Price-gouging or hypocrisy-gouging?

Like most of us, I have been glued to the television--moved by images from hurricane Katrina. In the aftermath of a devastating hurricane, it is particularly important to avoid the silly moral posturing that so often characterizes news analysis of economic issues.

Every time gas prices at the pump rise quickly, there are calls for investigations of alleged price-gouging by "the oil companies." Why does this seem a bit silly to me? Lots of reasons:

1) Price-gouging investigations have occurred dozens of times in the past. Oil companies have been cleared of the charge, repeatedly.

2) Price-gouging investigations, and the accompanying congressional grandstanding, are as predictable as the summer solstice. The revenue gains from a brief period of opportunistic price-raising would hardly outweigh a negative outcome in one of these investigations.

3) Oil company profits are not particularly high compared to other industries--and do not (to my knowledge) appear to rise and fall with hurricanes.

4) Long-run prices are determined more by supply decisions of Saudi Arabia and OPEC (and demand shocks from emerging Asian economies) than by strategies of "big oil companies."

These arguments notwithstanding, media figures have been berating "big oil companies" for their selfishness. Fox's Bill O'Reilly has been particularly comical in this regard. In what looked like either a heart attack, a sexual climax, or a fit of righteous rage, he accused oil companies of making excess profits and challenged them to give 20% of their excess profits to the disaster relief effort.

Hard to argue with challenging someone to give to the relief effort. Hell, let's challenge KFC to do the same. (Full disclosure: I donated to the Red Cross, as many others have, and I think it's fine for media personalities to encourage people to donate.) It's the linkage between oil companies and the disaster that's a bit of a stretch.

The linkage assumes the existence of large "excess" profits due to the hurricane. Let's watch to see if oil companies end up earning more about 7.5% by the end of the year, or if the inevitable investigation turns up any evidence of wrongdoing. Lots of important assets have been destroyed in the gulf coast--a major oil-producing region. Pipelines, refineries, infrastructure, etc. These all have to be rebuilt.

The linkage also assumes that if prices rose at gas stations these gains went to "the oil companies." Individual merchants have enormous autonomy in times of disaster. If you possess a desired commodity, you may sell it for what you choose. It may be difficult for anyone, oil company executives included, to usurp that authority. And the linkage denies the possibility of secondary markets. (If you gave gasoline away, a secondary market might well arise in which people who received it sold the gasoline to people who valued it more.)

Also, implicit in the analysis is the idea that price increases in a needed commodity are "bad." In a post about Hurricane Charley, I wrote:

What happens when we decide that price increases are "immoral"? Goods don't get there. So fewer people end up with ice, generators, gas, or food. It's true, of course, that the few that end up with the goods pay less for them, but this only benefits the lucky and connected few at the expense of the unlucky many.

And this is MORAL?

To be sure, you could argue that increased prices may not have led to greater flow of gasoline to the region this time, because of insurmountable transportation problems. But even so, high prices lead to conservation. Gasoline is used only for essential tasks and only by those who value it most.

Inescapably, gas will be rationed. If not by price, then by other mechanisms: long lines and hours of waiting. Is this somehow an intrinsically better allocation?

But by far, the most bizarre aspect of O'Reilly's comment is its hypocrisy. He offered no evidence at all that oil companies profits rise dramatically when disasters occur. (It would seem particularly unlikely that profits would rise when the destruction centered on a major oil-producing and refining area.) But it does seem clear that the cable news media do profit from disaster.

The first Gulf War put CNN on the map and established it as a force to be reckoned with. Ratings rise dramatically when tragedy strikes. No one profits more from this terrible tragedy--or any other tragedy (e.g., an abduction of a girl in Aruba)--than Fox.

I want to emphasize that I do not condemn cable news for their increased ratings and revenues during crisis times. On the contrary, this illustrates a main point. Because there is such fierce competition for these ratings and revenues, cable news outlets are able to perform an incredibly important service. 

It looked to me as though news people were often first on the scene. They appeared to communicate vital information before the authorities and the relief agencies were aware of the scope of the problem. There may be reasons to criticize FEMA and others for a slow response. The flip side, though, is that we should be impressed the amazing speed and scope of the media presence.

Compassion probably played a part in this response; but so, undoubtedly, did the quest for higher ratings. This, I would argue, was a very good thing. If we were to demonize the media for "profiting from disaster," if we were to limit the higher revenues that followed from the higher ratings gained from tragedy, then we would likely have slower and less thorough coverage.

And more deaths.

(A high price to pay for indulging in moral sanctimony and getting back at anyone who makes profits).

Lastly, the state of Texas appears to have shown a great deal of compassion for the victims of the hurricane. Texas appears to have sheltered and fed huge numbers. Houston--headquarters for the oil industry in the U.S.--appears to be leading the way. Not sure exactly what this means, but it seems an interesting irony.

I am not an apologist for the oil industry. Just an occasional defender of the glibly demonized. (And a critic of the dubious moral "calculus" practiced by many who don't know how to take a moral derivative.)

P.S.Babcock

Comments

[Econoclast]

Agreed, everyone loves to hate the oil companies. The real culprit is more likely our limited refinery capacity. It's hard to find a very satisfactory explanation as to why more refineries haven't been built, and somewhat tempting for conspiracy theorists to speculate that the existing refiners have an interest in keeping capacity tight.

It is, I think, true, all the same, that the oil companies have been found guilty of price fixing in the past (albeit the quite distant past) -- something that becomes easier the fewer distributors there are in the market.

From an investor's standpoint, the intriguing question is when and where we are finally going to find an alternative to oil. Has to happen sooner or later. Got any good ideas?

BTW, I think the average return on capital for the oil cos is more like 10% than 7.5%.

[philip]

Thanks for the comment! It is strange, isn't it? For some reason people go nuts about the oil industry. There's no logic at all.

As to your observation that oil companies have been found guilty of price-fixing in the past, you're clearly talking about the old John D. Rockefeller "Seven Sisters" robber-baron days of a bygone era. This is irrelevant, of course, to present circumstances. Lots of industries were guilty of abuses in those days, as competition was less robust (and less international) and the diffusion of information was less sophisticated. Heck, railroads used to be hugely powerful and collusive in those days too, but that hardly describes the present condition of, say, Amtrack! It is clearly unreasonable to use that historical artifact to characterize Amtrack or it's likely behavior in the present.

I remember reading that there have been about 30 consecutive investigations of price-gouging (in the modern era!) and I believe that none of them has turned up evidence of wrong-doing.

It may be that oil company profits are higher in very recent years that when I last visited the data, but they really haven't tended to be out of line with profts earned in other industries. Usually, oil companies are in the middle of the pack.

It seems very plausible to me that refineries aren't being built for the same reason nuclear power plants aren't being built. No conspiracy theories needed. It's just that, rightly or wrongly, no one wants refineries around them. Many existing refineries exist only because they were approved and constructed decades ago. (If you were to try to build refineries at those very same sites *today*, it would be nearly impossible.)

As far as what to expect in the future, I agree that that's a very interesting question indeed. I hope and believe that as prices edge higher, now or whenever, they will create conservation efforts and movements toward economical alternatives--gradually, naturally, and without a huge amount of pain. Jim Hamilton has a really great set of posts on the "peak oil" debate, linked to by Steven Levitt here:

http://www.freakonomics.com/2005/08/peak-oil-welcome-to-medias-new-version.html.

Best place I know to get both sides of the argument!