Who's to Blame for High Oil and Gas Prices?

Parent Cafe
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<p><a href=“http://finance.yahoo.com/columnist/article/yourlife/2973[/url]”>http://finance.yahoo.com/columnist/article/yourlife/2973&lt;/a&gt;&lt;/p&gt;

<p>Executives of the big oil companies have been hauled before the U.S. Senate recently to defend their industry’s recent mergers and record profits as American consumers face high oil and gasoline prices. I’m going to defend the big energy companies in this case, since I think they’re not the reason for high prices.</p>

<p>…That being said, I also know how a lynch mob operates. After all, if there’s a problem, some cause has to be found. And it’s really lovely if the cause can be someone rich and powerful so that we can work off our envy and also take the intoxicating drug of anger. Anger organizes our emotions, lines them up, removes ambiguity, and feels good.</p>

<p>So, the mob goes after someone to lynch, even if that person is innocent. After all, as the immortal Bob Dylan sang long ago, “A lot of people have knives and forks, and they don’t have nothing on their plates, and they have to cut something.” </p>

<p>This comes to mind because of the recent actions in the U.S. Senate that attempt to “crack down” on energy companies because the price of oil is so much higher than it used to be and because one large oil concern, Exxon (XOM), is reporting very large profits (after many years of modest earnings).</p>

<p>The only problem with this idea is that it’s based on a totally false premise. The energy companies don’t set the price of oil or of gasoline. The prices you pay for heating oil or gasoline aren’t set in boardrooms in Texas but in trading rooms at commodities markets all over the world.</p>

<p>Gas prices aren’t set in shadowy conferences in shooting lodges, but in rooms of people shouting or punching computer keys in London, New York, and Tokyo. Oil is a world commodity like tin or copper or rubber or coffee. The price is set by traders anticipating supply and demand.</p>

<p>Rumors of war in the Mideast, terrorism against oil platforms in Nigeria, warmer weather in New England, bitter cold in London – these are what set energy prices. Even the biggest U.S. energy companies are tiny pawns in the game compared with the world market, flotsam and jetsam in the ocean of world oil trading.</p>

<p>So, when prices go up or down, it’s not a conspiracy. It’s panic or confidence in the market. It’s just like what happens on the stock markets every trading day – greed or fear at work, not at the companies being traded but on the exchanges. The oil companies can either lose or gain from this trading.</p>

<p>I know this is hard news to digest because who do we hate then? </p>

<p>Well, some think we solve the problem by just hating and blaming the innocent – in this case, the oil companies, dragging them from their beds, and lynching them. So what if they’re innocent? Someone’s got to pay.</p>

<p>The only problem is that if we keep punishing the companies that in good faith give us the energy we need to power our lives at market prices – which sometimes give them a big profit and sometimes give them a small one – eventually, they’ll go away. Or they won’t have the ability to do their jobs as well because of all the restrictions we’ve put on them.</p>

<p>Never mind, some think. A lot of people have knives and forks, and they don’t have nothing on their plates, and they have to cut something.</p>

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<p>Nice post, Simba! However, start looking for your Teflon overcoat … the flames are coming. :)</p>

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<p>I blame China and India. They have the temerity to grow and modernize.</p>

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<p>Barrons. (I don’t hate him - in fact, we’ve never met! ;))</p>

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<p>What I don’t get is, if the “market” determines the cost of a commodity like oil, why is it that prices fluctuate (usually upward) immediately when there is not only a real cause (like a natural disaster which significantly reduces drilling and/or refining capacity) which would be acceptable, but also when there are “fears” of something happening – which in reality leaves the industry no worse off than before, at least until those “fears” are realized? Why must the consumer bear the burden for things that “might” happen? In those instances I can only think that the resulting rise in price is really greed disguised as “fear”. That is what angers the consumer.</p>

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<p>Simba, unfortunately your take is also simplistic. Capitalism is a complex beast. The statement:

is largely true, but not entirely. It’s not a question of “conspiracy” - evil men hudding in smoke filled rooms - but it’s not a pure “supply and demand” issue either.</p>

<p>Yes, the price of fossil fuels wil continue to rise. There’s a finite supply, the easy to get stuff has been gotten, and a develping world is using more per capita globally ever year. That actually doesn’t explain the profits of the oil companies, though, when you think about it. Consolidation of the industry through mergers does lessen competition, which allows an increase in profit margins at whatever the underlying price level is. </p>

<p>Make no mistake - big business will maximize profits - including using less than honorable or admirable means to do so - if not held in check. Cosolidation of control over a market sector becomes problematic long before an actual monopoly is achieved. I’m not knowledgible enough to know if that point has been reached in the oil business, but I am aware that consolidation has occurred and profit margins apprear to be rising. Those are danger signs, which congress should not ignore.</p>

<p>And by the way - “Hate, lynch, knives, anger, envy, etc” is pretty strong language. On the other hand: “in good faith give us the energy…” and

There was an interesting article in the paper over the weekend about how Bush uses the “some think” tactic in his speeches pretty regularly. You make an extreme statement - a straw man - and then ascribe it to “some” - i.e. unidentified people who disagree with you - and then state how you “disagree.” Even though this tactic has been successfully exploited by a prominent politician doesn’t make it a good way to state a reasoned opinion.</p>

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<p>Speaking of profit margins, they are certainly something that could and should be regulated. They are supposed to be a percentage of a company’s income that reflects a REASONABLE profit after expenses. If one accepts that premise then the obvious extension is that if the margins are increased, the profit becomes UNreasonable. Any reason why the margins should not be “set”?</p>

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<p>If you try to regulate proft margins you are in for a world of hurt. The accounting alone would kill you. Then who is to say that Microsoft should have a rate double or triple Exxon’s?? Leave that idea to France.</p>

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<ol>
<li> Would fail to reward efficiency</li>
<li> Would fail to punish inefficiency and waste</li>
<li> Would encourage corruption in setting margins and dishonesty in measuring profits.</li>
</ol>

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<p>Well, there is that little thing about oil spills in on the North Slope, undetected for 5 days because of lack of enforcement of regulations, found out becaues someone smelled something, the largest pipeline spill in the nation’s history:</p>

<p><a href=“http://news.yahoo.com/s/afp/20060314/sc_afp/usenvironmentoil_060314210557[/url]”>http://news.yahoo.com/s/afp/20060314/sc_afp/usenvironmentoil_060314210557&lt;/a&gt;
<a href=“Financial Express”>Financial Express;

<p>Guess where the money for an accurate leak detection system went. ;)</p>

<p>There is someone who wanted to drill in the wildlife refuge. I wonder who that someone might be.</p>

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<p>Don’t forget that business is cyclical. It wasn’t that long ago (1999) when oil was ~$10 bbl and US gas prices were $1.10 gal…oil companies were losing money big time, and it encouraged Detroit to crank out SUVs instead of better products, which is why THEY are losing money…</p>

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<p>Oh, okay, so let profits run rampant…</p>

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<p>Ummm, bluebayou - the oil companies had billions of dollars of profits in 1999. I don’t think SUV’s happened because Exxon and Chevron were losing money. </p>

<p>Leanid - it’s not one or the other. As I said above, when profit margins get really big - particularly in a commodity product - then government regulators should start taking a close look, to see if there is a growth of anti-competitive factors which artificially inflate prices. We may be there with oil, we may not - I’m not knowledgible enough to know one way or the other. But, yeah, “rampant” profits are, in fact, a danger sign. As with most things in life, there’s not a neat or simple answer.</p>

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<p>kluge - Profit margins or profits? Don’t you mean, when PROFITS get really big?</p>

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<p>Yes, companies like ARCO did have a small profit ($500 MM on $10 bn in rev) in 1998, but it laid off thousands and whacked R&D budgets to stay in the black. And, guess what, with smaller R&D budgets, less oil was found for the future…</p>

<p>Marathon NI=$300MM on $22BN in rev
Texaco NI=$800MM on $38BN in rev</p>

<p>Low gasoline prices encouraged Ford execs to spurn hybrid technology, whereas Honda and Toyota kept at it.</p>

<p>Don’t forget that nearly half of current ‘profits’ went into the US treasury for corp income taxes (46% tax rate when all is done). Given the size of the deficits, we need more companies making profits.</p>

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<p>bluebayou - good point about needing more companies with profits. But, what does it have to do with margins?</p>

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<p>gross margins-gross profts is just an accounting term for some specific industries…as far as I’m concerned, the only thing that matters is profits-net income before tax.</p>

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<p>Do you agree that if profit margins (which is the percentage of income realized as profits after expenses and taxes) could be kept level then the huge net profits (after taxes and expenses – the corporation would still pay the same to Uncle Sam) would not be as big. Rather, those excess profits, since they could not be above a certain % of income, would have to go into other EXPENSES like R&D and (egad!) employee salary and benefits? Given, of course, a benign corporate philosophy!</p>

<p>Am not sure what you mean by “profits-net income before tax”. Isn’t that “gross income”, or have expenses already been subtracted? Isn’t the profit margin applied AFTER taxes and ALL other expenses are accounted for?</p>

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<p>1999:
Arco: $1.5B profit on $13B revenues
Texaco: $1.2B on $36B
Exxon: $8.4B on $187B
Chevron: $2.3B on $37B</p>

<p>I’m sorry, but that’s a long way from “losing money” in my book.</p>

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<p>leanid:</p>

<p>every industry uses Gross Profits or Gross Margin in different ways. Under GAAP certain industries must account for items in a specific manner if they use the term Gross Margin. But, Gross Profit/Margin is usually a dollar figure which includes main operations of the company, but not necessarily corporate back office.</p>

<p>Take a clothing retailer:</p>

<p>Net Sales less Cost of Goods sold (pants, shirts, ties, etc) = Gross Profit</p>

<p>Now deduct Sales & Marketing expenses, Corp overhead/G&A, Other Income/Expense…net it all out and apply a tax rate. Of course, every industry is different.</p>