The Liberal Lie, The Conservative Truth

Exposing the Liberal Lie through current events and history. “Republicans believe every day is the Fourth of July, but the democrats believe every day is April 15.” ****** "We will always remember. We will always be proud. We will always be prepared, so we may always be free." RONALD REAGAN

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Two Reagan conservatives who believe that the left has it wrong and just doesn't get it!

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HISTORICAL QUOTE OF THE WEEK - "Always bear in mind that your own resolution to succeed is more important than any other." ABRAHAM LINCOLN

Thursday, April 27, 2006

THE BIG BAD OIL COMPANIES

The out cry because of high fuel prices have demonized the big oil companies especially since they are reporting, "record profits, " in the last few quarters. This oil company profit debacle is fueling, (no pun intended), action in Congress to investigate oil companies for price gouging and fixing and talk of a windfall profit tax is still in the mix. Yet in the fuss over , "big oil's, " profits has anyone bothered to look at any comparisons concerning profit margin and revenue ?
At random I took the profit margin as opposed to revenue of Exxon/Mobile, Centex Homes and Microsoft to make a comparison that reveals an interesting statistic that is being left out of the story concerning oil companies.

Exxon/Mobile $100.72 billion in revenues - $9.92 billion profit or about 9.85%

Centex Homes $ 4.55 billion in revenues - $375 million profit or about 12%

Microsoft $11 billion in revenues - $3.38 billion profit or about 30%

Again with a random selection of companies the profit margin compared to revenues for Exxon/Mobile are considerably less than Microsoft and more about 2 % less than Centex Homes yet no one is complaining or considering investigating either company because of record profits. Just like everyone else I do not like the cost of fuel especially when I fill up and as everyone else it dips into the family budget. This does not mean that I am opposed to any American company making a profit. That is what a free market system allows so that any company that continues to make a profit can expand business, its workforce and improve or explore for new product. The oil companies are no different. Yet the cry is to punish oil companies with investigations and taxation on the profits which will be passed on to the consumer with even higher fuel cost. The belief that the oil companies are gouging is ridiculous. Consider this. In a free market economy that is based on consumer spending which drives prices in the market why would oil company executives get together to raise fuel prices in conjunction with one another ? The actual reason for the cost of fuel is that for the first time in our oil consumption history demand is greater than the supply. The refining capabilities which have not been increased in 28 years though demand has increased tremendously in that same period cannot keep up with world demand for fuel. This creates a situation that allows the oil speculators to control the price of oil based on future supply and how demand will effect that supply. Additionally because of government and environmental regulation oil companies have not been allowed to explore for oil or increase refining capabilities to keep up with demand. Yet countries outside of the United States are doing just that in order to increase their share of the market. China for instance has cut a deal with Cuba to begin drilling in the Gulf of Mexico 75 miles off of the Florida Keys in some of the same waters that our own environmentalists lobbies have fought to keep this country from using. Will the Chinese and Cubans take the precautions that we do in order to protect the environment ? Their history says no. Both countries have a poor environmental record. Also the many different blends of fuel cause a disruption in the refining as refineries have to adjust and clean for the changes and the blends that are required for different regions of the nation.

Now back to the profits. Exxon/Mobile made a $9.92 billion dollar profit in the last quarter at a rate of 9.85 % or 8.5 cents per gallon. The United States government made 18.4 cents per gallon or 9.9 cents more per gallon that Exxon/Mobile which equates to a profit margin of approximately $20 billion dollars. Yet the government is not investigating themselves for this price gouging! This does not include state taxes which vary according to the state and are far more than even the federal tax per gallon. In the 70's and 80's when big oil was losing money the government never investigated why. Nor did they legislate to assist the fledgling companies which eventually merged with the larger ones causing a type of government induced monopoly since regulations and hampered ability to refine and explore for their product caused many companies to fold and even the larger ones to struggle. Additionally in the 70's the Carter administration increased taxes on oil companies and set a ceiling on prices. Oil companies are not the problem government and a greatly increased demand in the market are. The price gouging investigation will reveal the exact same results as it did in the early 90's when the Clinton administration investigated because of fuel surpassing the $2.00 per gallon threshold. They found no gouging then and will find no gouging now. The only result of government intervention during this fuel dilemma will be disaster just as it was in the 70's. The market will balance itself by early summer when refining capabilities will return to 100%. As far as the supply and demand that will depend on whether the relaxation of regulations continues and if the environmentalists lobby continues to have the hold on Congress that they have for 30 years. My prediction. Get used to gas prices of $2.50 per gallon or more, thanks to our ever meddling federal government.

Ken Taylor

19 Comments:

Blogger JasonSpalding said...

Have you ever looked at a map of gas prices in the United Stated based on county? Have you compared it to the results shown on a map showing the winning presidential candidate by county?

9:21 PM, April 27, 2006  
Blogger Rob said...

Your choice of comparison firms is ridiculous because oil is a basic commodity and houses and technology are not. If you compare oil firms to grocery stores, steel, paper, or utility firms you will find these firms all have lower operating margins:

Oil = 13%
Grocery = 3.8%
Steel = 10.6%
Paper = 4.1%
Utilities = 10%

Show me a basic commodity industry that has a higher operating margin. On top of that, oil firms are seeing their profits and their margins rising significantly.

There may not be gouging - we will have to see. However, Americans will pay high prices at the pump for years to come because oil companies have had no incentive to innovate and invest. The mega mergers have reduced competition and our government provides billions in subsidies and tax breaks to the most profitable firms in the world.

In the face of rising demand, how many new refineries have been built in the U.S. over the last 30 years by oil companies? Zero. By not investing in increasing capacity, oil companies have ensured that they will create the supply/demand imbalance that is in their favor - at the expense of consumers.

Ken, you make an assumption that there will be no disruptions in supply and hurricane-damaged refineries will come back online, so gas prices will fall back to $2.50. With hurricane season and the summer driving season still a month away, not to mention global instability and saber rattling with respect to Iran, I would argue that we are more likely to see $4.00/gallon than we are to see $2.50 this summer. One Gulf hurricane that takes out U.S. refining capacity could send gas prices even higher than that.

2:05 AM, April 28, 2006  
Blogger Mark said...

Today (4/28)is the one year anniversary of my blog. Be sure to visit on this special occassion.

8:48 AM, April 28, 2006  
Blogger Vern1966 said...

Conservatives like to point out, as well, that oil companies have not built more refining capacity because of environmental regulations. As if the awesome power of the environmental lobby were ever able to keep those poor little oil companies in check. I wish. But if increasing capacity meant that the cost of your product would go down, negatively impacting your bottom line, well then why in the world would you? Believe me, if they saw any reason at all to build refineries, big oil would have done so long ago.

10:54 AM, April 28, 2006  
Blogger Vern1966 said...

I don't agree with excise profit taxes. But these companies are reaping these huge profits on the backs of the taxpayer! Instead of taxing profits, let's just require oil companies to pay their fair share of taxes, and stop the incentives and subsidies.

And talk about the height of hypocrisy! Bush's speech calling for energy reform? Is he kidding? He's basically saying he'll take away some of the perks he just signed into law. And further gut environmental protections while he's at it. The heads of these oil companies were behind closed doors writing this administration's energy bill, and they were not required to be sworn in during congressional testimony. Yeah, let's trust 'em.

11:15 AM, April 28, 2006  
Blogger Rob said...

I am not for a new "profit" tax, but still believe there should be gouging investigations. If it is occurring the penalties should be severe. However, I am for taking back the tax breaks and cutting government subsidies will bring billions into the Treasury and the oil companies will still maintain huge profits.

The suggestion that we give oil companies further tax breaks is just crazy. First, there would be no obligation for oil companies to give that money back to consumers in full - they could keep some/all of it as profit. Second, that solution does nothing to solve the capacity problem. Oil companies have more than enough to invest in new refineries or build infrastructure to tap new oil reserves. They just choose not to. (ExxonMobil felt that it was wiser to give their outgoing CEO $400 million.)

It is not surprising because that is the essence of capitalism - maximize profits and shareholder value. I am not lamenting that, I am just stating a fact. There is no place for social fairness or consideration of the common good in capitalism, which is why we have government and tax policies.

12:40 PM, April 28, 2006  
Anonymous Anonymous said...

It is rarely reported but not only did they not build any new refineries they dismantled some 40 per cent of the ones that were in service. I have only seen this on one occasion a minimum of six years ago in the New York Times.

7:21 PM, April 28, 2006  
Blogger ablur said...

Great post. Accurate and well articulated.
Since these are publicly traded companies and beholden to their stock holders to net a profit, they did okay. When people make investments in a company stock their goal is to beat the banks and money market accounts. At the end of the day big oil just makes it. The average stock holder will only see about a 5% return.
Everyone keeps wanting to cast the oil companies in the roll of the villain. If we could supply our own crude we could cut costs. Yet, we can't drill in ANWR. We can't drill on the west coast. We can't drill off Florida, even though Cuba is planning on doing just that. We instead choose to buy oil on the open market mostly coming from volatile regions on our globe. We are funding the very ones who hate us by buying oil from their friends.
Nobody wants to lay blame on those who got us here.

12:40 AM, April 30, 2006  
Blogger Vern1966 said...

"Nobody wants to lay blame on those who got us here."

We got us here all by ourselves by not taking the need to explore alternative energy sources more seriously years ago. Do you think we just started developing alt fuel technologies yesterday?

1:40 PM, May 02, 2006  
Anonymous Anonymous said...

There are ALL sorts of unscrupulous games that led to the current oil/gas price fiasco: (1) lack of antitrust enforcement resulting in nearly zero competition; (2) collusion by the oil companies on price (nearly impossible to expose as big oil is extremely sophisticated at hiding it); (3) continued failure to mandate better fuel economy on vehicles and use of alternative energy sources that would have lowered demand and encouraged greater R&D into clean fuels; (4) tax credits/breaks to big oil (can you say bribery?); (5) failure to permit, if not to encourage, the building of new, larger and more efficient refineries. This is both a pocketbook issue and a HUGE political issue. The economy get dragged down by our oil addiction while limiting our freedom, e.g., we have to play nice with the likes of the House of Faud. Its been mishandled for decaded with NO relied in sight, though I must admit I was floored when I heard W. Bush use the words addicted and oil in the same sentence.

3:05 PM, May 05, 2006  
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