Media turn consumers against 'big oil'
for making money.
By Amy Menefee
Free Market Project
Nov. 2, 2005
|Â Â Â Â
It’s the Poor Innocent Consumer vs. Big Bad Oil, with a side
of Politicians to the Rescue.
Â Â Â Â The media love a good controversy – so much so that
they stir things up when the facts don’t warrant it. Since
oil companies released their profit numbers last week, the
news template has been one of angry consumers claiming
they’ve been harmed and politicians vowing to do something
about gas prices. Both parties have been aided by the media,
who declared that oil profits were "beyond imagination."
"Supply and demand?"
Â Â Â Â
On “CNN Sunday Morning” October 30, hosts asked viewers to respond
to the question, “Who do you hold accountable for high gas prices?”
Ignoring market forces that set prices in favor of playing a
political game, Anchor Tony Harris also rephrased the question: “Who
are you blaming?”
Â Â Â Â CNN’s Miles O’Brien framed a report about high
third-quarter oil profits as “something to get your blood boiling”
and “get you a little outraged” on the October 28 “American
Â Â Â Â The fact is, when the price of a product goes up, the
people who sell that product make more money. The only way this
happens is if consumers keep buying.
Â Â Â Â That’s the oversimplified version of what happened to
oil companies’ profits in the third quarter of 2005. Interruptions
from the hurricanes tightened supply, but consumer demand stayed
high, fueled by China and India – so gasoline prices went up. Oil
companies profited from the situation, but they didn’t arbitrarily
set their prices extra-high. Market forces determined prices.
Â Â Â Â Unfortunately, most journalists haven’t been getting
it. Rather than accepting the way the market works, they have pitted
consumers against oil companies, bolstering the case of those who
call for a “windfall profits tax” on the companies’ earnings. That
includes members of Congress, who have scheduled a hearing on energy
pricing and corporate profits for November 9.
Â Â Â Â Sen. Olympia J. Snowe (R-Maine) summed up the news
template when she said, “At a time when the American people are
struggling to pay their energy bills and the residents of my own
state of Maine will be hard-pressed to pay their home heating costs
this winter, it is deeply concerning and, frankly, outrageous that
oil companies are boasting record-breaking profits,” according to
the October 28 Los Angeles Times.
Â Â Â Â NBC’s Brian Williams opened an October 28
“Nightly News” report with “the outrage across this country today
everywhere people were ponying up to pay more for gas” – even though
drivers that day were actually paying 51 cents less per gallon than
they had during post-Katrina highs. Anne Thompson’s following story
described Congress and consumers “demanding change,” as Williams put
it, without explaining that the temporary price spike and the
accompanying profit spike were just business as usual. Thompson used
comments from people on the street, one of whom said, “We’re all
getting cheated,” and the reporter closed by saying drivers wanted
to “stop shelling out wads of money to feed the profits that tonight
have America fuming.”
Is Being Profitable a Crime?
Â Â Â Â Reporters commonly failed to put oil profits in a
larger business context. When they cited Exxon Mobil Corp.’s $9.9
billion third-quarter profit, they focused on the raw numbers rather
than explaining to viewers that Exxon doesn’t make as much relative
to its product as many other industries do. A comparison of profit
margins – dividing net profits by the amount of revenue the company
took in – shows that other companies enjoy much higher returns.
Â Â Â Â For example, Exxon’s profit margin for its
high-earnings quarter (dividing $9.9 billion by revenue of $100
billion) was almost 10 percent. But a look at
Fortune’s Global 500 list from July 2005 shows that is not
unusual – and some companies surpassed that in earlier quarters.
Johnson and Johnson showed profits of almost 18 percent in the July
report, while Bank of America enjoyed more than 22 percent.
Â Â Â Â The media also ignored the largest beneficiary of the
oil “windfall”: the government. The Tax Foundation’s Scott Hodge and
Jonathan Williams noted in an
October 26 report that “in recent decades governments have
collected far more revenue from gasoline taxes than the largest U.S.
oil companies have collectively earned in domestic profits.” In
fact, “since 1977, there have been only three years (1980, 1981, and
1982) in which domestic oil industry profits exceeded government gas
Â Â Â Â Their analysis used only government revenue
from gasoline taxes. It didn’t even include corporate taxes on the
companies’ income. From 1977 to 2004, federal and state gas tax
collections have totaled more than $1.34 trillion, the report said –
more than twice domestic oil industry profits during that time ($643
Taxing Industry Hurts Consumers
Â Â Â Â Even though state and federal governments have already
made a fortune from gasoline sales, some in Congress are calling for
more taxes on the industry. And the media have helped their case by
presenting the issue as ABC’s Bob Woodruff did on the October 27
“World News Tonight”: “Are the oil companies making too much money,
when oil and gas prices are pinching so many Americans? The oil
companies reported earnings today that are almost beyond
Â Â Â Â But ABC’s Mellody Hobson was the voice of reason on the
October 28 “Good Morning America,” saying that when “you look where
regulation has been attempted, when our country tries to regulate
prices, it ultimately not only ends up being bad for consumers, it
actually ends up being bad for American business. People lose jobs.
It is not a good idea.”
Â Â Â Â More than 250 economists have agreed with Hobson,
sending their concerns to Congress in an open letter October 26.
Free Market Project advisers John Berthoud, president of the
National Taxpayers Union, and Gary Wolfram, professor of economics
at Hillsdale College, were among them. The signers included two
Nobel Laureates in economics, as well as professors from the
University of Chicago to Princeton University and Harvard Business
Â Â Â Â Citing a Congressional Research Service report about
the results of a windfall profits tax imposed in the 1980s, the
economists emphatically said that a profit-punishing tax would mean
less gasoline available to Americans. The CRS found that the
previous tax led to decreased domestic oil production and increased
reliance on foreign sources – the opposite of widely accepted goals
for U.S. energy policy.
Where Does the Money Go?
Â Â Â Â In a free market, businesses are able to use their
profits as they see fit – whether reinvesting in the company or
giving bonuses to employees. However, both politicians and the media
have been asking questions about how the oil companies are using
Â Â Â Â For its part, Exxon has reported that it had new
capital investments approaching $15 billion in 2004, which went
toward new exploration and production as well as refining capacity
and research for new energy technologies.
Â Â Â Â Also, Exxon spokesman Mark Boudreaux told the Free
Market Project that “ExxonMobil has added 384,000 barrels per day of
refining capacity in the United States through expansions,
technology, and operational improvements over the last 10 years.”
Â Â Â Â “The average refinery size in the U.S. is about 125,000
barrels per day [Oil & Gas Journal numbers],” Boudreaux said. “So
that means we have in effect built the equivalent of three new
grassroots refineries over the last decade.”
Â Â Â Â Building and expanding refineries isn’t cheap. The Cato
Institute’s Peter Van Doren and Jerry Taylor wrote on June 4 that a
large refinery can take $4 billion to $6 billion to build.
Â Â Â Â That isn’t something companies or their investors take
lightly. Alastair Walling, a legal fellow at George Mason
University’s Mercatus Center, wrote in the October 27 New York Sun
that “refining requires risking vast sums (billions and billions of
dollars), and in addition to being traditionally thin, margins are
often unpredictable and uncomfortably erratic. … Any sane person
with money has kept his or her cash as far away from refining as
Research Analyst Charles Simpson contributed to this report.