Kinder Morgan Inc. is buying El Paso Corp. for $21.2 billion. This is going to "create the largest natural-gas pipeline network in the U.S."Now, it seems obvious that the oil industry is an oligopoly, but is that good for the U.S.? Kinder Morgan with all of its new pipeline could claim that it is difficult to get to a certain region and raise the costs an exorbitant amount. Kinder Morgan "will have 80,000 miles of pipeline and an enterprise value of $94 billion" (note: the picture is the current Kinder Morgan pipeline map) and it will become the fourth largest energy company in U.S> (Market Watch). Although, the deal isn't supposed to close until the second quarter so that leaves some time for speculation.
At least in Pennsylvania, competition in the natural gas market doesn't exist (Pittsburgh Post-Gazette) (it also seems that in general, there are hypothesis and legislature for the promotion of competition in the natural gas industry). This deals more with gas to one's home rather than oil for cars, but the idea seems similar. In addition, NaturalGas.org claims that the demand will keep on rising in the future alongside demand for other forms of energy. This increased demand, with low competition makes me a little worried. Will prices be raised to the point where gas is a luxury? Or will that happen and the market will give up on gas altogether?
In the past week, Kinder Morgan's stock price has gone up .15% (it looks way more impressive in graph form) (Daily Finance). In contrast, El Paso's stock has gone up 2.30% over the past week (Daily Finance). Maybe people are buying because they know that Kinder Morgan is going to pay $26.87 per share versus the current $19.59 per share. I think this is interesting because despite all of the interest in alternative energy, most people still expect natural gas to be a prominent energy source, at least for the time being.
What do you think should be done concerning the potential for immense power in gas companies? Should anything be done?
4 comments:
Based on our historic consumption of fuel despite soaring prices, I really don't think that oil will ever become a luxury in America. According to Tom Kloza, chief oil analyst for the Oil Price Information Service, "Americans have cut back driving in the face of high prices, but they are likely to spend more on gasoline in 2011 than ever before." Looking back on our lessons about elasticity, it seems that demand for gas, even at today's prices, unfortunately remains inelastic. For this reason, I also voice my concern for the "oil oligopoly" as lack of competition may lead to the abuse of pricing. However, the companies will want to maximize marginal revenue, meaning that it would be in their best interest in the long run to keep prices manageable enough so that the public will not be indignant.
I, too, am worried about potential power abuse. This being said, however, I have doubts that anything will ever get very far. If there is abuse of power, the government is likely to step in and make drastic changes to the way the oligopoly works. After all, corporate power abuse has always been calmed down by the government. Although with the current political divide, anti-trust legislation might be much harder to pass (ugh).
As far as the elasticity of oil goes, it does seem to be inelastic currently. However if the oligopoly grows smaller, that might change. There is definitely a push towards carpool, public transportation & more fuel efficient cars, so my guess would be that people would move on if gas got obnoxiously high.
For now the best we can do is hope that people aren't so incredibly greedy and malicious that they would push the prices too high. And if that's not enough, we can count on the economic pluses of keeping prices relatively low (as Vinh pointed out).
I agree with Vinh. However I am slightly torn on his statement regarding the companies. They might not have a choice on whether or not to keep the prices manageable. In regard to the overall oil oligopoly I think that the US as a whole is overly connected to it because of our heavy dependence on oil. I think that Dani's comment is especially important in there being an apparent "push" toward fuel efficiency, because it will help to make us less vulnerable in the game of oil.
I want to second Dani's last comment about the economic pluses of keeping prices low. Because of the economies of scale, in theory the larger the company the more efficient / productive, it would be for the company to build new pipelines or to maintain them. As we can see with the recent PG&E issues, pipeline maintenance is apparently very important. Furthermore, given the US government, I doubt that there will be an actual issue with overly high prices because many public officials will want to look into high prices if a large part of their constituents are unhappy about it - officials like reelection, large companies have serve more people - given that there are no rules that prevent the government from stepping in to challenge oligopoly prices.
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