Joe Kennedy II Wants More Regulation of the Oil Industry

by Don Boudreaux on March 23, 2008

in Energy, Myths and Fallacies, Prices

Joseph Kennedy II knows neither the relevant history nor economics.  Here’s a letter that I sent today to the Wall Street Journal in response to Kennedy’s essay that appeared yesterday in that paper.

Joseph Kennedy argues for
more government regulation of the oil industry ("We Need a New Bargain
With Big Oil," March 22).  His argument, however, is suffused with
ineffective anecdotes (such as the untearful tale of the "young mother,
who had to move in with her mother to keep her children warm and
healthy") – with mistaken history (Teddy Roosevelt’s attack on Standard
Oil was for "the good of the nation" only if the nation was served by
breaking up a firm that steadily pushed the price of kerosene down) -
with naivete about government (Mr. Kennedy assumes that all those
additional powers that he demands for government will be exercised by
apolitical geniuses) – and with bad economics (his assertion that
private firms have no right to charge "whatever they want" reveals his
failure to understand that prices convey vital information and
incentives to producers as well as to consumers
).

So why, exactly, did you publish Mr. Kennedy’s uninformed and ill-reasoned essay?

Sincerely,
Donald J. Boudreaux

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{ 21 comments }

John V March 23, 2008 at 9:46 am

wow, that was really bad. Mr. Kennedy got national forum for that?

Bottom line is this:

Many people…rich, poor, smart, stupid, greedy, generous…simply don't understand what you (or even silly little me) take for granted as common sense and objective about economics.

babinich March 23, 2008 at 10:45 am

"Political leaders also need better oversight of domestic oil trading markets."

My God…

SpotCash March 23, 2008 at 11:03 am

The WSJ published Kennedy's rant for the same reason that it has published many other similar rants from those forces opposed to the free market. The WSJ wants to permit them to make their best case, publish it, and thereby show the people in the US how dangerous these minds are.

Sam Grove March 23, 2008 at 12:02 pm

Here's one from Paul Krugman:
This banking crisis of the 1930s showed that unregulated, unsupervised financial markets can all too easily suffer catastrophic failure.

Apparently he fails to appreciate that the FED was created in 1913 to prevent such catastrophes, a full 16 years BEFORE the GD.
Full article.

spencer March 23, 2008 at 12:48 pm

Interesting argument. But of course you do not want to look at the point that the greatest era of investment in domestic oil drilling and production was the 1970s era of price controls. Just as soon as price controls were dropped in the early 1980s oil prices and drilling collapsed.

Sam Grove March 23, 2008 at 12:53 pm

Just as soon as price controls were dropped in the early 1980s oil prices and drilling collapsed.

Was there anything else going on in the world at that time?

Sam Grove March 23, 2008 at 12:55 pm

Of course, if price controls are in place, you NEVER drop your prices lest you be prohibited from raising them again even if the market calls for it. What the scenario you described indicates is that, sans price controls, prices may have dropped sooner.

Dirck the Noorman March 23, 2008 at 1:27 pm

I dont follow Kennedy's reasoning here:

"Political leaders also need better oversight of domestic oil trading markets. Speculation has exacerbated the runup in the price of oil — as much as a $25 a barrel premium, according to the U.S. Senate Subcommittee on Investigations. To reduce this impact and increase transparency in oil trading, Congress should subject over-the-counter electronic trades to increased federal reporting and oversight requirements, as has been proposed by Sen. Carl Levin (D., Mich.) and others."

Speculation is not illegal. And if these speculators have "exacerbated the runup in the price of oil" then they will suffer accordingly when the options on which they are speculation approach expiry and the market's voting machine converges with its weighing machine.

Its worth recalling this man's recent, unashamed praise for Hugo Chavez.

http://tinyurl.com/yjkeht

I dont think its unfair to say JPK2 is simply a socialist.

http://tinyurl.com/35w9s2
http://tinyurl.com/26fal2

tarran March 23, 2008 at 2:09 pm

I can explain why they published Mr. Kennedy's essay:

he is a member of the ruling class and whenever possible you keep them happy. It costs the Wall St journal very little to publish the essay, and it may later earn them a pass if ever their fortunes are in the hands of the Kennedy clan. The Kennedys do have a long memory and one does not want them as enemies.

Methinks March 23, 2008 at 4:24 pm

Apparently he fails to appreciate that the FED was created in 1913 to prevent such catastrophes, a full 16 years BEFORE the GD. – Sam

…and that the Fed turned a problem into a crisis. But assholes like Krugman have managed to convince the larger population that the GD was a failure of capitalism, of course.

But of course you do not want to look at the point that the greatest era of investment in domestic oil drilling and production was the 1970s era of price controls. Just as soon as price controls were dropped in the early 1980s oil prices and drilling collapsed.

Is that in real dollars or the inflated 1970's dollars? If the increase was in real dollars and was not sustainable after price controls ended, then there was an inefficient allocation of assets in the 1970's, right? Moreover, those very same price controls (combined with the oil embargo in 1974) served as incentives to create energy efficient products, permanently dropping demand. So, when oil and gas prices were allowed to reflect real demand, the demand they reflected was lower than it would have been had we not had price controls.

Will March 23, 2008 at 4:44 pm

Mr. Kennedy's article was, naturally, ludicrous. I have to say, though, that's one of your more combative letters to the editor.

I like it, but those types don't seem to ever get published.

snguyen March 23, 2008 at 5:06 pm

The reason why exploration increased during price controls was because they were put in place on "old oil". Newly discovered oil could be sold at a much higher rate. The policies were intended to promote oil exploration. See

http://research.stlouisfed.org/publications/review/75/11/Controls_Nov1975.pdf

mcwop March 23, 2008 at 9:40 pm

Spencer, the price of oil went from about $10 in 1973 to $50 in a very quick amount of time, then the price stayed there through the 70's. Exploration and drilling is based on the price of a barrel, not the price at the pump. Regardless price controls in the 70's were implemented after the price per barrel had already run up. I seem to remember shortages after those price controls were implemented.

vidyohs March 24, 2008 at 9:46 am

'Tis amusing that JK-theduece speaks so heartfelt about alternate sources of energy and threw his support to his uncle to block installation of a "wind farm" that could be seen from their vacation compound in Marth's Vineyard.

'Tis more of a pity that we have no honest media that will publicly point that out everytime any of the Kennedys speak on energy.

OregonGuy March 24, 2008 at 12:45 pm

Thank you.

Now, if we could only convince these guys that the massive spending on alternatives that nobody wants–although "everyone" says they're good for us–we might be able to reduce the cost of gas at the pump.

FreedomLover March 24, 2008 at 12:49 pm

Oil companies are EVIL and must be destroyed.
/leftist rant

RBadzinski March 24, 2008 at 3:11 pm

Why do we always let the people who created this situation off the hook. The current price of oil is a result of three factors 1) the declining price of the dollar and 2) 30 years of environmental policies that lock off large areas of proven oil reserves within the territorial U.S. and the regulations that make the building of any coal, nuclear or refining capacity impossible. Given these conditions for the past 30 plus years is it any wonder today that with constricted supplies and growing demand that we are seeing energy prices at record levels.

The American public needs to understand that this is what they wanted when they readily voted for politicians who promise that we can solve every perceived problem without them having to bear any cost.

Sam Grove March 24, 2008 at 3:16 pm

After accounting for inflation, energy prices are not at record levels…at least for gasoline.

MU78 March 24, 2008 at 5:03 pm

Why do some people that inherit their wealth not have a clue about how that wealth was created? Oh, wait! The Kennedy's probably know how Papa Joe made his money and think no one else should be able to manipulate stocks and import illegal booze.

Now if only they would take some of their money and sign up for a good class in economics.

John Dewey March 24, 2008 at 6:02 pm

RBadzinski: "the regulations that make the building of any coal, nuclear or refining capacity impossible."

I agree with your post, but I wanted to clarify one point. Oil refiners have been able to increase capacity of existing large refineries, through capital investment and through increased efficiency. In the 1990's refinery utilization in the U.S. increased from 75% to 94%.

The oft-quoted statistic about the number of U.S. refineries being cut in half since 1980 is misleading. Small, inefficient refineries built to serve small oil fields have been closed. The mega-refineries along the Gulf Coast were expanded to enjoy increased economies of scale.

Fortunately for the rest of the U.S., Texas and Louisiana have been friendly to the refining industry.

FreedomLover March 24, 2008 at 6:13 pm

Dewey:

Until this nation gets serious about nuclear power, it's not serious.

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