Tim Russert Doesn't Understand Basic Economics

Here's a clip from this Sunday's "special edition" of Meet the Press on high gas prices. Simply astonishing:



I love the expression on Bodman's face. First, one of confusion: "Did he really just ask me that question?" Then shock: "Holy shit, he really asked me that question." Then, after his brief answer, he just stared at Russert like he was an idiot, and there was silence. Full video of the show here, and full transcript here.

I guess Tim Russert doesn't read Charles Krauthammer.

Russert asked why "profits" are up, not "prices". Russert's question is reasonable, because the oil companies have control over their margin, if not the going cost.

Dan: because production has actually increased, just not at the same rate as demand.

David: I'm not sure you understand the supply and demand theory or its limitations. Oil companies are not mathematically forced to maintain high profits in order to prevent American consumers from using more gasoline than can be produced. The rate of gasoline consumption is highly insensitive to the price. The oil companies could reduce their margin such that they make their required profit and simultaneously give the consumers a little break.

I understand that gasoline demand is inelastic (over the short term). That's precisely why the price has to go up so high before the supply and the demand reach equilibrium.

Dan, I'm not sure you understand the supply and demand theory or your limitations. When demand is up and supply is down, there isn't enough gasoline to go around. Somebody needs to decide who gets gasoline and who should do without. The best way to do that is through the price system. When there isn't enough gas, it gets more expensive. That way, individuals will use their knowledge of their world to decide how much gas they want to buy.

The fact that this results in high profits for oil companies is almost 100% besides this point. As a completely separate point, the high profits available to oil companies makes other oil producers willing to invest in more capacity to drill for oil and refine it into gasoline. If you were to do anything to reduce those profits, you would only be locking in the high price of gasoline.

Barbie says "Economics is hard!"

"The oil companies could reduce their margin such that they make their required profit and simultaneously give the consumers a little break."

That's called price fixing - go to jail, go directly to jail, do not collect $200...

does a lowering supply and an increasing demand = higher prices? YES.

does a lowering supply and an increasing demand = higher profits for oil companies? IT DEPENDS.

profit = revenues - cost.

thus, to answer second question, one must examine changes in revenue and cost.

1. costs change too, but in the short term they don't change much. cost to extract oil will not change that much. this is affected by technological developments, etc.

2. revenues may change. revenue = price of oil x oil sold.

price of oil, as we've established is increasing. oil sold doesn't change much in the short term. people dont change oil purchasing habits in the short term.

therefore, one can say that yes, low-supply and high demand can mean higher profits.

this kind of conclusion is automatic to certain people. other people have to work it out. i would have expected mr. russert to figure it out faster though.