Arithmetic 101

BillOReilly.jpgSometimes I wonder at how deficient in basic math skills are our public figures and the talking heads. The other day (perhaps Tuesday) on his TV show, Bill O'Reilly was discussing the evil oil companies. Mentioning how one of them had made billions in profits, he offered that if they simply reduced the price of gasoline by 10%, they would only reduce their profits by 10%, but still make plenty of money, and help out the average consumer. This is mathematically wrong, not to mention offensive.

The Math
If a company spends $20 billion dollars drilling, distributing, and selling gasoline, and generates $24 billion in sales, it has earned $4 billion in profits. That's simple enough.

Here comes the big math. If the company had been induced to lower it's prices by 10% (and the same number of gallons had been sold), how much lower would their profits be? 10%? (Would I really be writing this article if it were 10%?)

Am I insulting your intelligence if I do the math? I suppose this entire post insults your intelligence.

10% off of $24 billion in sales is $21.6 billion in sales. Subtracting the $20 billion in costs, yields $1.6 billion in profits. That's $1.6 billion instead of $4 billion. The profits would have dropped by 60%, not 10%! In fact, had they reduce their prices by 17%, they would have actually lost money!

Now these were all hypothetical numbers, but the point is that anytime someone offers advice for anyone on how to run their affairs, you can be sure it's not as well thought-out as he thinks, or that at most he's got only his interests in mind.

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I think you mean the profits

I think you mean the profits would have dropped by 60%.

I saw that segment, and the

I saw that segment, and the whole thing was flawed. The guest - someone from The Public Citizen, made several spurious claims, First, he said that the oil companies are vertically integrated (which many of them are), and then said "that's like being a monopoly". What a tool! That's like saying a really tall person "is like being obese." Monopoly refers to horizonatal integration, not vertical.

Then he said that ExxonMobil et al are making their profits downstream, in refining and marketing. I understand why he would say this, because those parts can be price-controlled by the government, which, no doubt, the guest wanted. But it isn't true. Refining margins haven't changed much over the last few years, and gasoline retailers make essentially zero profit on gasoline - they use it as a loss-leader to get people to come in and buy high-margin potato chips and coffee. ExxonMobil, and any toher firm with large dometic oil production, will make scads of money from high oil prices because their production costs are still the same, but their upstream arms can sell to their downstream arms at world prices. And even The Public Citizen flacks know that the US FTC can't do a damned thing about world crude prices.

Then O'Reilly mentioned that if ExxonMobil lowered their price by 10%, they'd be "helping everybody, not just themselves." Does he not understand that publicly traded companies have legally-enforceable fiduciary responsibilities to their shareeholders, and not "everybody?" Is his misunderstanding of the basic (and I mean, really basic) underpinnings of market capitalism so complete?

Aaaarrrggghhh.

Thanks for providing the room to vent.

"Is his misunderstanding of

"Is his misunderstanding of the basic (and I mean, really basic) underpinnings of market capitalism so complete?"

Yup - because he's a collectivist, like every other two-bit fraud on the teevee.

Of course, since the average

Of course, since the average gallon of gasoline has 42 cents of tax on it, including 18.4 cents in federal tax (as of 2002), there's one easy way to cut gas prices by 10% - cut the federal gas tax. Needless to say, no big surprise that wasn't mentioned on the show.

At one point he even

At one point he even complained that gas stations behave like monopolies - everytime one of them lowers (or perhaps raises) the price a few cents, the others nearby lower it too.

Where to begin in responding to such a thought?

bq. _Where to begin in

bq. _Where to begin in responding to such a thought?_

How charitible of you to refer to what goes on inside Bill O'Reilly's head as "thought".

I think you mean the profits

I think you mean the profits would have dropped by 60%.

You're right. I went a while without checking the comments, so someone over here must've updated it without acknowledging the change. By the time I did see your comment, I didn't know how to react, because I didn't understand what had happened until I saw your comments on Fair To Middlin'.

One danger of posting about stupidity is making a mistake yourself. Good catch.

Gas prices tend to drive

Gas prices tend to drive media folks into a frenzy. Look at this "news" article posted on the website of Cleveland's ABC affiliate:

http://www.newsnet5.com/money/2943063/detail.html

Thanks Bill, I appreciate

Thanks Bill, I appreciate it.