, the conservative think tank named after -- who else? -- Herbert Hoover. His old adversary John Kenneth Galbraith once erupted in oratorical excess on the TV show "Firing Line," that there is any such thing as a "market."
Well, we now know that there is. One of the reasons for the robust economy in so many places around the world today is the existence of markets, which establish the value of resources, effectively allocate those resources and establish sustainable profits for product. With the booming economies in places such as China, India and our own country, oil is now relatively scarce, and the price buyers are willing to pay for it is high. Yet, despite the sudden increase in oil prices, the profitability of oil long-term is not exorbitant. Though it may astonish the Democrats who are now playing the demagogue's game with the oil companies and the Republicans who apparently wish to join them, investors know that oil's return on capital is not terribly high. In fact despite the surge in oil prices in recent months, BP, the world's second-largest oil corporation, reported a 15-percent decrease in profits for the past quarter, as a consequence of lower output, a refinery shutdown and increased taxes.
The oil industry is a high-risk operation. As Boone Pickens, one of the industry's most perceptive entrepreneurs, has been saying for several years now, the production of oil has probably peaked. The world can pump 85 million barrels a day. The world consumes 30 billion annually and will thirst for more as the years go on. That means prices will go up. Moreover, with a madman running Iran and a would-be Fidel Castro running Venezuela, it is not clear we can count on the aforementioned daily production of 85 million barrels.
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