By Merrie Spaeth, KERA 90.1 Commentator
http://stream.publicbroadcasting.net/production/mp3/kera/local-kera-488500.mp3
Commentary: Headlines Versus Truth
Dallas, TX –
You've heard of deceptive advertising? We're seeing deceptive headlines. I'll bet you've seen the ones I'm talking about: "Exxon profits soar." That was the Washington Post. Or the front page of USA Today, "Big oil rakes in historic profits" with the subheads, "Exxon net soars 75%" and "Senate hearings ahead."
Well, duh. Why wouldn't there be Senate hearings? Obviously Exxon and the other big oil companies are using hurricanes Katrina and Rita to double or triple what we pay at the pump - and pocketing the charges.
Obvious, but wrong. Record profits just means big numbers. Profit means what you make on a dollar of revenue, from which you deduct taxes, depreciation and other stuff. What's left is profit. Say, you put $100 in a savings account and it pays four percent. That's revenue, on which you pay taxes, so may be you end up getting three dollars. Again, that's your profit.
The oil industry makes an overall profit of about seven and a half percent. By contrast, banking makes almost 20 percent. When you look at where to invest, you don't look at the raw numbers. You look at the profitability. Are you going to put your money in an investment which pays two percent or four percent?
All that "profit soars" stuff is demagoguery. It's true, but misleading. The numbers did get a lot bigger, because of disruption in supply, and Katrina and Rita, but the even greater problem is the volatility of prices.
Exxon invests somewhere around $15 billion a year into exploration and development. It takes forever to bring new product on line. So why don't they invest more? There's supposed to be more oil in the sand of Canada than in Saudi Arabia. That's a lot of oil. Of course, it's about twenty times more expensive to get it out of the sand - something like two tons of sand for every barrel of oil. That's a lot of dirty sand. If oil would stay at $60 a barrel, it might pay to develop that oil, but OPEC could flood the market and put the Canadian oil sand out of business.
The media has done a good job covering the story. There has been excellent coverage of - get this for a gripping story - the different flows to the gas station and the resulting price competitiveness. Or, this is good news for pensions because Exxon stock is a favorite of pension funds. Bet you didn't stay awake reading that.
Headlines are a problem because most of us don't read beyond them or the top-of-the-hour TV read. They're not wrong, but they are misleading.
And so politicians of both parties count on the fact that we're so stupid that we won't pay any attention to the real economics.
And of course, Exxon's ads aren't terribly helpful. The tag line is "Yes, our earnings are up but not out of line with all industries." Translation: we're raking it in, but not as much as Pharma.
Democrats are screaming for a windfall profits tax - which sounds good, but it really says "we are afraid of big numbers" - and Republicans, who should know better, are calling for hearings on the sharp escalation of prices.
Maybe headlines should come with disclosures: "Exxon profits up - confirms decisions to invest a decade ago" or "Exxon profits up 75% - caution: numbers in headline are not what they appear to be."
Reading beyond the headlines, I'm Merrie Spaeth.
Merrie Spaeth is a communications specialist based in Dallas.
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