I watch The Factor with Bill O’Reilly every night. Sure, he’s a little pompous and he’s not as funny as he thinks he is, but he usually has good guests on, he asks direct questions and doesn’t just put up with it when people don’t answer their questions (he’s the best in the business at this if you ask me). I tend to agree with him on most issues but we disagree on a few. He’s much more in favor of government regulation than I am, but I think his view on economic issues has actually moved closer to mine during the latest presidential administration.
But for some reason, he is just clueless on oil and gas. He’s like the people in Congress who demagogue the issue and blame the evil oil companies and the speculators and anybody else they can, and then they have a hearing and find out that it’s all just supply and demand. And then a year or two later when gas gets expensive, they do it again and reach the same conclusion. Yes, oil gets expensive at times, caused by supply disruptions (Hurricane Katrina) or the threat of them (Iran). But his argument is that it’s a giant cartel, oil companies are colluding with each other, gas stations are colluding with each other, and “the folks” end up getting screwed. His evidence? This was his conversation with John Stossel on Tuesday night’s program
BO: Now, if you say I’m wrong about the oil companies, how come I have four gas stations in my town and they all charge the same. How come?
JS: Because they see what the other guy is charging and they don’t want to go above it because they’d lose business, and if they go much below him they might not make a profit.
BO: You don’t think that’s collusion though?
JS: No, it’s market competition.
BO: There’s four delis in my town, and they don’t charge the same for a sandwich. Each sandwich is different at each deli. But for gas it’s all the same and you say it’s not collusion.
Stossel argued that sandwich prices aren’t displayed prominently for all to see the way gas prices are, so deli owners don’t know what the other guy is charging at all times. That’s part of it, but I think he should have also said that not all sandwiches are alike. Sandwiches are a monopolistically competitive market with product differentiation: a sandwich from Subway is not the same as one from Quizno’s, which is not the same as one from Jimmy John’s. Buy me a sandwich and let me eat it and I can probably tell you where you bought it from. But gas is gas. Fill my tank up with gas and let me drive my car and there’s no way I can tell from the car’s performance which gas station you bought it from. That’s the difference.
If every gas station is charging the same price, it’s either perfect collusion (boo!) or perfect competition (yay!). You can’t just look at the price and conclude one or the other – you have to look at the costs. In a letter to the Mining Journal, an Upper Peninsula newspaper, Brooke Ferns argues that stations make about a 5% margin on gas. If gas is $3.50, the station makes 17.5 cents per gallon — and that’s before utilities, labor, insurance and other expenses are taken out. Use a credit card and they lose another 2 percent. Gas stations aren’t making tons of profits. There’s too much competition for that. Most of the profit made by gas stations, as I understand it, are in the convenience foods they offer — there’s no margin in gas.
Want to know how competitive the market can be? A few years ago, one gas station owner actually shot his rival because they guy reduced his gas prices a few cents. He was sick of the price war they were in (note: price wars keep prices down, not up), one person got a bat, and the other person got a gun, and when it was all said and done, one owner was killed. (Postscript: when the police were occupying the rival gas station, nobody could use the pumps, so the other gas station actually raised its prices. And in case you’re wondering, the shooter was killed a year later by someone else. Retaliation maybe? Or perhaps it’s just more from the evil oil cartels…)
O’Reilly is convinced that not only is he correct, he has the moral high ground because he is advocating for “the folks.” Sure, we all want to pay lower oil prices. Now he’s actually suggesting we tax exports of oil because he doesn’t want us shipping oil out of the country. Why is it being shipped? Because it’s shipped from ports where it’s easy to ship it. Even if it’s produced here, it might be easier to refine in another country than be shipped across this country to a domestic refinery. That requires using trains or pipelines. A new pipeline down to the gulf would help, but President Obama nixed that one.
I take some comfort in knowing that other economists feel Bill is just as wrong as I do. The next day, he read this letter on the air: “As an assistant professor of economics, I can tell you that the market for consumer gasoline is perfectly competitive. There is not a lack of competition.” – Greg Givens, University of Alabama, Tuscaloosa. Bill’s response was classic: “Professor, I’m not really sure what that means, but there’s definitely collusion in pricing.”
Translation: “I have no idea about a fundamental model of market structures taught in every economics principles course, but that won’t stop me for jumping to a conclusion that contradicts it.”
So here we have a man who has millions of people watch his show every night, who has made it his mission to convince everyone that the oil companies and gas stations are colluding, and he doesn’t even know about the model of perfect competition. A freshman in my Principles of Microeconomics course knows more about the gasoline market than he does. On this issue, O’Reilly displays a dangerous combination of ignorance and arrogance — one rarely seen outside Washington, D.C.