Honolulu Advertiser

SECOND OPINION  by Cliff Slater

December 5, 2005

Big Oil’s “excessive profits” are good for us

There is something breathtakingly audacious about politicians taking oil companies to task for “excessive profits” and considering a special “excess profits” tax. In other words, telling companies like Exxon Mobil that they have been taking more of our money than they should. This is especially droll coming from politicians who — always and incessantly — do precisely that with taxes.

Besides that, 35 percent of Exxon’s profits already go in taxes.[i] So, if the profits are excessive, so are the taxes on those profits, but we do not hear of any politicians calling for a “windfall taxes” rebate to us motorists.

“Excessive” gasoline prices stem from two factors. First, Big Oil should charge whatever the market will bear — no more, no less.

If they charge more, then consumers will buy their competitors’ gasoline. If they charge less, then they encourage consumers to buy more gasoline than they would if the price were higher; the net result of which would be shortages.

In addition, if consumers do not like $3 a gallon gas, just imagine how they would howl if gasoline was only $2 a gallon — but there wasn’t any.

That’s lesson #1: The high pump prices were good for us.

Now for the “excessive profits”: Taking cyclical boom-and-bust businesses like oil companies to task for having high profits over the short term is ridiculous. It is like taking gift shop operators to task for making “excessive profits” in December when they have been breaking even for the rest of the year.

Over the years, Exxon Mobil’s profits have been about 5.5 percent[ii] of total revenues — about the U.S. industry average — and they have plowed back all of the last ten years profits into the business to ensure oil supplies for their long-term profitability. We consumers need them to do that. If we impose an “excess profits” tax, it would cut into precisely what we need if we value the long-term viability of energy supplies.

The problem is that consumers do not properly understand the role of markets since our schools teach them little or nothing about the subject.[iii] And, so business profits become “excessive” — no matter what they are — whereas union workers, such as Honolulu’s container crane operators out for a boost in their $200,000 annual compensation, are just “working families” seeking what is “fair.”[iv]

Instead of business (Big Oil especially) taking the hard route of educating consumers to understand how and why markets function to the nation’s benefit, they pander to consumers’ outrage with “corporate responsibility” guff while unsuccessfully trying to justify their “excessive profits” as “fair” and “reasonable.”

This plays right into the hands of politicians who will, at the first chance, begin pontificating about profits being “unconscionably excessive” and so on. It is not the function of businesses to be reasonable; it is their job to do what the market disciplines them to do.

We must remember that caricature capitalists — cigar smoking and overweight — do not own Exxon. Its owners are largely mutual funds, such as the Vanguard Group. If you have ownership in a pension plan (government or private) or a 401(k) plan, then you are likely an Exxon shareholder.

However, if you still believe that Exxon is excessively profitable, then go buy some shares. A caveat though: In March of this year, when oil was $40 a barrel and before any hurricanes, you could have bought Exxon Mobil shares for $62. Today, with oil up to $55 a barrel, hurricanes galore, and sky-high gas prices, you can buy Exxon shares for $55 — a 10 percent decline.[v] You might want to figure that one out.

So, if you want to fault Exxon Mobil, it should be for inept public relations.

Cliff Slater is a regular columnist whose footnoted columns are at www.lava.net/cslater


[iii]  (What do they learn?)