Alan Reynolds

When the unsurprising news came out that big oil companies had big profits, Bill O'Reilly of Fox TV concluded: "My contention is the oil companies don't have to double their profits. They can maybe make them two-fifths (40 percent). Take a little less for the good of the nation."

 Exxon-Mobil's recent profit margin was up to nearly 9 percent of sales. Suppose they tried to cut that to a nickel out of every dollar by offering to sell crude oil for $3 a barrel less than the going price on the Chicago mercantile exchange. Refiners around the world would instantly commit to buying every drop. By the next day, the world price of crude would be same as before.

 Suppose the Big Five oil companies got together and agreed to cut retail gasoline prices at their company-owned stations by 20 cents a gallon. Motorists would soon drain those stations dry, leaving the much larger number of independent gas stations in a position to charge even more. Meanwhile, independent station owners would file a complaint with the antitrust division of the Department of Justice accusing the majors of collusive predatory pricing to drive them out of business.

 If prices or crude oil and gasoline really rise and fall at the whim of U.S. petroleum companies, why would oil and gas prices ever fall? Texas crude fell to $12 in February 1999. Was that because U.S. oil companies suddenly became less greedy?

 "Average U.S. gasoline price tumbles to $2.48 a gallon," was a recent headline at USA Today, noting gas prices had dropped by at least 55 cents. The price of crude oil dropped 9.8 percent in October. The Dow Jones stock index for oil and gas companies fell 9.2 percent. On the futures market, natural gas prices fell 18 percent in a single week.

 O'Reilly's spin zone had to spin a new theory. He now argues that while prices rose because of some inexplicable hurricane of greed, they subsequently fell because "the oil companies have been scared into lowering prices of oil." He claims to know "the worldwide demand for oil is the same today as it was eight weeks ago. But oil prices are declining -- so what gives? Fear. That's what gives. Millions of Americans are angry with big oil and are buying less fuel."

  Excuse me? If millions of Americans are "buying less fuel," how could demand be the same? Trying to spin his way out of that paradox, O'Reilly differentiated "worldwide" demand. But worldwide demand must be entirely irrelevant unless domestic prices of oil and gasoline are set by supply and demand in worldwide markets, rather than by corporate caprice.


Alan Reynolds

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