Posted by
Andrews on Saturday, May 24, 2008 9:30:19 AM
I am always amused when I hear how incredibly well the oil companies are doing, and how their profits are so exorbitant.
First, let me say that the world price of oil rose for a simple reason, a massive increase in world demand. This increase has helped the oil companies in their capacity as oil drillers. I have seen various numbers but it appears they do drill for about 40% of their oil, and in this regard their profits have risen. However, I don't understand why this is a bad thing. If someone would pay you $10 for your work and another would pay $20, would you work for the $10 offer to keep labor prices from being "too high"? Of course not. So why should oil companies sell below world market prices? Or if they use that oil to produce gasoline, why would they want to sell it for less than they could get by selling the oil on the world market? That would be malfeasance toward their shareholders.
Second, "big oil" buys about 60% of their oil on the world market. Though prices have risen here, it still appears on paper that they made a huge profit, but that is, in part, an artificial profit caused by accounting rules. Accounting figures profits on purchase cost, not replacement costs. So I buy 1 million gallons of oil at $1, prices rise over the following month, so I can sell it for an average of $2 per gallon. On paper I made $1 per gallon. But, in reality, the replacement cost is now $2 per gallon, so, despite my paper profits, I have actually just managed to break even. There are good reasons for the accounting rules, and they do provide a consistent way to measure profits and losses, but that doe snot mean that the numbers accounting principles produce can always accurately reflect reality*.
However, all of this really doesn't matter.
As I wrote before, if anyone thinks oil companies are making "unfair" profits, all they need to do is buy stocks. All of the companies making up "big oil" are publicly traded. If you think they are turning huge profits, buy some shares and enjoy those "windfall profits" yourself. Of course, it appears that stocks have been stalled or dropping over the past year, which suggests these "obscene profits" are more in the imagination of demagogues than in reality.
All of this is amusingly reminiscent of the 1970's. All the meaningless congressional hearings and investigations. Since the 70's every aspiring populist congressman has investigated "big oil" and every time they have found the same thing, oil companies are big, but their profits are actually a bit low on average. No windfall profits.The idea that "big oil" is some hugely profitable enterprise is a myth created by tax hungry politicians and anti-industry demagogues, nothing more.
In closing, let me ask one more question. To those who would confiscate "windfall profits" from an industry, would you be willing to pay them back the same percentage whenever they suffer "windfall losses"?
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* I was very briefly an accounting student and even earned a few dollars tutoring in accounting. However that was a long time ago, so I am not as current on accounting rules as I would like. So if I am wrong and the SEC allows oil companies to use a different accounting system for costs of production, please let me know. As far as I can recall the SEC was pretty stringent in their demands that corporations follow conservative practices. And I can't imagine, after Enron, that they have become more lenient.
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NOTE: The 40/60 split between production and purchase is not a precise number. I have seen too many differing figures to be able to identify the "correct" number. 40/60 seems a good compromise. Please do not tell me that these numbers are "wrong", I am aware they are at best an approximation. Even if the numbers were 60/40, or 80/20, the argument is the same.