U.S. vs. Oil Refiners: Are Profits ‘Justified’?

“Winners and losers” is a familiar journalistic story construction that often oversimplifies situations. The September 25 Washington Post dubbed motorists the “big losers” and oil companies the “clear winners” in U.S. gas prices, turning the free market into a battlefield.

Justin Blum’s article was based on the fact that “the recent rise in gasoline prices has not benefited everyone in the production and distribution chain equally.” Thus began an unfair distribution of commentary on the market forces at work, including a reference to the economic laws of supply and demand as the “view” of oil refiners.

• Numbers without context: A chart accompanying the article, which drew some of its information from “analyst estimates,” divided pump prices to show how much of the cost of a gallon of gas goes to each stage of production. According to the chart, refiners’ share of gas profits has increased 255 percent since last year. The chart, however, did not give any explanation of what happened in the industry during that year. Readers were not told how much of the refiners’ profits might have gone directly back into the business due to increased demand for gasoline.
  
• Industry/free market voices scarce: In more than 1,200 words about gasoline production, Blum quoted only one oil industry spokeswoman. Mary Rose Brown of Valero Energy Corp. said “demand has outpaced capacity” in the refining market. Brown was the only voice for free market principles, though Blum referred to “analysts, consumer advocates and participants in the oil markets” who “indicate that typical market forces were at work in the price run-up” after Hurricane Katrina.
  
• Lobbying for profit control: Blum included quotes from Sen. Byron Dorgan (D-N.D.), who proposed extra taxes on the “windfall or excess profits” he saw oil companies reaping from price spikes. Blum wrote that “environmental and consumer advocates are urging the government to lower oil company profits in another way,” by reducing gas demand through tougher vehicle mileage standards. He alluded to other “officials” and unnamed “analysts” who frowned on the oil companies, but no one countered the notion that government should “lower” a company’s profits. As the market continues to work, the profits will “lower” themselves when demand for gas declines.
  
• Your market or mine?: Blum ventured to explain rising prices from the refiners’ side, saying they “were able to sell their gasoline for higher prices as a result of the short supply and the spike on the mercantile exchange. In their [refiners’] view, the increases were justified because the market dictated that their final product – gasoline – had risen in value.” The forces of supply and demand work regardless of anyone’s “view,” though Blum made it appear as though some price increases aren’t “justified.” Prices aren’t determined by the opinions of either side, but by how much gas is available and what consumers are willing to pay for it. Blum could have read one of the Post’s graphics with the story, which said that “prices are determined by world market forces based on supply and demand.”