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Wednesday, May 10, 2006

Oil Prices and the Media: Don't Believe the Hype

The National Center's Peyton Knight attended a Media Research Center Business and Media Institute symposium on gasoline prices at the National Press Club today. Given the high public interest in oil prices lately, I thought readers might be interested reading Peyton's notes about what conference participants had to say:
This morning, the Media Research Center's Business and Media Institute sponsored a panel discussion on energy prices and media coverage at the National Press Club. The event was titled "Oil, Markets, and the Media," and panelists touched on a number of issues surrounding the topic of oil and gas prices, including: the cause of higher prices; solutions to higher prices; congressional responses to high gas prices; and what journalists should consider when reporting on the topic.

Panelists included:

Dan Gainor, Executive Director, Business and Media Institute
U.S. Rep. Jack Kingston (R-GA), Vice Chairman, House Republican Conference
Bob Slaughter, President, National Petrochemical and Refiners Association
Quin Hillyer, Executive Editor, The American Spectator
Jerry Taylor, Senior Fellow, Cato Institute

Quin Hillyer moderated the program and noted that, as a native of Louisiana, he fully understands how oil booms and busts can have a drastic effect on the economy. He noted that it takes incentives for people to invest in the oil industry, and said he was not speaking about government handouts as incentives. He said government regulations with regard to the oil refinement process have created disincentives to investments. Hillyer also said federal moratoria on offshore drilling and federal restrictions on exploring for oil on public lands have helped lead us to our supply problem.

Jerry Taylor of the Cato Institute presented a "list of grievances" he has with how some in the media are reporting on high oil prices. He also noted that print media seemed to be doing a better job covering the issue than other types of media.

Taylor's grievance #1: The media does not put corporate profits in a proper context. Taylor explained that a look at oil industry profit margins tell the real story. He pointed out the in the fourth quarter of 2005, BP posted a profit margin of only 6.8 percent and ExxonMobil posted a profit margin of only 10.7 percent. Taylor said that in the case of ExxonMobil this margin was only slightly higher than the U.S. industry average, and that over the long run, the oil industry has been less profitable than many other industries. He also pointed out that the company that employs Bill O'Reilly, a very prominent TV and radio critic of the oil industry, reported a 10.2 percent profit in the fourth quarter of 2005.

Taylor's grievance #2: Journalists seem to have very little understanding of how gas prices are established. Taylor explained that gasoline prices are determined on the regional spot market, and that "'Big Oil' does not set the price." He noted that there are too many actors that play on the spot market, and because of that, oil companies (or anyone, for that matter) can't manipulate spot market prices. Taylor also said that mergers and acquisitions within the oil industry have a negligible impact on gas prices, and cited studies that show this.

Taylor's grievance #3: So-called "price gouging" is "gibberish." Taylor noted that no one, either in Congress or otherwise, seems to be able to so much as define "price gouging." Prices are based simply on what the market will bear, he said. If price gouging is based on the price of acquiring raw materials, then every business is a price gouger. He also noted, with just a hint of sarcasm, that if Congress was really serious about so-called price gouging, it would throw every member of the National Association of Realtors in jail.

Taylor's grievance #4: Many assessments of current gas prices lack proper perspective. Taylor explained that when comparing current gas prices to historic gas prices, you have to account for more than inflation. You must also account for the growth in per capita income. With this in mind, he cited several examples:
In 1955, gas cost 29 cents per gallon. Adjusted for inflation, that would be the equivalent of paying $1.76 per gallon today. But adjusted for inflation and growth in per capita income, 29 cents per gallon in 1955 would be equivalent to paying $5.17 today.

In 1972, gas cost 36 cents per gallon. Adjusted for inflation, this would be equivalent to paying $1.36 per gallon today, according to Taylor. Adjusted for inflation and per capita income growth, it would be equivalent to paying $2.66 per gallon.

Gas cost $1.38 per gallon in 1981. Adjusted for inflation, this would be equivalent to paying $2.74 today. Adjusted for inflation and growth in per capita income, this would be equivalent to paying $4.30 per gallon today.
According to Taylor, failing to account for per capita income growth paints an inaccurate picture.

Rep. Jack Kingston (R-GA) spoke about legislation that he and multiple colleagues in both the House and Senate are promoting. The bill is the "Fuel Choices for American Security Act" (H.R. 4409 and S. 2025), and, according to Kingston, its aim is to reduce oil consumption by 20 percent in 20 years by "tickling the market." He stressed that oil imports are a national security issue, and claimed that during the 1970s, the market responded differently to gas squeezes than it does today. He said that in addition to talking about drilling for oil in the Arctic National Wildlife Refuge, we should be talking about other things like conservation.

With regard to folks blocking drilling for oil in ANWR due to environmental concerns, Rep. Kingston offered the following analogy: If ANWR was the size of a basketball court, the proposed area for drilling would be the size of a dollar bill.

He also said that if President Clinton had not vetoed ANWR drilling in 1995, the U.S. domestic oil supply be 20 percent higher today.

According to Rep. Kingston, the aforementioned legislation would force automobile manufacturers to comply with a number of regulations, forcing them to build lighter cars and more "flex-fuel" and hybrid vehicles. One of the promotional bullet points contained in a flier he distributed at the conference said that the Fuel Choices for American Security Act "Changes The Way We Choose To Travel."

Rep. Kingston also suggested that cutting out U.S. Postal Service delivery on Saturdays would help conserve fuel, and that this is a discussion we should be having. He also said that he had spoken with constituents who were paying $75.00 to fill up their Ford F-150s, and that something needed to be done about that.

The Congressman had to leave shortly after his talk, though during the question and answer session, the legislation he was promoting did not receive any kudos from the remaining panelists. When asked for an assessment on the bill, Jerry Taylor called it "beyond hare-brained," and said he was "stunned" that legislation like this was coming from a conservative Republican.

Taylor further stressed that it isn't the job of the federal government to mandate what types of vehicles are manufactured in Detroit. He also pointed out that one of the biggest problems we've had is that we haven't heard a single Republican say that the best thing we can do is leave gas prices alone and allow the market to work. He noted that Ronald Reagan stressed this message and "it didn't seem to hurt him too much."

Bob Slaughter, President of the National Petrochemical and Refiners Association, agreed with Jerry Taylor that print media have been better at covering this issue than other media. He pointed out that we currently have the smallest excess capacity of oil in the international market than we've ever had, and that there is tremendous international competition for what few excess available barrels of crude exist.

Slaughter also referenced ethanol mandates, and said that they contribute to higher prices. He said that U.S. tariffs on ethanol imports, in particular, don't make much sense. He also noted that there has been a lot of talk about how ethanol is going to lower gas prices, but the "truth of the matter" is that the price of ethanol "follows the price of gas." Slaughter explained that ethanol is really an "agricultural support program," and for that reason, the politics behind it are so strong that it is difficult to get anyone to speak the truth about it.

He also noted that environmental regulations and the NIMBY (Not In My Back Yard) phenomenon have essentially made new refinery construction a non-starter. Slaughter explained that it takes 10 years or more just to build a new refinery, and the lengthy process is full of uncertainty and financial risk to investors. He said that expanding the capacity at existing refineries is much faster and less financially risky. In addition, he pointed out that the squeeze on refinery capacity is not unique to the United States, but that this is a problem worldwide.

Slaughter also noted that the House failed to pass a refinery bill that would have eased the permitting process for refinery construction, however, it recently passed a bill to address price gouging, yet the legislation it passed doesn't even define what price gouging is. He said that the bill instead directs the Federal Trade Commission to define the term.

Dan Gainor of the Business and Media Institute concluded the conference by pointing out that according to the Energy Information Administration, the price of oil hasn't come close to its record high, despite what some in the media are saying.

"The harp on record profits simply ignores reality," said Gainor.

He also agreed with Taylor and Slaughter that print media seems to be doing a more competent job covering the gas price issue than other forms of media.

Gainor said that "the combination of hype and info-tainment" has made for a "more combustible mixture" than oil and gas itself.

-report compiled from notes taken by Peyton Knight

Posted by Amy Ridenour at 10:10 PM

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