Thursday, July 26, 2007

For the Standard Examiner, Blaming Business Beats Useful Analysis

Today’s Standard Examiner editorial references a story in last Sunday’s NYTimes that pins part of the high cost of gasoline on oil industry greed. The Times story is actually far more balanced than the Standard Examiner infers. SE editors cherry picked and overemphasized certain points from the Times article to grind an axe, claiming that the oil industry, as usual, is up to no good.

Times reporter Jad Mouawad is not as myopic as are SE editors. He tries to capture the fact that we’re talking about complex economic and technological systems. He works to explore many factors and tries to concentrate on mechanical breakdowns at refineries, which is one of the most significant factors in the recent rise in gasoline prices.

“As a whole,” writes Mouawad, “refining disruptions have been considerably higher than in previous years….” But Mouawad makes it clear that these breakdowns and disruptions are caused my multiple factors. He also notes that due to the current tight supply of gasoline, these “unplanned perturbations” have a greater impact on market prices than in the past.

Why is gasoline supply tight? Well, it turns out that there are multiple causes for this as well. One of the major causes is increasing demand. We gripe about paying high gasoline prices at the same time that we are buying record quantities of gasoline. The industry is struggling to keep up with demand. While the industry cites the high cost of implementing new government regulations, others have decried the industry’s unwillingness to invest in new technologies.

Some of Mouawad’s sources say that refiners have been avoiding regular maintenance to stay in the game as long as possible. This ultimately results in more equipment failures and safety problems. But there are two sides to this story as well. One industry insider sighs, “Refiners want to keep running in today’s economic environment, but when they shut down they are accused of gouging the system. When they don’t, they are criticized for overrunning their facilities.”

The Times story is a well researched and balanced article that helps readers comprehend the complexities behind rising gasoline prices. Standard Examiner editors, on the other hand, use the Times story as a platform for demagoguery. They feign simplicity by ignoring the complexities highlighted by Mouawad.

Appropriately, the Times story appeared in the business news section, while the SE article appeared in the opinion section. But that is no excuse for employing ignorance as a weapon for throwing stones at an easy target.

Perhaps a more useful and informative step would be to study in what ways governmental laws and regulations prevent competition in the energy market, and therefore, prop up high energy costs while stifling innovation in cleaner alternatives. Nah, it’s easier to just throw blame.


y-intercept said...

I was actually more troubled by the forces that pushed prices of gas a bit too low in previous decades than I am with the forces that are keeping gas prices high at the moment.

The low prices pushed a large number of players out of the alternative fuels market, and it encouraged waste.

I would agree that government meddling has the affect of magnifying both the troughs and peaks in prices. However, even with no government interference, troughs and peaks will appear in the market.

At the center of everything is the simple fact that gas is not a renewable resource, and the market will skit about as it tries to find ways to allocate the use of the resource.

Since oil is a limited non-renewable resource, I think it would be foolish to try and increase production. Investment should be directed primarily at getting the most from current production.

Building a new oil refinery is an 80-100 year investment. I suspect that the oil industry correctly realizes that the current situation where production is limited by processing capacity will soon transform into one where the challenge is finding enough crude to fill capacity. Building a large number of new refineries is not a wise investment.

That means that, at this point in time, energy producers should be taking profits from oil, and throwing it into more promising long term investments such a alternative fuels.

The SE hates profit takers. Profit taking does not make wealth disappear it realigns the whole economy.

I suspect that the SE reporter threw out the snarl word "profit taking" simply because it re-inforces wealth envy.

The fact of the matter is that profit taking is a good thing. All though the left uses the word "profit taking" as an attack, I find that I prefer living in a world that is struggling with the distribution of profits, rather than one consumed with meting out losses.

I think the worst thing that could happen would be for oil companies to be reinvesting all of their profits back into capacity. Such an action would simply accelerate the consumption of a non renewable resource.

Reach Upward said...

You have provided a valuable lesson in market functionality. I agree that price swings are inevitable in any market. When it comes to energy, the government should do what it can to foster free competition. Other than that, it should get out of the way. Government regs that support the oil industry should be scrapped so that fair competition can ensue. The market would then be able to adequately respond to the need for environmentally favorable alternatives.