Tuesday, September 13, 2005

Exxon Mobil: Massive Gouging

Exxon Mobil posts a $10 billion profit this quarter. $110 million a day. Boy, howdy, thank you Republicans for those much needed corporate tax breaks in the energy bill. I don't know how these guys would make ends meet without it!

19 Thoughts:

Blogger pawlr said...

Lets see how much this corporate welfare helps the economy.. how many jobs will $3/gal create? Lets start counting backwards, shall we?

Tuesday, September 13, 2005 6:01:00 PM  
Blogger A.T. said...

You haven't yet asked any relevant questions, Pawl. The relevant questions are: what are the current vs historic annual profit margins? How does this compare to other oil companies? To what degree is this profit margin accomplished via oil/gas versus other products and services, current vs historic? To what degree is this seasonal - i.e., how much of annual profit is dependent upon summer months, in which prices go up (w demand) per long-running market history? What effect do OPEC decisions have on Exxon's profitability?

This other stuff isn't economics, it's just dishonest political rhetoric that doesn't help anyone.

Tuesday, September 13, 2005 6:39:00 PM  
Blogger pawlr said...

Ah! Allen, thanks for coming over to defend Big Oil by asking the tough questions. Heaven knows they need it.

Since you raise them, perhaps you'd like to answer some of them for us, although the dramatic recent rise in the Year Over Year stock price of all Big Oil companies clearly show that their profits have moved into the "obscene" category. The AMEX Oil Index, a basket of 12 oil industry stocks, has surged 63 percent in the last year. The top oil companies have also seen standout results - Dow Jones industrial Exxon Mobil Corp. has risen 30 percent, Chevron Corp. is up 27.5 percent and ConocoPhilips has gained nearly 70 percent over the last 52 weeks.

Explain to me, as well, why the current tax structure was so hurtful to Big Oil in this context -- ExxonMobil alone set record profits in 2004. Based on these numbers, it does it honestly seem to you that they suffered so greatly that they needed $14.1 billion in total tax giveaways (only $1 billion or so was for conservation incentives)? Be honest.

Tuesday, September 13, 2005 7:03:00 PM  
Blogger A.T. said...

Ha! Come on, Paul, you’re above this aren’t you? YOU are the one accusing Exxon Mobil of “massive gouging”; shouldn’t YOU be the one to actually back up your own accusation with evidence?? Since when do accusers get to make accusations with no evidence and then declare the accused party guilty unless they provide exculpatory evidence?? [ … OK … let’s forget the Bush Guard Memo … and the Downing Street Memos … we wouldn’t want to declare this a Left Wing M.O., would we?]

But seriously, you chastised me a few weeks back for using a slippery slope argument, deeming it in violation of some rule of rhetoric. How much more fundamentally bogus is an argument with no relevant evidence?

My intent is not to defend Big Oil, only to point out the fallacy of your argument. Well, it’s not even much of an argument, just a declaration. I have no motivation to defend or attack Big Oil; indeed you may be right in your claim. But who can tell – you’ve presented nothing meaningful for evaluating the level of current profit margins.

And am I reading this …

http://finance.yahoo.com/q/bc?s=XOM&t=3m&l=on&z=m&q=l&c=

… incorrectly? (Hopefully not, lest my MBA brethren heap mocking scorn upon me.) The most recent quarter, which you deem egregious, was completely flat until the hurricane disaster, at which point the value spikes a meager 3-4%. This is a basic market dynamic reaction (lower supply with same demand = higher price) and hardly – on its face – tied to Administration policy.

Not that stock price proves anything about profitability anyway. In that regard, it’s strictly circumstantial. Hence the relevant … one might even say “reality based” … questions I provided which deal with profit margin trends and external market forces.

Tuesday, September 13, 2005 8:40:00 PM  
Blogger pawlr said...

Allen - actually the 3m graph you're citing supports a much more damning argument that ExxonMobil, at least, is directly profiting from Katrina. As you say, the stock price is flat until Aug 30, when it jumps over 62.

More germane to my original argument is the 2y graph for ExxonMobil, which shows a > 50% rise in stock price over the last 2 years. And noone requires an MBA to know that the most common reason for a stock price rise is: profitability, or a rising expectation of future profits (dot.com fantasies aside).

Tuesday, September 13, 2005 9:14:00 PM  
Blogger pawlr said...

Sorry, I duplicated the 3m graph. The 2y graph is here

Tuesday, September 13, 2005 9:25:00 PM  
Blogger A.T. said...

No, Paul, you're missing the point completely. Your claim ...

"Exxon Mobil posts a $10 billion profit this quarter. $110 million a day. Boy, howdy, thank you Republicans for those much needed corporate tax breaks in the energy bill. I don't know how these guys would make ends meet without it! "

... was that Republican corporate tax breaks created a price-gouging scenario.

How in Hades does this...

"Allen - actually the 3m graph you're citing supports a much more damning argument that ExxonMobil, at least, is directly profiting from Katrina. As you say, the stock price is flat until Aug 30, when it jumps over 62."

... relate to corporate tax breaks? It doesn't. Now, you're talking Katrina. Or something. I'm not even sure what you're trying to say at this point.

Other than you don't like Big Oil. That would've been a more sensible and consistent post. Just post "I don't like oil companies." That way, it's more straightforward that you're merely communicating feelings, so that you don't provide an argument with unsubstantiating non-evidence.

And how does this stock price show that they are profiteering off of Katrina anyhow? Stock price is THE MARKET, not THE COMPANY. People ... normal people (and their stock market representatives) ... realized that the price of oil would increase or perhaps not see the normal end-of-summer decline, so they invested. Are you, then, criticizing people for making this investment?

And your point about profitability is overstated in its correlation to stock price. True, a company that increases in profitability will likely enjoy an increase in stock value. But there are other reasons - many other reasons - why stock value may increase. Even something like a perceived increase in relative-stability will cause an increase in stock value, even though the company may have shrinking margins.

Consider Best Buy (BBY), for example. http://finance.yahoo.com/q/bc?s=BBY&t=1y
Oh, how I wish that I invested in Best Buy 12 months ago. That's about a 40% increase in stock value. But the margins on consumer electronics are ridiculously thin and remain so. There are hundreds of similar examples.

Your argument here just doesn't hold water. Now, if you actually demonstrate the gouging with relevant financial data, then I'll agree with your argument. For now, you don't have one.

Tuesday, September 13, 2005 10:37:00 PM  
Blogger pawlr said...

Allen - Lets get back to basics, maybe we can find some common ground here, or at least clarify what we're talking about. By saying oil companies "gouging", I am claiming that oil companies are charging consumers (and other businesses) more than they should (more than is necessary for them to operate at a reasonable profit). If you believe that any business should be allowed to charge as much as they want, even in a monopoly-type situation, then you'll probably never agree with me that "gouging" is going on, since how could companies charge an unfair price if that's what makes them the most money? So if that's what you believe, we probably don't have much to discuss here.

The situation currently in the U.S. is that a handful of oil companies control a large majority of the gas/oil distribution. Prices, although they vary regionally, rise more or less together. There is no meaningful competition between energy suppliers within the typical buying radius of the consumer. I can choose to drive less, or get a Prius, yes, but if I rent or own a coop I cannot choose not to heat my house or apt. in the winter (this is actually when energy costs are highest). The cost of gas passed on to shipping prices means that inflation takes hold across an economy, if other companies cannot increase productivity to compensate. This is a realistic, completely uncontroversial assessment of what it means to be a consumer of refined oil products in any industrialized country.

Now typically, when supply costs rise, profits do not. So if OPEC charges $65 per gallon, it is reasonable to expect that cost to carry over to the consumer at the pump. That, by itself, is not gouging, it is simply raising prices to cover costs.

What indicates gouging, to me, is that the profits of major oil companies have risen mightily over the last 2 years, _concurrently_ with the rise in the cost of unrefined oil supply. If you need more evidence than just a stock graph to see that, I can certainly look it up. But what I've seen so far is that Big Oil is not just passing their costs on to the consumer, they're increasing it.

Tuesday, September 13, 2005 11:18:00 PM  
Blogger pawlr said...

Correction to the above: I meant "$65 per barrel".

Wednesday, September 14, 2005 2:02:00 AM  
Blogger A.T. said...

And I pretty much agree with all of that, except that you've never demonstrated an increasing profit over time, given a same product distribution footprint. Just a one quarter profit, which - in and of itself - doesn't tell the story you claim.

It is the equivalent of saying "New York City is irresponsibly overcrowded - it has 10,000,000 people!" Well, 10MM is an impressive number, yes, but it doesn't mean the city is overcrowded. It may or may not.

[And, no, I don't know what the actual population of NYC is.]

Wednesday, September 14, 2005 7:14:00 AM  
Blogger Demotiki said...

Paul,

Your patience astonishes me. I thought it was your girlfriend who worked with autistic children?

Just as an aside, remember that Big Oil was "losing" so much money because of Katrina, that the administration removed the emissions standards for gasoline, saying that the measure was designed to help big oil to "remain profitable in a difficult environment."

Andrew

Wednesday, September 14, 2005 8:13:00 AM  
Blogger A.T. said...

So ... "autistic" is an insult for you guys? I'm afraid that the relevance and maturity level of this blog seems, at times, to be in serious decline. Most unfortunate.

And, as usual, Andrew has added a great deal to the debate. Facts? Arguments? Reason? Feh! Who needs em?! Not the Left apparently...

Wednesday, September 14, 2005 10:07:00 AM  
Blogger Demotiki said...

Allen,

You don't know how to argue, I doubt if you even know how to think. You are a brainwashed moron who believes what he is told to believe by his masters. Wake up, your country needs you to live up to your responsibilities. Don't be dead weight.

Autistic is not an insult, it is mearly descriptive.

By the way, you were a nasty little brat when I posted on your site. Stop trying to pretend that you are the Duke of Queensbury.

Andrew

Wednesday, September 14, 2005 11:08:00 AM  
Blogger pawlr said...

C'mon Demo, is it necessary for you to be so nasty? I consider Allen a valued contributor no matter how much we disagree.

Why can't we all just get along?

Wednesday, September 14, 2005 1:37:00 PM  
Blogger Kyahgirl said...

Butting in, I actually thought you guys were having an amazingly polite debate and working your way around to some kind of understanding. Patience and fairness on both sides. Challenge, rebuttle, etc.
Just an observation.

Wednesday, September 14, 2005 4:47:00 PM  
Blogger pawlr said...

Here's a pretty informative, recent .pdf of a Congressional Research Service Report on Big Oil's profits. According to it, not only has their stock price increased over the last 2 years, but their profit margin as well. From August 2005.

Wednesday, September 14, 2005 5:02:00 PM  
Blogger A.T. said...

This is indeed a pretty interesting report. I can't honestly tell if actions rise to the level of "massive gouging." If I translate their profits on revenues into simple margins, here's what I get:

Major Corps, profit margins, years 02, 03 and 04: 4%, 7%, and 7%

Exxon, profit margins, years 02, 03 and 04: 6%, 10%, and 8%

All the other major companies' margins are similar, except - for some reason - Occidental, whose margins for the same period are enormously higher: 17%, 18%, and 22%. I have no idea why.

Even though the increases are there (although the 04 decrease for Exxon may be puzzling), these single-digit margins don't strike me as obviously high. Someone more interested in financial analysis could glean much more, I'm sure.

The report did have some interesting tidbits:

"Total revenue growth for 2004 compared to 2003 was 35% for the group, which
was less than the 44% growth in net income, suggesting that possibly the greater
profitability of the major oil companies in 2004 did not arise solely from the higher
price of crude oil. Compared to 2002, revenue growth for 2004 was approximately
70%, less than the 175% growth in net income for the same period."

"Since oil price increases began in 2004, the oil industry has earned increased
profits. These profits might have resulted from other factors in addition to the
increased price of oil. A key factor in increased profitability might be the tightness
in the U.S. gasoline market, a factor related to the lack of enough refinery capacity
to meet U.S. demand for petroleum products."

"If oil and petroleum product prices are to decrease, supply will likely have to
increase relative to demand. Expanded supply results from investment in the various
stages of the oil industry production process, from exploration and development of
new oil fields to increased refinery capacity. If the underlying economic parameters
and the regulatory environment are not encouraging, investment might not be
undertaken. Historically volatile prices and profit levels coupled with a tight
regulatory environment contribute to industry uncertainty."

"Other legitimate uses for earned profits include paying higher dividends and
retiring outstanding shares, acquiring assets through merger and acquisition, and
investing in new product areas. These uses of profit may benefit shareholders and
strategically position the firm in the global market, but they do less to expand the
supply of oil and products on the market and thereby reduce prices for consumers.
As a result of significant time lags that tend to occur in the oil industry, it may
be too soon to know whether or not investments in the industry, if taken, will result
in the increased supply of oil and petroleum products needed to reduce prices and
consumers’ costs."

and lastly...

"Profits in the oil industry have been volatile over the past three decades,
reflecting oil price changes as well as other market effects. For example, net income
for the major energy companies, as defined by the Energy Information
Administration (EIA), increased almost threefold by 1981, compared to 1977, on the
oil price increases associated with the Iran-Iraq war. By 1986, net incomes of the
major energy companies had sunk below 1977 levels. Profits peaked and declined
at least three other times during the period 1987-2002.5 Volatility in the price of oil,
which leads to volatility in profits, makes investment planning risky. Investments
which might qualify for implementation if a high oil price is assumed may not qualify
if a lower price of oil is assumed. This uncertainty may have contributed to the
cyclical nature of investment and capacity expansion in the industry."

All of which is to say that it seems that, yes, prices have increased beyond that which would be *forced* by economic realities. Some of the price increases would seem to be, then, optional in nature for profit increase. It's too soon to tell how the increased profits will be used, which would probably be what you're interested in understanding to determine whether it is not "legitimate," and thus, presumably, "gouging." Finally, given the described significant fluctuation in the profitability of oil over the last 30 years, it is also unclear to what degree the increased profitability is the result of thinking such as: "we better get our profits while we can, because the profitability is unlikely to be there X years from now."

I, for one, find these results inconclusive. But interesting, to be sure.

Thursday, September 15, 2005 7:10:00 AM  
Blogger pawlr said...

Allen, based on this single report (which I have little context for, I just found it out there) I guess its a little excessive to claim "Massive Gouging". What still seems absurd - and was the main point of my post - is the tax policy in the 2005 energy bill.

Seriously, I could *possibly* see the benefit of using people's tax money to aid a struggling or failing industry (car manufacturers, airlines, even S&Ls). But to offer the kind of giveaways in the latest energy bill to an industry that is by no means either struggling or failing seems like completely squandering the people's money. This was my original point - aside from the inflammatory title to the post - that I was trying to show: why is such corporate welfare being offered to support what seems like a thriving industry?

Note also that the reports demonstrates the high number of M&A activity in the '90s, which have resulted in the consolidation into 4 main large companies (and the revenues of 9 far exceeding that of the others).

At its end, the report mentions the necessity of offering "incentives" to encourage oil companies use their profits for upstream capital investment. Perhaps this is how Republicans sleep at night - consoling themselves that doling out people's money to successful companies like Big Oil will somehow come back to their constituents in the form of more and better jobs.

But this type of tax investment doesn't make sense to me at all, because especially with globalization, how can you trust a corporation to aid a specific nation's population when their options are so diverse: investing the money (even hiring) in other countries, buying up another, smaller company, doing stock buybacks with excess capital thats offer higher dividends (to lucky stockholders).

What the energy bill is doing is actually "throwing money at a problem", a heck of a lot more so than using people's tax money to help schools and build the infrastructure of the country.

The larger context for these giveaways is that only 6-10% of them are conditional on helping wean the country off of the teat of fossil fuels altogether, but that's a whole different story and most definately a post of its own.

Thursday, September 15, 2005 9:04:00 AM  
Blogger Doug said...

Hey, all:

I think this was a good debate, and there's no need to get personal and nasty...

Dug

Friday, September 16, 2005 4:24:00 PM  

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