Sunday, July 06, 2008

A Perspective on Big Oil

Even as the Bush Administration fades into history, the poisonous rhetoric continues. We continue to hear the calls by one demagogic politician after another to tax the oil companies and their “windfall” profits. Of course the sums being reported are indeed huge but these are big companies and like all big companies their revenues are truly large but no larger than any other large company. Then there is the idea America is being held hostage by the Arabian States. Well not exactly. The fact is that country that holds the place as our largest importer is Canada who sends us 1902K barrels of oil per day. Saudi Arabia is second with 1519K barrels and Mexico third with 1230K barrels. Fourth place falls to Nigeria and Venezuela is in fifth place. Then there is the blather coming from those who opposed the Iraqi War but feel that we should just take the oil because after al “they owe us”. Talk about a mixed message! But Iraq already is in sixth place as a source of oil. So it seems we are already getting oil from Iraq and will undoubtedly get more as that country stabilizes. It is worth noting that Iran, Dubai, the Arab Emirates, Yemen, and other sunny and delightful places peopled by colorful natives are not on the list of the top 15 suppliers.

It is also worth noting that in general that the oil these countries are exporting are government owned and controlled by OPEC, an organization that is illegal in the United States. But it is this organization that sets the price for oil and that price can be set arbitrarily according to what the market will bear. So they could charge $200 a barrel and drive the cost of gasoline to $20 a gallon if they chose. So if the oil companies are behind this and they are only after bigger and bigger profits why don’t they set the price higher? Outside of what it would do the world economy, the reality is that the oil companies don’t control the price of gasoline.

So what about those HUGE oil profits that Obama and Hillary want the congress to take (steal) from these oil companies who are gouging us at the pump. No one seems to have actually looked into these HUGE profits and oil company profits have historically run between 7% and 12%. These irresponsible calls for robbing the oil companies on the basis of their ‘OBSCENE” profits are simple demagoguery.

But what about those OBSCENE profits the oil companies are making?. A little perspective seems to be in order. Speaker of the House Nancy Pelosi (D) calls oil company profits obscene and at first blush many – if not most people – agree. Over the past 12 months, for example, ExxonMobil has made pre-tax profits of $164 billion on sales of $369.5 billion. That’s a lot, but is big oil company profits behind these increases in pump prices?
First, Big Oil can't dictate gasoline prices. Markets determine the price of oil. It's supply and demand that sets the price at the pump. So what you pay at the pump is the market price not a price set by the oil companies. This issue was resolved by the Supreme Court decision last year when they ruled unanimously that oil companies have not been colluding to set prices.
So once again I say that oil prices are high today because the economies of huge nations like China and India are developing rapidly. More oil is being demanded in the world market and there are few new sources of supply, like ANWR or the California Coast. Also if you remember Hurricane Katrina destroyed a lot of oil processing capacity around the Gulf of Mexico so not surprisingly less oil is being processed. .Econ 101 tells us that when less oil is supplied, gasoline prices rise. WOW – what a concept!!! Do you think any of the liberal community has grasped this simple fact or are they ignoring it in hopes of getting a vote??
But let’s get to the nub of the matter. What does the average oil company get out of your $4.50 gallon of gas – ten cents!! The federal tax on gasoline (hello Obama and Pelosi) is nearly twice that (18.4 cents) but then the states get a share also. The price on a gallon of gas in New York is 68 cents and roughly the same in California but virtually every state gets a cut larger than the ten cents the oil company gets. Do any of these politicians call for a reduction in taxes on gasoline – don’t bet on it. That would reduce their income because the government feeds on tax revenues so they want to take more from you and from business – especially oil companies and their “windfall” profits.
So if Exxon made $369B in revenues and $164B in “profits” where did the money go? Well there is a difference between gross profits and net profits. Exxon must spend billions on exploration, billions more on development, and further billions on refining and transportation. When all of these operating costs are figured in those OBSCENE profits evaporate pretty quickly. So when you actually examine where the money goes it becomes evident that these oil companies are hardly making money hand over fist. In fact earnings at Exxon rose 9% last year but fell 4% in the fourth quarter, underscoring the challenges of rising costs and lower commodity prices. The reality is Exxon's profit margins are only 10.7%, while profit margins at Microsoft, on the other hand, are 26% -- so who is gouging whom?
Perhaps we should pass a windfall profits tax on software companies because what the liberals want with their windfall tax on oil companies is to fund the search for alternative sources of energy, such as ethanol and nanotechnology. But when John McCain offered $300M as a reward for anyone who could come up with a viable electric battery operated or other viable alternative he was scorned. The reality is the liberals love throwing money around on in federal research grants to create alternative energy sources and satisfy the academics who live off of those research grants and vote liberal. So given that these giveaway grants are to be used for alternative sources of stuff why shouldn't Uncle Sam give grants to:
• Dell… to create more powerful computers?
• Boeing… to build faster aircraft?
• McDonalds… to make low-fat French fries that taste good?
This won’t happen of course because companies are profit driven and will do better on their own. A little less demagoguery about big oil would go a long way to solving the energy problem. Trust me, we will have alternative energy sources eventually. Many scientists believe that near incredible advances in nanotechnology will allow us to solve all our energy needs with solar power within 20 years.