Last week, I got into a heated argument with a few Democratic friends who were complaining about Exxon’s “obscene” 2006 profit of $39.5 billion.
I agree it’s high. It’s the highest profit, in total dollars, in U.S. corporate history. But as usual, I took the contrary path. My friends needed testing.
The gist of their argument was that ExxonMobil ripped off all of us, and that Exxon should give us that money back or, at the very least, Exxon should be prohibited from making that much money ever again.
My answer: You aren’t proposing a solution. You’re making a reckless wish. And you’re whining.
Denying Exxon the chance for a higher profit when oil demand is up and oil supplies are in doubt is almost guaranteed to leave you with an empty gas tank.
“But how about Exxon’s social responsibility?” one asked. “Don’t they have a social responsibility?”
I can agree with that point, and I wish Exxon and other corporations had a deeper sense of social responsibility. Shareholders also should have more democratic influence on corporate operations. But that’s not the way things are yet.
The way things are, Exxon’s responsibility is to produce a profit. Its other responsibility -- its mission, really -- is to find more oil supplies when oil demand is up.
Bouncing costs. Last year, the price of oil bounced up and down and up again, between $55 and $78 a barrel. Exxon’s costs rose, but in the end, it kept its prices high enough to post a $39.5 billion profit on $371 billion in sales.
That was a 10.65 percent profit margin. For each $1.00 in its corporate costs, Exxon was charging its customers about $1.11. By comparison, in 2000, when supply, demand and prices were much more predictable, Exxon’s profit margin was 7.59 percent.
Last year, for every $2.50 gallon of gasoline, Exxon made 26.6 cents in profit. With all the uncertainties over oil supplies, directly and indirectly, from Russia, Nigeria, Iran, Venezuela and even Saudi Arabia, can we be certain a 26.6-cent margin was excessive or “obscene”?
If, from month to month, you’re not sure whether your costs are going to go up or down 50 cents a gallon, a 26.6-cent per gallon margin might be reasonable.
Self-defense. Last year, had Exxon charged the average gasoline price it charged just two years earlier, the company would have lost $33.5 billion. That’s because in 2005 and 2006, the price was extraordinarily volatile and generally rising. Exxon had to build in an extra margin to protect itself. Assuming consumers want a reliable gasoline supply, Exxon was protecting consumers, too.
“But why is it that Exxon can charge extra just because the price MIGHT go up?” my friends asked. Answer: Because they would be irresponsible to ignore the risk. If there are signs of a pinch in oil supply or a spike in oil prices, Exxon has to anticipate it. If Exxon assumes next month’s oil price will be the same as this month’s, it could find itself billions of dollars in the hole.
“Why do gasoline prices ALWAYS go up?” Answer: They don’t. As my post-Katrina gasoline-price bet shows, the price that went over $3 a gallon in late 2005 already has dropped twice to $2 a gallon.
Yes, it’s back up near $3 a gallon again. But check your economic history. The price went sky-high in the 1970s, but once OPEC pushed the price too far, the world economy contracted, and OPEC lost consumers. OPEC doesn’t want that to happen again. The price will moderate again.
Incentive critical. There is one especially good reason to let Exxon’s profit margin rise 3 percentage points (from 7.59 to 10.65 percent) in an energy crisis. When oil supplies are disrupted, we want to assure Exxon and every oil middleman that they will be rewarded for finding new supplies, and for finding them fast.
Exxon’s reward -- Exxon’s incentive to scramble in a crisis -- is that price spike. Take that away, and the next time we lose a major oil supplier, you can expect Exxon to do nothing. You can expect to wait days for your next gasoline fill-up.
“How can you defend Exxon?” my Democratic friends asked. To which I respond I’m as upset as they are at rising gasoline prices, and, at the gut level, I’m as angry as they are toward the oil companies. After all, when Esso changed its name in the 1970s, my mother immediately labeled the Exxon logo “the sign of the double cross.”
I don’t want the oil companies to charge us a penny per gallon more than they have to, but unless they’re obviously conspiring to fix prices artificially high, how do we know what the fair price is? I’m willing to subject Exxon to a windfall profits tax, but then, how do we calculate what is a windfall?
Profit motivates. Keep in mind there are all sorts of proposals to force pharmaceutical companies to provide certain life-saving drugs free or without profit. Those proposals always sound good until someone points out that, if you cut the profit out of one life-saving medicine, the drug companies may never develop another important drug again.
Cut the profit out of oil, don’t expect more oil.
“They don’t find any more oil anyway.” That’s partly true. In case you didn’t notice, with Exxon’s huge profit came a huge missed opportunity. Under the normal laws of price and supply, when the price of oil soars, an oil company should run out and drill for more oil. But Exxon isn’t allowed to drill where the promise of success is highest.
Here was Exxon with tens of billions in surplus dollars, and America’s most likely locations for significant new oil finds were off limits to exploration or drilling. No Alaska reserve. No outer continental shelf. Even if Exxon wanted to invest in electric car stations, based on wind power or nuclear power, its options were limited by government regulations and hostile public attitudes.
Economic paralysis. So what could Exxon do with its cash? It had two choices: Continue to pay the foreign dictators who supply us, or pocket all the surplus as profit. Exxon did a little of both.
Instead of boosting dictators and taking short-term profits, I’d like to see Exxon fulfill its mission for the long term by finding new oil and developing energy alternatives. Right now, we’re freezing a major part of the energy economy, and then we’re wondering why we see no progress.
Let’s cut the whining, and solve this problem.
I’d start by forcing Exxon to divest Mobil. That would make some economic sense. (Who allowed that 1999 merger in the first place?)
The next steps: Where higher prices aren’t already encouraging energy efficiency, encourage consumers to cut back on using fuel. Then give Exxon and Mobil and OPEC some competition. Make it much easier to build electric-generating plants to supply electric cars. And open up more U.S. oil fields to responsible drilling.
How would you solve the problem? Price caps?