Thursday, September 21, 2006

Bill Schneider, Call Your Economist

One of the most frustrating things I encounter as an economist is the tendency of people to believe things that, when seen in the light of the most basic economic reasoning, are simply nutty. Things like the belief that gasoline prices are the result of manipulation by a handful of oil-company executives.

Even well-educated people who have ascended to the heights of the opinion-manufacturing business are not immune to these problems, as the
following excerpt from CNN, involving their political analyst Bill Schneider, demonstrates:

SCHNEIDER: You can see voter concern dropping in the polls. In July, 41 percent of voters said gas prices and energy costs were the most important economic issue facing the country. That number has dropped to 26 percent.

What's driving gas prices down? Industry sources cite a lot of reasons, including higher fuel inventories, a so far mild hurricane season, the truce between Israel and Lebanon. But this oil industry critic believes that what drove prices up was speculation. And a report from a bipartisan congressional investigation may be having an impact.

TYSON SLOCUM, PUBLIC CITIZEN: I think that that sent a signal to these speculators that they had better pull back a little bit. And I think that's what we're seeing.

SCHNEIDER: The dropping prices may last just a couple of months. Long enough to get through the November election.

Could that be what the oil companies want?

SLOCUM: Eight-one percent of their money goes to members of the Republican Party. I cannot say for sure whether or not they are influencing prices to assure that outcome. But it is, I think, more than just a coincidence that we're seeing an easing of prices at a time of running up to a very, very important election.

Let us take this hypothesis out for a spin and see how it does. In it, gasoline prices are essentially what oil company executives want them to be. This raises the immediate question of why, if oil companies can “set” prices, they aren’t higher all the time. The conspiracy theorist who really thinks things through might argue that they are high most of the time, except when it would damage the prospects of Big Oil's electoral favorites. But that's not true. Gas prices were under a dollar a gallon in much of the country as recently as 1998, and adjusted for inflation are not historically high at the moment, nor were they even as recently as a few months ago. (Adjusting for inflation is important because oil companies have to pay their costs in current dollars, and many of these costs have presumably gone up at roughly the rate of inflation.) Oil industry profits over the long haul are not consistently high relative to other industries as a percentage of sales revenue. Some evidence for that is compiled here, although the true believer may not be persuaded by it in that it is found on oil company website.

As for the possibility of the price-manipulation hypothesis itself, think about everything that would have to hold for it to be true. First, there are many oil producers around the world selling gasoline to the franchise owners of the stations. All of the decision-makers of every one of these producers would have to cooperate in lowering the price that they charge the gas station owners despite what is apparently an opportunity for greater profits by going the usual gouging route. Any company that lowered prices would gain business from those who didn't, but only by incurring losses rather than profits and thus angering shareholders. The discipline required becomes all the more remarkable when we consider that commodity prices are falling across the board, not just in oil, suggesting that every commodity producer has to be in on the act.

In addition, if gas prices are artificially low now then presumably they will increase dramatically after the election. This means that a lot of people whose business it is to make money by estimating what commodity prices will be in the future stand at the moment to lose quite a bit of money by forgoing profitable trading opportunities. The New York Mercantile exchange quotes gasoline futures contracts for delivery in December at a price as I write this of $1.56 a gallon, hardly above the $1.49 price that you can get gasoline at now on the spot commodities markets. If Public Citizen and Bill Schneider really believe in the oil-company-manipulation hypothesis, they ought to put their money where their mouth is and aggressively buy gasoline futures. Public Citizen, as a Naderite "public interest" organization, could certainly use the money. Of course, talk is cheap, especially on television, since whatever someone says on television tends to vanish from the memory fairly quickly the next time a network needs a talking head. And such talk is valuable to the speaker insofar as it influences underinformed voters. But betting your own money is another matter.

The price of gasoline, like the price of everything that is tradeable, is not "set." It is the result of competition among buyers and sellers for resources and consumer attention given the available alternatives. That people are willing to suspend belief in this basic truth for some industries such as gasoline and pharmaceuticals is discouraging, but may have to do with the fact that these goods have very inelastic demand, and so people desperately want to believe that there is some sinister explanation for what they are seeing. But there is not. Messrs. Schneider and Slocum live in the Washington, DC area, where there are many capable economists. I suspect that for many of them, the door is always open. The two commentators should take advantage of those resources.


Post a Comment

<< Home