O'Reilly vs. Economic Sense

A co-worker let me know about some awful commentary by Bill O'Reilly on the subject of energy markets. Specifically, oil and gasoline pricing. What follows is a transcript from the web broadcast of the 9/21/05 "Talking Points Memo" of The O'Reilly Factor. (Sorry, I can't figure out any way to permalink the video.)

This is a manifest example of O'Reilly's economic ignorance. I sprinkle in the truth as we go.

Getting to the bottom of high fuel prices. That is the subject of this evening's Talking Points Memo. It's not easy. Last night we had an extensive discussion about the pricing of gasoline and the huge profits American oil companies are making. One thing struck me: after all the experts we've talked with, after all the research we've done, we still can't find out who exactly sets the price of a gallon of gasoline. Which human being in America does that?

Bill talks about "the price of a gallon of gasoline", as if it exists. It doesn't. There is no single price of gasoline — that's a widespread myth.

It's obviously empirically false. Gasoline prices vary across the country, and they vary even within local markets. Prices also vary for different grades of gasoline. There are many prices for gasoline. So many, in fact, that no single human being could set them all.

Every time I ask who sets the price I get "the market", "the Merc", "OPEC", and on and on. Well it's all B.S. Somebody tells your local gas station owner exactly what to charge. Somebody does that.

No, Bill. Nobody does that. Really. The owners of gasoline stations each price their product individually and independently. There is no single person who sets the price of gasoline. There are thousands and thousands of gas station owners who each do the job for their own station.

Have you noticed that different grocery stores charge different prices for a gallon of milk? Do you think it's more likely that there's a powerful and secretive Milk Pricing Czar telling each individual store what its price should must be, or more likely that the stores are setting their prices on their own?

If you can believe it for milk, isn't it plausible for gasoline?

Let me ask it another way, Bill. Exactly what sort of punishment is meted out to those who defy the Gasoline Pricing Czar? How exactly does the Czar maintain control over all those gas stations?

But the five major oil companies have managed to fog up the situation so much that confusion reigns. Nobody will tell you exactly who's deciding what Americans will pay for fuel.

Nobody will ever be able to answer that question to your satisfaction. The question presupposes the existence of a person dictating prices. There is no such person. Markets are decentralized. I understand that it may be difficult for someone with an authoritarian personality to accept that, but sometimes the truth is uncomfortable.

The ultimate answer to this question is that individual American consumers are deciding how much they will pay for fuel. The act of purchasing gasoline is evidence that the consumer thinks the gasoline is worth the price. If gasoline stations only offer gasoline at prices higher than consumers are willing to pay, they won't buy. The fact that gasoline would have to get extremely expensive in order for people to significantly cut back on their usage is evidence of the tremendous usefulness of gasoline and the large magnitude of the "consumer surplus" at the prices we've enjoyed until very recently.

What we do know, because the law demands it, is what kind of profits the oil companies are making each quarter and those profits are astronomical during a tough time for America. We know for sure that while millions of Americans are hurting financially, the oil companies are rolling in dough.

The law actually only requires publicly traded companies to report their profits. The largest American oil companies are publicly traded; I just wanted to state things more clearly.

O'Reilly's assertion that the oil companies are "rolling in dough" is a bit premature. Wouldn't it be more prudent to wait for the quarterly earnings reports?

Something that often goes overlooked in discussions of oil company profits is how much those companies themselves have been impacted by Gulf weather. They've had to deal with rigs and refineries being shut-in and damaged. These things obviously make it more difficult to deliver product to market. Prices are higher but quantities are lower, so the net effect on revenues is not obvious. That's why I'd rather wait for the quarterly reports.

It's also important to realize is that the oil companies will need to spend significant amounts to repair their facilities, which will reduce profits.

The only oil companies who unambiguously benefit from the current situation are those whose facilities and trade were not disrupted by the hurricane. The clearest examples of such companies are foreign. (Did you know that the United States imports more oil from Canada than from any other country?)

Eight governors have now asked President Bush to investigate alleged price gouging. Those governors base their assertions on a study done by University of Wisconsin economist Don Nichols who says for gasoline to cost $3/gal the barrel price that OPEC charges would have to be $95. Since OPEC is presently charging $58/bbl, Professor Nichols concludes the USA oil companies have some explaining to do.

I was not able to find this study, but I'm confident that the current price of gasoline has much more to do with a pipeline and refinery crunch than with crude oil prices. The United States ordinarily has to import gasoline because we don't have enough domestic refining capacity. With refineries shut-in due to Katrina — and now with additional refineries threatened by Rita — we are even less able to refine gasoline domestically. We've increased our imports of gasoline to compensate.

Oil (gasoline) tankers do not turn on a dime. It takes time for the change in logistics to provide adequate supply. In the meantime, we should not be surprised that gasoline prices are higher than one would predict from looking at crude oil prices. But you can't run your car on crude oil — gasoline is a different product. Crude oil is merely one of many factors involved in gasoline production. The price relationship between crude oil and gasoline is not as direct as O'Reilly thinks it is.

I suspect that Professor Nichols is aghast at how O'Reilly has twisted his study. (I've sent him e-mail.)

Again, Talking Points is not a conspiracy operation. When we see all the oil companies failing to answer simple questions,

… and O'Reilly failing to understand how markets work.

when we see their high-paid mouthpieces in DC hiding,

… public affairs people aren't blunt enough to get through to you. But in a pinch, I'd be willing to come on your show and explain a few things.

when we see analysis that US oil concerns and energy concerns are exploiting tragedies like Katrina and the War on Terror, we get angry.

There's that word "exploiting". Someone please tell O'Reilly (and Congress!) the many reasons why price gouging is good and helps people. I encourage price gouging.

Finally, all of us can do something. All Americans should cut back energy consumption, as I've said, as much as possible. Not buy gas on Sundays. Let's send a message to these energy people who operate in the shadows.

Not buying gas on a particular day of the week is completely ineffectual. It doesn't send any message at all, because it doesn't change the aggregate quantity of gasoline used. The "big oil companies" won't even notice!

If nobody fills up on Sunday, but they all fill up on Monday, all you've done is time-shifted an unchanged total demand. In the process, you've doubled the amount of gas that needs to be sold on Mondays, and long lines are the predictable result. This attempt to "send a message" is worse than useless, it's actively harmful. Don't do it.

Shame on O'Reilly for advocating such total nonsense.

The coming winter will punish millions of Americans who have to heat their homes using gas or oil. No question we're going to get hurt. Government owes us some oversight, but we owe it to ourselves to use less oil. Let's do it. And that's the Memo.

Bill, baby, get back to me after you've taken an economics class.