Supply and Command

Friday, July 18, 2008

Transcript

Economic turmoil was the story this week, with oil and gas prices causing much of the anxiety. The rise in prices are often cited as a simple issue of supply-and-demand but Howell Raines, media columnist for Portfolio Magazine, says journalists haven't pushed back hard enough against oil companies' explanations for the high prices.

Comments [16]

Jack from Chicago

I would have more respect for this case of media criticism if I had greater confidence in the facts of the leading critic. This report certainly did little to help me understand the complexities of the energy markets. Why would oil companies cut back on exploration; once they run out of reserves they have no business? If they believe that current prices are unsustainable, then I can see why they would be choosy about how much they are willing to spend to get a barrel of oil out of the ground. What has happended to domestic refining capacity in the US? My understanding is that the capacity at existing refineries has grown substantially. Why is it that no new refineries have been built? A refinery near Chicago wanted to get permits to take sulfur-rich Canadian oil but met with much local protest. What percent of gasoline consumed in the US is produced in the US? What percent of world production do big oil companies represent? Are they price-takers or makers? If distribution is such a good business, why are gasoline stations being closed by the hundreds and why is Exxon trying to sell a bunch?

This is not the first time OTM has had a guest on whose views were not properly vetted for accuracy. I expect better.

Jul. 28 2008 12:07 PM
David from Rhode Island

Andrew - none of your comments are particularly relevant to what Raines said. While OPEC certainly keeps the market from being a "normal" supply situation, they have been around for decades. They are doing nothing now that they have not done for years, in fact they are holding supply steady or increasing it slightly. So as a relative constant over the past year or two, they are not a direct factor in the price run-up. They are an indirect factor in that they have not increased supplies as they might have, given that it is demand that has increased so much. Which is everyones point, demand increasing dramatically.

In any case, it is effect, not affect. Cause and Effect.

Jul. 25 2008 08:30 PM
andrew hennessy from college park, md

Economic theory assumes perfect competition. Ever hear of OPEC? The energy industry is rather far from competitive. In the last quarter U.S. consumer demand for oil went down, but price did not go down until it was clear to the world that the U.S. economy had slowed. U.S. increases in oil prices can also be traced to the sliding dollar.

The people who assume there is only one cause for an affect are rather simplistic.

What about the tax breaks and subsidizes for large corporations (see oil co) ? If you read him, Adam Smith also talked about using government to constrain concentrations of market power.

Jul. 23 2008 06:40 PM
Bill from Baldwinsville, NY

I have three more criticisms of Raines' article. First, in part, he seems to assume that what happens in the U.S. determines the price of oil and gas. It doesn't as there is a world market for both. More broadly, he seems to assume that firms like ExxonMobil dominate the world market for oil. They don't. Of the 20 largest oil companies in the world, only 5 or 6 are publicly held (like BP, Shell, & ExxonMobil). The largest oil firms include the likes of Saudi Aramco, Gazprom, Pemex, and Petroleos de Venezuela. Any analysis must include them and their actions. For example, Fareed Zakaria make the point that while publicly held companies try to maximize profits, these other firms have other goals, such as supporting social programs in their countries. As a result, they likely underinvest in exploration and production. Finally, as others have pointed out, collusion is very hard in markets like this given the multiplicity of firms (just like it is among editors -- can he and OTM imagine editors colluding to keep writer's salaries down?).

In seems that Raines and OTM, in trying to make a critical analysis, only go far enough to satisfy their biases.

Jul. 23 2008 11:42 AM
Julie Baxter from Austin, Texas

Very interesting story yesterday from the AP:

"HOUSTON (AP) — As giant oil companies like Exxon Mobil and ConocoPhillips get set to report what will probably be another round of eye-popping quarterly profits, just where is all that money going?

The companies insist they're trying to find new oil that might help bring down gas prices, but the money they spend on exploration is nothing compared with what they spend on stock buybacks and dividends.

It's good news for shareholders, including mutual funds and retirement plans for millions of Americans, but no help to drivers already making drastic cutbacks to offset the high cost of fuel.

The five biggest international oil companies plowed about 55 percent of the cash they made from their businesses into stock buybacks and dividends last year, up from 30 percent in 2000 and just 1 percent in 1993, according to Rice University's James A. Baker III Institute for Public Policy.

The percentage they spend to find new deposits of fossil fuels has remained flat for years, in the mid-single digits."

http://ap.google.com/article/ALeqM5jdMq36pfzhyHeyexEU51JX5sr1egD922KTHG1

Also quite telling that with Dolly in the Gulf, oil prices spiked yesterday...

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4375312.ece

...just on the sheer *speculation* that it could cause damage to platforms and refineries. Somebody made a nice bit of pocket change there!

Jul. 23 2008 09:13 AM
Martin

Oil "bubble"? Really?

It seems like you just identified a weakness in your understanding of the current issues at hand

Oh well - you still provide me with a great weekly podcast!
thanks

Jul. 21 2008 11:34 AM
Richard from Chicago

The only thing more ridicuous than Howell Raines' original piece in the Portfolio is the fact that OTM producers would give him more time on air for it. ANWR is a symptom of a much larger problem: shortsightedness on exploration and exploitation have caused a crisis in production.

Jul. 21 2008 10:19 AM
David from Rhode Island

Brian - They interviewed that other famous "troll for the PR firms that suckle at the teat of the oil industry", Al Gore on Meet The Press yesterday(free podcast also if you missed it). He not only stated twice that limited supplies and rising demand from India and China were the source of most of the price increases, he also stated, as I did (facts are so annoying) that the lack of exploration in the offshore areas is because of a shortage of equipment, engineers, and because it would be a drop in the bucket of what would be needed anyway. But of course the oil companies are behind all those issues also. They tell students what to study and what not to study, even though these engineers make well into the 6 figures pretty quickly. I am tempted to be extremely sarcastic right now towards you Brian, so I will stop here.

By the way, like Ken I am also not a lover of the oil companies (nor am I a hater of them), it is just more important to focus on things that will really help, like getting off oil and coal, etc. as quickly as possible. Howell Raines, disgraced former editor of the NY Times, distracts from this important need rather than helping, and Bob Garfield was completely in the tank for him. Really poor job, Bob.

Jul. 21 2008 07:29 AM
Ken from Fernandina Beach, Florida

I'm not lover of oil companies but I do try very hard to follow energy issues, and OTM's credibility on the subject has taken a dive with the interview with Howell Raines. If Raines knows what the price of oil will be in 10 years, exactly where to find some now and how much to invest in the pursuit, he should let us in on the secret. And while he's at it, which parcel of land near his house we can build a couple of refineries. I despair we'll ever get a useful national energy policy with Raines and Garfield posing as experts.

Jul. 21 2008 12:15 AM
David from Rhode Island

Also, listen to the Science Friday (NPR) podcast from the same day as the OTM show. The one on what a canard it is that off-shore drilling will make much difference. In short, the 40bbl of oil that is thought to be out there (that includes even the off-limits areas) would make about a 0.5% difference in the oil supply in the 20 years it would take to get it out. And that assumes no increase in demand, which is certainly not the case. It totally blows apart Raines' ill-conceived arguments.

Jul. 20 2008 10:46 PM
David from Rhode Island

Brian, nice try. When you have no facts, accuse people of being "trolls". I have no connection to the oil industry, professionally. I just actually read and listen to a lot more than you must. You make statements that have no meaning, like we are "too obvious". Sure, citing facts is pretty obvious I guess. As far as the 80%, that is actually fairly high. These systems have to be maintained on a rotating basis, both to maintain operating levels and to stay within EPA compliance. And refineries shut down because it would cost more to get them in compliance than makes sense to do. After all, if oil companies make money hand over fist producing gasoline, why make less of it? Besides, when there was a gasoline shortage a few years back, that was because of a variety of factors including a lack of refining capacity. But not even Raines says this price run-up is due to a refinery capacity shortage. I have not heard one story about anyplace being out of gasoline. Your comment makes no sense, Brian.

Jul. 20 2008 10:46 PM
Brian

Seems that Matt and David are trolls for the PR firms that suckle at the teat of the oil industry. Sorry guys, you're too obvious. Why is it that refineries (I have relatives who work and worked in refineries until recently) are only running at actual 80% of capacity? And why are refineries shutting down? Hmmm. Sounds like market manipulation to me.

Jul. 20 2008 10:08 PM
David from Rhode Island

Raines then says something that strikes me as even more amazing. He derides Tillerson's comments about increased demand from China, India, etc., saying that for us to accept his depiction that the increase in prices is due to supply and demand as being "as inevitable as gravity and as random as lightening" is naive. The lightening comment is a complete non sequitur. Nothing in Tillerson's comments indicated he thought these were random events. And in the absence of government controls or monopoly/price fixing circumstances, a long line of Nobel Prize winning economists will tell you this was inevitable. Has Raines had his head in the sand regarding the incredible growth in those countries, not only in industry but in the number of cars being purchased? And I remember more than a few stories predicting this run up in demand in an era of diminishing supplies in the NY Times Sunday Magazine, among numerous other (generally liberal) publications. And finally, the oil companies actually do not control even half the world's oil, so their ability to "manipulate" the price is questionable anyway. But not a word of this from Bob.

Jul. 20 2008 02:59 PM
David from Rhode Island

Matt pretty much nails it. I would only add that Raines says during the interview that the oil companies have cut back on exploration, shut down half the refineries and to redirect ALL (emphasis mine) of their R&D spending into profits. Besides the fact that the last 2 are factually wrong (they have not shut down half, and my many peers in the Ph.D. community that work for the oil companies would be shocked to learn they are not being paid or supported, not to mention that the people researching alternative energies will be surprised to learn they are being given rubber checks by their oil industry benefactors), it ignores that to the extent it has a bit of truth much of it is due to government regulations that are too expensive to comply with. In an ivory tower you can dismiss that as "greedy capitalism", but people constantly forget that when they support regulations like these (and I do support many of them) there are consequences. These are just ridiculous statements that go unchallenged. It is amazing how Bob Garfield always seems to have done his homework when a guest says something that doesn't further his political viewpoint, but is mute when they do.

Jul. 20 2008 02:41 PM
Matt from Arlington, VA

The second point, is that commentary advocating for the need of a more vigorous journalism that isn't as relaxed about corporate public relations, isn't a comment about the media coverage. It is a trojan horse used to smuggle Mr. Raines' personal political preference for Roosevelt era economic regulation and Senator Barack Obama's campaign policy proposal into the current media narrative.
Missing this stark political advocacy under the guise of media criticism seriously calls into question Mr. Garfield and On The Media's own journalistic standards and the ability to thoroughly analyze the journalistic standards of current media coverage of important issues instead of substituting advocacy for analysis.
If Mr. Raines and Mr. Garfield prefer the regulations propagated under the blue eagles of National Recovery Administration and the Obama Campaign they should make that case on the merits instead of sneaking them in the back door as criticism of the marketplace of ideas when they are clearly pushing a position within the marketplace.

Jul. 19 2008 11:39 AM
Matt from Arlington, VA

Howell Raines and On The Media commit journalistic malpractice on two fronts in Supply and Command.
By dismissing examinations of the supply and demand oil story as an artifact of reporter socialization during the 1980's Mr. Rains and Mr. Garfield mislead OTM listeners to think that economic theory has nothing to contribute and the current price of oil is only an artifact of the business practices of oil companies.
In point of fact, a rarity in this segment, if such profit-taking was the only reason for the high prices, As Mr. Raines flimsily asserts, then the incentive for other firms to take less profit, do more business than the firm taking too much profit, and make more profit in the process (at the margin) will lower the price of oil products in question.
This type of competition would be prevented if say the supply was limited. Thus the supply and demand story explains the rise in prices much more than Mr. Raines' commentary.

Jul. 19 2008 11:39 AM

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