Last week’s quarterly earnings announcements made for a lot of wailing and tooth-gnashing about the profits of oil companies. I was too buried in other things to opine, but others said smart and useful things. Take, for example, this question from Russ Roberts to those who want to impose a windfall profits tax on oil companies:
… if they lower prices when profits are high, are you willing to make a charitable contribution to oil company stockholders when profits are low or negative?
Russ is right when he says that the true economic illiteracy is not the asymmetry of wanting to take their profits but not subsidize their losses. The true economic illiteracy comes in the lack of understanding of what prices do, where they come from, and how they work to induce optimal decisions on both sides of a transaction over time.
Then there was Jim Glassman’s interview with Dan Yergin at Tech Central Station. They touch on several interesting and important energy topics, including the windfall profits one:
What a windfall profits tax does is introduce a lot of distortions. It reduces investment, it increases a sense of political risk and it doesn’t achieve the goal that is intended, if it is to facilitate investment in new sources. It obviously responds to a political demand, but it has the opposite effect of increasing supply. It really will lead to decreased supply, not only here, but it will be something that will have an impact around the world. And this is a time when you want to increase and encourage investment, not provide disincentives to investment. …
I think that there are two things that we can do as we are heading into the winter that would be significant. The first thing is that we really ought to make sure that people really have the information and the knowledge about the minor changes in behavior that they can make that will not only save them money but in a total sense would reduce natural gas prices and take the pressure off. If all of us this winter reduced our thermostats by two degrees, homeowners, commercial establishments, we would save more natural gas than has been lost because of Hurricane Katrina.
The other thing we ought to do is not wait until a cold winter, if we do have a cold winter, and address now how to build flexibility into some of these environmental regulations so that for instance, in an area where a utility is only allowed to burn oil four days a months, perhaps in January if there is really pressure on prices they can burn oil eight days a month and reduce their consumption of natural gas. And there is no shortage of residual fuel oil, the type of oil that does get burned in utilities, so it wouldn’t add to the price pressure on oil but it would take pressure off natural gas.
Demand response and adaptable environmental regulations … yes, that’s the litany here at KP.
Then at Catallarchy, David Masten delivers the goods by calculating Exxon-Mobil’s profit margin, which was 9.85% for the third quarter. Healthy, but not outrageous.
From the Fortune Global 500 data, financial services company Bank of America is getting margins of 22.3%, General Electric had 11%, and Proctor & Gamble comes in with 12.61%. Big Pharma does quite well with Pfizer at 21.5%.
Note that the margin data are consistent with the higher costs that oil companies face due to cleanup and restarting Gulf resources taken offline due to hurricanes.
Finally, today Russ Roberts gave a commentary on NPR about the role of high profits:
There’s another benefit of high prices. They encourage greedy oil companies to pull oil out of the ground that isn’t worth pulling out of the ground when prices are low.
Getting oil out of the ground and into your car in the form of gasoline is an extremely expensive and unpredictable process. ExxonMobil spent almost $15 billion last year on equipment to find new oil and make refineries more productive.
As consumers, we want oil companies to take risks and spend money searching for new supplies. Profits are the reward for risk-taking and investment. Take away profits when they’re high and oil companies will take fewer risks and invest less. That means less energy in the future.