Price Gouging: Quit Whining Already!
- ChipThe latest round of sniveling has been fostered by the announcement of profit increases for the major oil companies recently. Despite steady decreases in gas prices in the Charleston area, local talker Casey Bartholomew set my blood to boiling with his nonsensical arguments yesterday on his afternoon radio show.
He was going on and on about ExxonMobil reporting a 79% profit. It's not a 79% profit, it's a 79% increase in profits. According to Casey, this is making people choose between feeding their families and putting gas in the car. I think, most likely, that people can find more frivolous items than 'food' in the family budget to eliminate when the dollars get tight. Maybe I'm the nut.
First of all, most companies operate based on a profit margin. They have shareholders to please. It's no different than an individual investor. If you invest your money, you expect a certain amount of profit for the risk you are taking. If you invest the vast amounts of money that oil companies invest, you have a right to expect to make a profit. How much is fair?
I know, that's for the third quarter of 2004, but the basis is the same. Margins are currently a bit higher, perhaps 8 to 9%, not high compared to, say, banks. And part of the reason they are higher is because wages and fixed expenses don't grow as a function of oil price. Also, most of these profits will need to be reinvested to pay for oil rig and refinery repairs.
- ExxonMobil- 8.9% after tax margin
- Chevron- 7.5% after tax margin
- ConocoPhillips- 6.71% after tax margin
- BP- 5.52% after tax margin
- Valero- 3.65% after tax margin
- Sunoco- 2.19% after tax margin
- Amerada Hess- 4.78% after tax margin
Casey also forgets that oil companies themselves do not directly determine either oil or gas prices. Oil prices are determined by futures traders, bidding on contracts to purchase oil from producers. Gas prices are determined by distributors, who must balance supply with demand. The method for doing this in a capitalistic economy is by raising and lowering prices. In the event of sudden decreases in supply, prices must be increased to reduce demand. Why reduce demand, you might ask? In order to preserve supply. This, of course, is a bit altruistic. There is a component of greed involved, but the market corrects for greed fairly quickly.
It can also be postulated that gas prices in lowcountry South Carolina didn't go high enough. I drove past several gas stations that ran out of gas completely. This indicates that they held gas prices too low, and as a result they were unable to adequately balance supply. Not that I wish gas prices had gone higher, but if I had needed gas badly enough, I would have preferred to have the option of paying a higher price over not being able to buy it at all.
UPDATE: My brother Jake brought up an excellent point, one that I completely ignored. Another good effect of higher oil and gas prices has been a renewed push for new sources of energy and more efficient uses of our current energy sources. Wal-Mart, bane of the left, is one of the companies leading the charge. I've also read stories of Wal-Mart converting some of their fleet to run on biodiesel, but at the time it is mostly speculation. That would be great for the agricultural industry.
My worry is that too many politicians and talking heads will demagogue this issue, and any progress will be quashed by people more concerned with political influence than actual progress. Taking profits from oil companies signals to anyone looking to develop new technoloigies that they better not be too successful. I don't think that is the method we should be sending.
UPDATE 2: Larry Kudlow, certainly a name with more credibility than mine, makes me seem brilliant.
