Truth Gouging

In the heady days of the Ottoman Empire, Sultan Mehmet IV hired a court historian to record the happenings of his magnificent reign. At the end of one afternoon, Mehmet asked his historian what had been recorded that day, and the historian replied that nothing of interest had occurred. The sultan then flung a spear at the historian, causing a great injury, and bellowed, "Now thou hast something to write about."

It appears that our national press has taken this page out of the historian's book. In the absence of interesting stories to trump about the war in Iraq, the progressing nuclear ambitions of Iran, the scurry for immigration reform, or any other subject of mere seriousness, the press resurfaces the big 'story' of the rise in retail gas prices that vex the lives of Joe Sixpack and Jane Soccermom. Of course, the story can not be simple. It must have an engaging plot, a cunning villain, and a deeper meaning for our consumption. Like Mehmet's spear fury, the story must show the intentional injury and curious motive that makes the reader gasp in astonishment at the wonder of human nature.

It is this which leads the journalist to snub the economist or industry expert, who would no doubt supply a dull and straightforward explanation for price fluctuation, and approach the politician, who is ever ready to finger a likely wrongdoer for any ill that troubles a potential voter. And in today's world, Senator Chuck Schumer (D-NY) is ever eager to act the finger-pointing goat. "It's not hurricane season, but the oil companies are just raising the price up and up and up," Schumer said. "And the question is, are they doing this dictated on the laws of supply and demand, or is something else at work?" But to convince the journalist that good sense led her to interview him rather than the dullard economist, he cranks, "It is not supply and demand. We know that."

Well what a politician thinks and what he knows may seem the same to him, but it may not be known to someone who thinks he knows everything that people know a politician talks a lot, thinks very little, and knows even less.

The market for gasoline is actually one of the most competitive markets in our economy. "Up 50 cents one day, down 25 cents the next, then up another 30!" Schumer suggests. "Something's wrong with the market!" he fumes. Now I'm not sure whether 'day' or 'cents' is meant to be biblically metaphorical, but his exaggerations don't really matter. Actually, fluidity of prices is the best indication that a market is driven by supply and demand. It is the stickiness of prices that New Keynesian economists point to as a market failure. If firms have any significant market power, prices would only go up. As can be seen in the graph provided, retail gasoline prices follow almost precisely the wholesale gasoline price that stations pay to gas distributors. The retail market is extremely competitive. Wholesale gasoline, in turn, is largely influenced by the world price of crude oil. (Note that a gallon of crude oil does not translate into a gallon of gasoline. Refineries generally convert a little over half of the quantity of crude oil into gasoline. The rest is used to produce heating oil, plastics, and other petrochemicals.) Further, investigations into the price gouging 'theory' by Congress in 2000 and 2001 produced no evidence that oil companies colluded or had any undue influence over gas prices.

What about the 'windfall profits' of oil companies that is so often talked about? If we look at the profits of the three largest integrated oil companies (Exxon Mobil, Chevron, and Conoco Philips), we find that their consolidated net profit margin in 2005 was 8.5%, up from 7.9% in 2004. This is less than corporate profits for the economy in general, which were 8.9% in 2005, up from 8.5% in 2004. Figures like these make the windfall profits claims an embarrassment to serious discussion. This is why those in politics and the media who love to take swipes at 'big oil' never talk percentages; they prefer to sensationalize by using big numbers—Exxon had a net profit of $36 billion last year—hoping that the listener doesn't put this into the context of the size of the company. The understanding that larger companies must have larger profits for capital reinvestment is simple but apparently not understood by simple-minded politicians.

In the end, while the higher cost of motor fuel in general is a bad thing, higher gas prices can be a good thing. Prices are signals to politicians, consumers, and investors. To the extent that high gas prices actually cause real economic hardship, politicians will remove the barriers to oil exploration, consumers will purchase more fuel-efficient cars, and investors will search for cheaper sources of energy.

Schumer demanded that oil company executives be sentenced to ten years in prison if found guilty of 'price gouging.' Now I will not call for Schumer to be imprisoned for ten years for his truth gouging. It's a free country. But I do wish the press would not waste our time with his finger-pointing—and instead find a real happening to write about, not one that they made a 'story' by asking the politician first and their common sense last.