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!
Envirowhacko obstructionists do, however...
He gives an excellent summation of the issues.
Great article. Of course the Libs will just put their hands over their ears and go, “LA LA LA LA LA, I CAN’T HEAR YOU.”
No more so than Sears and Roebuck. They exist to earn profits. They do that by filling a need.
Democrats WANT the high prices, everything they do is causing higher energy costs. Americans and republicans in particular are stunningly stupid. The democrats view oil like cigarettes - they want the money from it in taxes and they want to make its use more painful. It's deliberate.
Imagine the $$ that could go into our own economy, including taxes, if we would just allow the use of our own resources.
Excellent article and totally out of the grasp of a liberal mind.
MYTH: Oil and pipeline companies are charging unfair gasoline prices.
REALITY: Crude oil is a fungible commodity that is freely traded in the world market. Therefore, oil companies do not set the price, markets do. As crude oil goes up in price, so too does the cost of refined products, such as gasoline.
When the supply of resources gets tight and demand increases, prices will also increase, just as they do for other commodities. For instance, the price of oranges increases after there is a big freeze in Florida.
The US may apply ‘demand economics’ to try to limit the price of fuel, but China et al has to participate too. The price is based on worldwide demand. If the US adopts the model to conserve fuel, it would make no difference in the price. The market would just move.
Prices are not repeat not going to come down. If the price fell, the ‘cheapest’ product would prevail. That’s why we’ll probably see $5/gal gas. (Some are asking for $8/gal just for parity with the EU. Others, $10 to punish ‘consumption’)
All alternative fuels are demanding a $5/gal price and oil needs to meet that level for them to maintain.
Those promoting such policies are ignoring the ‘unintended consequences’ such as a 42% fuel surcharge on all transported goods. Thus an increased price at the stores.
While ‘mass transit’ in urban areas is a good idea, we end up paying $10,000 a FOOT for a trolley in downtown Columbus. (One track!!) So no one believes the government can, by spending more on infrastructure, ’solve the problems’ that they themselves have created.
As far as developing more alternative fuels, the government hasn’t decided what the ‘Carbon Tax’ would be on this new product. (See Montana Oil Shale)
So, innovators aren’t taking the necessary risks with their capital for fear it wouldn’t be profitable. (See Hillary’s plan to seize profits) The progressives are so opposed to anyone ‘making a profit’. There is no such thing as ‘Free Market’ when they intend to control it all.
The author could also have mentioned that the US Government makes more on OIL in TAXES than the OIL COMPANIES DO!!!
Liberals are soooo stupid...they wonder why jobs have gone overseas....well gee...ya think maybe it's all the taxes and regulations here???? Libeals are Economic IDIOTS!
The Dem business ‘model’
Every “business” (a vehicle to make money) has a product.
The product of the left is to manufacture and market a “problem”, that they can then “sell” (for donations)by yelling “crisis”!
If a real solution came along to answer their “problem”, they would be out of “business”.
They both do. Who do you think is doing the “speculating” which experts have estimated has added $40-$50 to a barrel of oil? I’ll give you a hint, unless you are willing to lose EVERYTHING, you have to be prepared to take delivery on the oil when futures come due. Who do you think is in a position to take delivery on such vast quantities of oil? Oh that’s right, the oil companies.
I don’t think Americans are stupid...........but they are lazy. We want the government to do everything.....and by so doing, the government wants “everything” and our people never take the time to question them. Until this happens, things will never change.
“Does ‘Big Oil’ deserve our scorn?”
No but Big Education certainly does.
Check out the soaring cost of “higher education” over the past 8 years.
“Does ‘Big Oil’ deserve our scorn?”
No but Big Education certainly does.
Check out the soaring cost of “higher education” over the past 8 years.
Bingo! A community activist would sleep under an interstate overpass if the average city was a happy place.
I wonder if European oil refiners are painted with the same “obscene profits” brush as American— we know the gas over there has been five to eight dollars a gallon for years. That mark up can’t be ALL taxes— or can it?
Great article, the MSM will probably never understand as to get it right.
ping
ping
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