Posted on 05/08/2008 8:25:56 AM PDT by yoe
Exxon Mobil recently posted the biggest-ever annual profit for a U.S. company at $40.6 billion dollars. Outrageous — they gasp — consumers are obviously being gouged by Big Oil.
Let’s look at the facts. First of all, just who is “Big Oil?” Exxon Mobil, Shell, BP, Chevron Texaco, Conoco Phillips? Wrong! It’s the government-controlled national oil companies of Saudi Arabia, Iran, Iraq, Venezuela, Libya, Algeria, Nigeria, Russia, Brazil, China, etc. In fact, the privately held Western oil companies that most people associate with “Big Oil” control less than 6 percent of the world’s reserves.
Do these companies set the price of oil? Absolutely not! Since 1973, the price has been controlled by a cartel of Oil Producing and Exporting Countries (OPEC) through imposed production limits. Prior to 1973, the price of oil was also controlled by a cartel that imposed production limits — namely, the Texas Railroad Commission.
With the exception of Saudi Arabia and war-torn Iraq, most OPEC countries are already producing at maximum capacity. Oil supply for 2007 was 85.5 million barrels per day compared to a demand of 85.8 million barrels per day. What do you think the price of oil will be when Saudi Arabia (which hasn’t discovered a new major oil field in over 30 years) no longer has spare capacity?
At current demand, we (as a world) are consuming more than a billion barrels of oil every 12 days. That means we need to be finding a billion-barrel field (which are classified as “giants”) every 12 days — and we are not. It’s even worse in that the fields which we are discovering are technically more difficult to produce — i.e., they produce at much slower rates — meaning that we really need to find a giant field every three to four days. Ten years from now, $90-a-barrel oil may be something we could only wish for. Most economists treat oil as a commodity — just show up at the window with enough money and they’ll make more. Unfortunately, oil is a finite resource.
But what about Exxon’s “enormous” profits? Exxon is a U.S. oil company, meaning that it pays enormous taxes to the U.S. government on its worldwide income. The same cannot be said for Total Elf Fina (a major oil company almost in the same league as Exxon that is based in France). Most foreign countries do not tax on worldwide income (at least none that I can think of). If we are to impose an additional tax burden on the U.S. oil companies, what incentive do they have to keep from packing their bags and relocating their base of operations to a more tax-friendly country?
But isn’t Exxon charging excessive prices at the pump? Shouldn’t it return those profits to the consumer in the form of lower pump prices? Exxon’s profit margin is a mere 10 cents on the dollar ($40.6 billion dollars profit on $404 billion dollars of revenue). The absolute numbers are big because Exxon is big.
There are a lot of companies in the U.S. with operating margins well in excess of 10 percent. For example, as an independent consultant, I made 73 cents profit on every dollar of revenue last year. Are my profits excessive? Should I be hauled before Congress to justify my profit margin?
By and large, the price at the pump is governed by the cost of refinery feedstock (crude oil), which is controlled by OPEC. The rest is governed by operating efficiencies and market forces.
What happens to the independent refiner if Exxon sells its refinery products at less than its cost of manufacture? The independents couldn’t compete, would scream bloody murder, and would haul Exxon before the courts for unfair trade practices. The same would apply to other integrated oil companies that might have a larger proportion than Exxon of their business in the downstream sector (refining and marketing) as opposed to the upstream sector (exploration and production).
Should the government force Exxon to subsidize the price at the pump? Just look at the exodus of private oil com-panies from Venezuela as a result of what Hugo Chavez is doing.
Lastly, ask yourself this question: “Who is Exxon?” Exxon is not this amorphous entity, but a business owned by its shareholders. So the next time you find yourself complaining about Exxon’s excessive profits, instead of complaining, buy its stock. And when you hear presidential candidates lambasting Big Oil in their plight to get elected, rest assured that you are at least better informed.
— Shaun Hoolahan, of 801 Rickards St. in Opportunity, was born and raised there. He received a bachelor’s degree in petroleum engineering from Montana Tech in 1982, a master’s degree in engineering management from the University of Alaska in 1987 and is a licensed/registered professional petroleum engineer who has worked on oil and gas developments around the globe. Retiring in 2005, he returned with his family to Opportunity and formed a consulting business. This article was written during a layover at the Frankfurt (Germany) International Airport.
NO!!But BIG GOVERNMENT should!!
Those great enlightened free-marketeers, the Brits, just slapped another 2 p/litre tax on motor gasoline, too (roughly 8 cents/gallon).
This is an excellent article—thanks very much for posting it.
No.
Since Congress produces nothing and creates nothing, But makes three times as much on a gallon of gas as the oil companies, let me rephrase that.
HELL NO!
If there is any critique of big oil, it should be that they are too vertical as companies. That is, they lack business diversity. It makes them fragile.
If they want to limit themselves to the energy sector, there are several major ways they could go, none of which involve typical alternative energy.
For example, they could design, build and launch an unmanned dust mining robot on a spaceship to the moon. Its purpose would be to sweep up dust, heat it until it releases Helium-3, then concentrate the He3 and send it back to Earth. Just a few ounces of He3 would pay for the whole program, and they could send back pounds of it on little space probes, just leaving the mining robot behind to continue to work.
Alternatively, they could develop a means to harvest the great undersea methane ice deposits. Not only obtaining a huge amount of methane gas for sale, but also clearing the oceans of this hazardous disaster waiting to happen.
It just takes creativity, but would serve big oil in the future by making their business stronger.
NO!
Agreed. I believe in Capitalism and it is Capitalism that makes all of us wealthy.
Sadly too many of our elected pander to the 50% of this nation that are too stupid to understand how Capitalism brought such a high standard of living in this country.
Of course not, doofus!
But 80% is close enough!
Socialism, government by the incompetent is the enemy everywhere enabled, of course, by government.
Did you know that governments everywhere at all levels get perks and bonuses to protect them from the consequences of odious laws that apply to the rest of us?
Fix that one problem, and the others sort of disappear.
Also, sadly, looting the country is not yet a crime.
When any politician goes into "public service" with a total worth of under $500,000, and leaves government service years later and is worth $100,000,000, a monumental crime has been committed, and the punishment so far is non-existent.
Think about it.
China is investing $2 billion in Venezula’s oilfield and is building a new refinery in China to handle that glop. Other major contractual items.
So how much money per gallon does an oil company make? How much money per gallon does the federal government make?
I don't buy it...
I don't have to buy oranges but I must buy gas to get to work and heat my home...And industy must by petroleum to operate and produce plastics, etc...
There is not and has not been a shortage of oil...
It costs the Saudis about two and a half bucks to get a barrel of oil out of the ground and onto a boat...
It's said that 'speculators' BID the price of oil and that's where the high cost comes from...That makes no sense either...
When you bid at an auction, you walk away with the prize...Supposedly in the oil business, the loser still gets the prize as well...All that he wants...So what's the point of bidding against each other??? There is none...It's a scam to keep the prices rising...The oil producers love it...The stockholders love it...
The price is based upon 'whatever the market will bear'...As long as the people will bend over and take it in the rear, the price will climb...
The oil company makes about 10 cents per gallon (and then pays taxes on it, I believe)....and the government makes about 30 cents......
What is outrageous is that the Saudies are making a 5000% profit on the oil they pump. THEY ARE ACCUMULATING OUR DOLLARS FASTER THAN WE CAN PRINT THEM! Soon they will be able to buy our entire country, just because we we too stupid to drill for our own oil.
Read this article.
As I understand it, anybody can invest in oil futures. Then, when the futures come due, they can presumably sell them back to the oil companies so that they won’t have barrels of oil sitting uselessly in their backyards.
Sure, you can sell them to the oil companies, for 0.000001 pennies on the dollar as the oil company has you “over a barrel”
=)
Bingo. Then, the guv'ment subsidizes all of the low income families and the rest of us have to pay full price.
No, 'Big Oil's' Big Owners do.
Envirowhacko obstructionists do, however...
Depends on the state.
The governments make three to five times as much.
Actual figures by state are easily found on the web...
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