What if a friend told you, “I got a $20 raise today”? Is that good, or bad? Is your friend on the way to a new tax bracket, or did he get a lousy raise? It should be rather obvious that you can’t answer those questions. Is that raise $20 per hour? $20 per day? $20 per year? Twenty bucks per hour would be a great raise for most people. Twenty bucks a year is only a good raise if you work some place like Bangladesh.
The point is, without the proper context, the information that is given is useless. And that’s what sort of story we’re routinely given by the press about Big Oil “gouging” consumers with “record profits.” Whether this is more a result of bias or ignorance of basic economics is an open question.
Here’s a typical entry from the Washington Post:
Five top oil company executives appeared at a Senate hearing yesterday to defend their high profits and spikes in gasoline prices and to beat back calls for punitive action.
“We do not see this as a windfall,” said James J. Mulva, the chief executive of ConocoPhillips, whose company recently reported a quarterly profit of $3.8 billion, up 89 percent from the comparable period last year.
“Over the last 10 years, Exxon Mobil’s cumulative capital and exploration expenditures have exceeded our cumulative annual earnings,” said Raymond, whose company reported a quarterly profit of $9.92 billion, up 75 percent from a year ago.
Is a $3.8 billion profit for ConocoPhillips or a $9.9 billion profit for ExxonMobil exorbitant or not? It’s the same question as “is $20 a good raise?” Without more information to put those numbers in context, the numbers are meaningless. We don’t know whether those numbers represent a profit margin of 1% or 100%.
Rich Lowry provided some needed context in a column last Friday:
Even in this boom, there’s nothing untoward about ExxonMobil’s profits. They are big, but it is a big company with big expenditures. What is important is the profit margin. For every dollar in sales, ExxonMobil makes 9.8 cents. McDonald’s and Coca-Cola make 13.8 cents and 21.2 cents, respectively. Google makes 24.2 cents, and Merck, Bank of America, Microsoft and Citigroup all make more than that.
What’s really going on of course is a bunch of windbag senators have been hearing an ear-full from constituents, and they want to be seen on television grilling the fat cats of big bad Big Oil. If these gaseous senators really wanted to help fuel prices, they would lower the barriers to drilling for oil and building refineries. But that would require doing more than posturing for the cameras.