Posted by: bmeverett | April 29, 2011

Bill O’Reilly gets gas prices wrong

Just so my loyal readers don’t think I beat up exclusively on the New York Times, let me take a shot at Bill O’Reilly, Fox News’ populist conservative. Mr. O’Reilly was a guest on Laura Ingraham’s radio show on Monday, April 25, where he concisely articulated most of the major fallacies about gasoline prices. Here goes.

Fallacy #1: There is no basis for gasoline prices to increase, since there is no shortage of gasoline. The beauty of the free market is its ability to adjust prices continuously and almost instantaneously. Let’s take a gas station owner who is selling 2,000 gallons of fuel every day. If his sales start to increase to, say, 2,050 gallons per day, he may opt to increase his price. If he increases his price too much and his sales drop to 1,900 gallons per day, he may have to lower his price. The station owner does not have to do a study of global gasoline supply and demand. He does not have to understand the nuances of Middle East politics. He doesn’t have to wait until there’s a long line of screaming motorists outside his service station. He’ll react every day as needed to his customers’ behavior.

Fallacy #2: The big oil companies use market instability as an excuse to put up the price of gasoline. Prices do not require an explanation, nor can sellers increase prices just because they think they can get away with it. People sell goods and services at whatever the market will bear. Mr. O’Reilly himself sells his services to Fox News for a reported $10 million per year. This figure is determined by (a) what Mr. O’Reilly is willing to take and (b) what Fox News is willing to give him. He can’t “put his price up” to $20 million by talking about his high ratings. Fox is either willing to pay him or they’re not. The same is true for gasoline. The price stays at the intersection of the supply and demand curves no matter what either buyers or sellers say.

Fallacy #3: The US oil industry is a monopoly. Mr. O’Reilly “just doesn’t believe” that the market is competitive. Over the years, there have been dozens of anti-trust investigations in the US and other countries and at the state and federal levels. All have concluded that the retail oil business is highly competitive. Perhaps Mr. O’Reilly doesn’t believe these investigations, but he can check it out for himself. In 2010, US consumers purchased about 138 billion gallons of gasoline. Shell, the largest US marketer, had only 15.4% of the market. There are roughly 175,000 gas stations in the US. In addition to the familiar Shell, Exxon, Mobil, BP, Texaco and Chevron brands, there are hundreds of other retailers including smaller US oil companies like Hess and Sunoco, independents like Sheetz and Racetrac, foreign companies like the Russian company Lukoil and the Venezuelan company CITGO, convenience stores like 7-Eleven, supermarkets like Safeway and Stop-and-Shop and major retailers like Costco and Walmart. There are very few places in the US where consumers don’t have a choice of gas stations.

Oil refining is also widely dispersed. ExxonMobil, the largest US oil refiner, has about 10% of the nation’s refining capacity, followed closely by Valero Energy, a company not generally included in the Big Oil club. Even if oil refining were controlled by dominant players, the US allows the importation of gasoline, permitting retailers to buy their product from the world market if they think they can get a better deal.

Mr. O’Reilly seems to be hinting that all these companies act in concert. Anti-trust violations are criminal offenses, and the perpetrators go to jail if caught. It seems to me that people, including Mr. O’Reilly, ought to avoid accusing people of criminal acts unless they truly have evidence. Repeated investigations have failed to uncover any such evidence.

Mr. O’Reilly is an example of a populist conservative. He generally supports conservative positions but shares a common suspicion of big organizations, including both government and corporations. This suspicion is generally healthy, but intuition shouldn’t replace analysis in understanding the issues of the day, particularly when correct information is easy to come by.

Note: Earlier this week, President Obama sent a letter to Congress suggesting the elimination of tax subsidies for major oil companies. For a detailed analysis of this issue, see my February 17 post entitled “Shame on Ed Markey (again)”. The President’s letter suggests that $4 billion could be saved by eliminating these “tax breaks.” Since the US consumed about 300 billion gallons of petroleum products last year, these changes amount to just over 0.1¢ per gallon. Once again, the President is not being serious.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s


%d bloggers like this: