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March 9, 2012

Bill O'Reilly: Exporting Nonsense on Gas Prices

March 9, 2012
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Lately Bill O’Reilly’s comments regarding gasoline prices have been nonsensical. O’Reilly’s analysis of the oil market and the role of exports is not only wrong, it’s absurd. Even if he were right, slapping taxes on American firms is not the way to help Americans. As we’ll see, oil refiners aren’t doing anything nefarious by participating in the global market. And as for O’Reilly’s proposals, they would not only cost American jobs, they would have a negligible impact on gas prices.

O’Reilly’s Plan to Tax Our Way to Prosperity

For those who missed his commentaries, here’s a good example of O’Reilly’s energy fallacies from his “Talking Points Memo” of February 22:

We began covering the skyrocketing oil prices last Friday with Lou Dobbs. He was candid. Saying because of the mild winter, there is plenty of oil and gas in the U.S.A. So supply and demand here should dictate lower prices.

But of course, they are not lower. They are much higher because the oil companies are shipping their products overseas. Measured in dollars, oil products are now America’s largest export worth $88 billion a year to the oil companies.

A decade ago, oil exports were not even among the top 25 exports. Most of the oil stayed here. And with working Americans getting hammered by stagnant wages and huge unemployment, this is yet another punishing situation for the folks.

Tomorrow President Obama will speak in Miami about gas prices. But he is likely to have no solutions.…However, if the Obama administration wanted to, it could ask Congress to raise export taxes on the oil companies to encourage them to sell their products here. Think about it. The oil companies are regulated by the federal government. They can’t drill on land nor in American waters without permission from the feds. Many Republicans want to drill baby drill but what’s the point if all the oil goes to China? Increased production obviously doesn’t mean lower prices for us.

The cartels overseas and the oil companies here set the prices based upon what they can get anywhere in the world. So right now we can expect oil prices to continue to go higher until the oil companies believe they are going to be held accountable. Then they will back off just a bit. [Bold added.]

O’Reilly’s analysis of the oil and gasoline market is simplistic and misleading, but even if it were correct, his “solution” is a betrayal of the supposedly conservative respect for property rights. If O’Reilly’s information were true, that companies needed permission from the government to drill on private and state lands, our oil production would be falling.  After all, oil production on government lands and waters was down last year, even as it climbed 14% on private and state lands.  If O’Reilly were right, Americans would really be hurting from the inevitably higher gas prices the government’s sloth at producing energy would have.   Unfortunately, in this case, O’Reilly is succumbing to his populist streak and railing against the rich greedy businesses in favor of “the folks.”

Even on his own terms, O’Reilly isn’t accusing oil companies of breaking any laws, mistreating any workers, or defrauding any of their customers. According to O’Reilly, these companies are selling their product to the customers willing to pay them the most for it, and therefore suggests that Congress should get involved and increase rates just on those specific companies. When the government starts targeting certain companies for punishment through the tax code, just think about the abuses that could occur.  Our Founders did, and outlawed bills of attainder.

If O’Reilly believes his own rhetoric, then why stop with gasoline? For example, the price of food has been rising aggressively during the last few years, making it harder for struggling families to make ends meet. At the same time, American farmers are exporting massive quantities of food abroad! If Congress slapped a big export tax on wheat, imagine how much cheaper bread would be for the folks here in America. O’Reilly’s implying that wheat and corn are unnecessary but gasoline is.  Maybe he should visit a farm or a bakery or a food processing plant.

Let’s push the analysis further. What if the mayor of Detroit made it illegal for any company to ship a car outside of the city for sale to an outside buyer? Imagine that from now on, all vehicles produced in a Detroit plant must be purchased by a final consumer in Detroit. Think of how much the price per vehicle would tumble, once the demand from the rest of the world were cut off! Those Detroit residents sure would benefit, having all of that massive supply of cars to themselves.

The Two Critical Flaws in O’Reilly’s Argument

As my analogies illustrated, O’Reilly’s analysis is wrong. In fact, there are two separate mistakes he is making.

In the first place—as the grain analogy was meant to demonstrate—O’Reilly completely misunderstands the benefits of international trade. Even if it were true that the U.S. were a net exporter of oil to the rest of the world, it still wouldn’t make sense for the government to slap a tax on U.S. exports. In other words, if there were a Saudi analog of Bill O’Reilly on Al-Jazeera, telling his government to stop exporting so much oil to the rest of the world in order to keep prices down for Saudi motorists, then that would be horrible economic advice.

One of the most basic economic principles is that all countries benefit from participating in the international division of labor, where each nation specializes in its “comparative advantage.” Countries (such as Kuwait and Canada) that are endowed with more crude oil than their own people will consume, export the surplus production to the rest of the world. The people in other countries pay for their oil imports by selling their surplus goods, such as wheat, cars, software, etc. Through this process, per capita living standards are far higher than they would be if each country had to produce everything domestically.

Thus we see that an attempt to hinder oil or gasoline exports from an oil-surplus country would make no economic sense. Yes, the people of that country would have more oil leading to lower gasoline prices for a while, but they would have less of whatever they were previously buying with their oil exports—perhaps wheat and hence bread prices would be higher. On net, the average citizen would be made poorer by the government’s interference with trade and market flows of goods.  And eventually, forcing an industry to sell at an artificially low price would mean it could go out of business, as many refineries in the U.S. have already, despite exports.

Yet there is something else fundamentally wrong with O’Reilly’s assessment of the situation: The U.S. is currently a large net importer of crude oil. In 2011, the U.S. imported 8.9 million barrels per day, and exported a paltry 46,000 barrels per day (just about all of it goes to Canada). So the notion that the U.S. would be awash in oil if it didn’t send it abroad, is nonsense.

The reader might wonder why the U.S. exports any crude oil, if we’re a net importer? Robert Rapier at Forbes explains:

Oil that is exported to Canada is most likely produced in fields that have easier access to Canadian refineries than to U.S. refineries. We import over 50 times as much oil from Canada as we export to them, so oil exports are clearly not the problem.

It’s not crude oil, but petroleum products, that the U.S. exports on net. Yet even here, the numbers show that O’Reilly is painting a false picture.  In December 2011 the U.S. exported a total of 108.4 million barrels of petroleum products, including tens of millions of barrels of products that our government makes very difficult to use here, such as petroleum coke, residual oil and high sulfur fuel oil.  Are companies supposed to keep products they could sell abroad but consumers cannot use here because of government regulations?

Looking at the destinations for our exported petroleum products, we again see that O’Reilly is misinformed. Of the total exported in December, 9.2 million barrels (8.5%) went to Canada, and 18.1 million barrels (16.7%) went to Mexico. We shipped the Netherlands (yes, the Netherlands!) 11.4 million barrels (10.5%) of petroleum products.

In contrast, China—the place where O’Reilly claims we’d ship all of our extra oil production, and so drilling here would be pointless—received only 4.1 million barrels of petroleum products, a mere 3.8% of the total for December. Once we see the actual numbers, we have to wonder: Did O’Reilly’s staffer bother to research the actual figures?

Why An Export Tax Would Make the U.S. Poorer

Now that we understand the true situation regarding the oil market and U.S. exports, we see the relevance of my absurd Detroit auto example. In Detroit, the major companies “import” most of the inputs (such as tires, glass, steel, etc.) from other cities, then use their own workers and factories to assemble the finished vehicles. Most of these products are then “exported” to cities outside of Detroit, because the car companies can obviously get a much better price for each unit by selling into the world market as opposed to just selling to Detroit consumers. If the mayor of the city foolishly made it illegal to export cars, it would simply ruin the industry. There wouldn’t be a huge gap in car sticker prices inside Detroit versus outside of Detroit; no, the number of cars produced in Detroit would simply plummet, with the market share going to other producers.

The situation is similar with petroleum products. Right now U.S.-based refiners operate in a competitive world market. Part of their business involves importing the inputs (i.e. crude oil) from abroad, using domestic workers and equipment to refine it into gasoline or other products, and then exporting some of it abroad. If the U.S. government foolishly slapped a tax on these foreign sales, the U.S. refiners wouldn’t continue with their previous level of output, and dump the excess stocks on the U.S. market.

No, if the U.S. government slapped a tax on foreign sales, then U.S. refiners would scale back their operations. They would import less crude from abroad, they would hire fewer American workers and run fewer shifts, and they would produce less refined gasoline. In the new equilibrium, it wouldn’t at all be the case that gasoline sold in the United States for far less than in neighboring countries. On the contrary, the U.S. refiners would cater to Americans with their reduced output, while foreign refiners would capture market share caused by the reduction in U.S. output (and exports).  The result, in other words, would mean U.S. job losses and not much relief for motorists.

Conclusion

Bill O’Reilly’s talking points against oil companies completely misconstrue the actual trade flows of crude oil and refined products. Yet even if O’Reilly did state the facts, his proposal for raising taxes on a profitable sector of the U.S. economy would destroy jobs and do little to lower gasoline prices.  In fact, his rhetoric sounds a lot like President Obama’s calls for increased taxes on oil companies as the way to reduce gasoline prices.  No one should believe either of them.

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