This article was last modified on April 30, 2006.

Fun With Numbers: The Oil Price Edition

On the April 26, 2006 episode of “The Daily Show”, the guest was Kimberley A. Strassel, a member of the Wall Street Journal Editorial Board. She had a discussion with Jon Stewart regarding gasoline prices and tried to explain to Stewart why oil companies were making record profits. Jon kept reasking the question (why the record profit?) and Strassel kept answering in a variety of ways, but never answered the question directly. She either did not understand what he meant, or he did not understand what she meant. Or, the way I interpreted it, Jon Stewart was trying to make a point about oil companies that Strassel did not want him to make. I heard her make two claims, both of which I flatly reject (though I freely admit I am not professionally educated in oil company policies or in economics).

Point One: Record Oil Prices Lead to Record Profits

Strassel wants us to believe that when oil prices go up, obviously the profits will go up. But that’s what the oil companies want us to believe, not what is automatically true. Let’s say a barrel of oil is $50 and raises to $70. That’s a 40% increase in price. Without thinking, how much do you think gasoline prices will go up? Do you think 40%? If you said yes, you’re falling for the trap Strassel was trying to set. Costs do not transfer from oil to gasoline PROPORTIONATELY. And I can prove it.

Let us say a gallon of gasoline costs the oil company $2.50 and they charge $2.75 (I have no idea what the actual costs are but it is really not important). Then the cost goes up to $3.00 for the oil company. That’s a 20% increase! If the cost for us was proportionate, we’d pay $3.30 at the pump. And if you believe Strassel, this makes sense to you. But look at the PROFIT, not the PERCENTAGE. Before they were making 25 cents and now they are making 30 cents. So YOU the consumer are paying more and they are making more. If they kept the gasoline cost at the pump $3.25, they would STILL have the large profit they had before the increase and YOU would SAVE a nickel per gallon… why can Jon Stewart see this but Kimberley Strassel cannot?

Point Two: Record Profits Are Good For the Consumer

Strassel’s other attempt was to say that we should stop giving the oil companies so much grief about their profits. High profits are good for the consumer, she says. But I disagree. We are the ones making their profit, which means we are the ones paying too much at the pump. That doesn’t make me feel like I’m getting a good deal.

And what is this nonsense about higher profits leading to better innovation… about the money being reinvested into the technology and helping progress? Obviously Strassel learned economics from a Reagan-worshipping professor. “Give the money to the rich and they will spend it, trickling down to the poor and helping us all.” I think we all know this is a lie. First, the wealth stays with the wealthy – since the majority of the money of this country moves to a smaller and smaller percentage, this is evident. And second, what connection is there between wealth and progress in technology? There are some advantages, yes. But overall I think closer inspection would show most technological advances were discovered by individuals with no great wealth and not connected to any business.

So do not tell me giving the oil companies money will lead to progress that will reduce our reliance on oil. That’s just stupid. What is more likely is that record profits will lead to record levels of wealth for oilmen. Look no further than the April 27, 2006 Washington Post: “The compensation package given by Exxon Mobil Corp. to outgoing Chairman Lee Raymond is said to total $400 million when all pension payoffs and stock options are included.” I guess the first 300 million wasn’t enough to live off of.

What They’re Not Telling You

According to one source, who remains anonymous and I therefore cannot vouch for their accuracy, “Here’s what they are NOT telling you. The raw material cost (crude oil) is rising. Say, 50% in one year. The cost of discovering, extracting, transporting, refining, and distributing the finished products is rising at a much lower rate. But those other costs also make up a percentage of the total cost of bringing the refined product to the consumer. Let’s say 75% for the sake of argument. Most businesses structure their pricing using percentage models, so if crude rises 50%, the cost of the refined product SHOULD rise only 25%, because the fixed costs of refining only rose 15%. But the oil company still raises the retail cost to the consumer the full 50%, claiming that it’s tied to the price of crude. The extra 25% is just gravy for them, their shareholders, and their top tier of executives. The guy who has to drive to work every day, even the people working at the refineries, get screwed.”

Where Strassel and I Agree

Strassel, Stewart and I all agree on one point: we should cut subsidies to the oil companies. The point, plain and simple: when we are already giving the company a record profit from our own pocket, should we also have to pay them from our taxes? Republicans complain all the time about the elderly and the sick getting welfare, but handouts to billionaires doesn’t seem to ruffle their feathers.

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