Black Profits

It is an interesting topic where the money goes and which companies make the fat profits.

Our era of trade at this scale probably never happened before. Trade was a major strength of the British Empire. However, it was built on division of labor. Each dominium had specialties partly due to distances, limited investment, and geography. India did not make machines. They did not do scalable textile manufacturing either. Britain did such stuff importing raw materials, processed diamonds, and agricultural products from India. Differentiation increased risks. Risk builds rivalry.

There was probably a short period, when perfect competition happened at scale in continental Europe. It was Austria-Hungary, Germany, Poland, and Russia in the end of the Nineteenth Century. We still see the similarities of Budapest, Mainz, Prague, Vienna, Warsaw, or St. Petersburg on the buildings today. Most of them were rebuilt or renovated after World War Two. Austria-Hungary may have shipped Ganz electric motors for elevators and seasonal workers for farms on RMS Carpathia from Rijeka to New York City, when they had to collect the shipwrecked passengers of RMS Titanic. All this was possible due to the sharing of information and professionals with knowledge of steam engines, steel bridge building, and electric engineering mainly from Great Britain, and New England.

Copyright© Miklos Szegedi, 2015.

Economic research consensus suggests that perfect competition allows zero profits. This is reached when producing one more unit adds to an average total cost, so that small competitors can compete at the current price level. However, there is a barrier to entry, a learning curve to reach such a perfect state for each company. There is also demand of net income from insurance, society and government that will push higher margins for entire industries.

Monopolies can increase prices and lower production to achieve the state when their individual profit is the biggest. This is when one more unit sold would cost more than the revenue increase at a lower price. One less unit sold would drop the costs less than the revenue increase due to higher prices. Profit is at the maximum at this point.

Monopolies of Standard Oil and AT&T were eventually split up. This happens when their products are not a luxury spending anymore of the upper middle class. They become common goods for the median, and politicians pick up the case for votes.

Competition may disrupt this state. Oligopolies make more units at relatively lower prices than a monopoly but higher prices than perfect competition. This is due to the specialization each of them carries out to win their respective market segments. This is the natural way how markets prevent regulatory enforcement of antitrust laws.

Monopolies and oligopolies are masters of their market segments. The know how is what makes Amazon and Microsoft build data centers with low risks and low costs.

Companies like Google go further than perfect competition giving Gmail for free. They can do this by being an oligopoly on the market of marketing of sellers that pay for the mail audience.

What does make black oil so profitable? It is a commodity, prices would just drop indefinitely. Oil is used for transportation. Congestion makes the demand elastic at high revenues. When cities cannot absorb more cars, demand increases as people stay more in traffic wasting time. However, the productivity does not grow as much as a result. Commuting becomes a luxury again. The issue circles back increasing prices as vast profits for oil companies. This is called stagflation.

The lowest gas prices are common in regions with excess freeways and nearby oil production like Texas, or the Persian Gulf.

Data may be available soon to prove this theory. Tesla keeps selling cars at a premium despite being green and simple. This means that it is not the energy that makes transportation expensive but the congestion that makes commuting a luxury, rather than a commodity. High inflation in populous, congested regions of India, and Pakistan also support this theory.

Moreover, roads need asphalt, a side product of refineries. It is hard to replace, and it happened to be cheap when car manufacturing started to expand in the 1920s. The more oil was used, the more roads were damaged, the more asphalt was available to fix affordably as a side product.

Electric cars may not reduce oil use as much as a result with a need of refineries to keep roads safe. Russia suffers from asphalt deficit due to the high distances relative to population. Budapest suffers from potholes having an efficient nuclear-powered subway and seamless bus transportation system. Smaller cars and fewer daily car commuters make asphalt relatively expensive. Heavy buses packed with people and harsh weather conditions make things worse increasing demand.

Governments can help by building more freeways and more cities in the desert. They are reluctant. Governments live on taxes that are a proportion of the GDP. It is corporate and individual income tax on black oil profits. They make money, if their taxpayers make money.

They introduce licensing or excise taxes as a result. These increase the barrier to entry allowing just enough lawyers, financial advisors, realtors, restaurants, cab drivers, etc. The higher quality of services lure bigger revenues and some inequality of those who can't afford such services relying on alternate solutions.

Governments introduce excise taxes, and licensing to increase their corporate and personal income tax revenues. They can redistribute more to those who fall out due to licensing. Higher revenues generate bigger profits, so companies benefit as well. Low income companies go for cost reductions as a result. Their knowledge eventually circles back to generate even more profits.