Wednesday, May 28, 2008

The Real Story of Big Oil Profits

Last week, our major American oil company executives were, once again, marched before the Congressional "verbal firing squad" in hearings that those political morons seem to think will lower oil prices.

Unless someone can prove otherwise, there has never been a Senate or House hearing that has produced lower oil prices in the history of this country. It is all political theater for politicians who need to cover their big asses. It was political show during the Carter administration when the lines of automobiles, waiting to get gasoline, were wrapped around our city blocks. It was political show at the end of the Clinton Administration when, like today, oil prices were rising precipitously. And, it has a been similar, fruitless political carnival over the last 3 years when, in hearing after hearing, the same questions and the same "nothingless" results have taken place.

Sure, the oil company profits are high; but, relative to gross sales, the profits are in line with most other business. The fact is that most of these oil companies had little or no profits following the OPEC embargo during the Carter Administration; and, only in the last few years have they returned to a "good" profit margins. I can't remember a single Congressional hearing that was ever held to find out why our oil companies were making money. Can you?

The liberal Senators and Representatives of this country seem to think it is socially unfair that the oil compani4es should profit from high oil prices while we all suffer at the pump. Maxine Waters, a democrat from Caliifornia, actually hinted that the oil companies should be "nationalized" to keep prices low. How "maxist" is that! Does she really think that adding the inefficiency and wasteful spending of our Federal government will actually lower prices?

It appears that our lawmakers just don't understand the oil business. Just because the oil companies are making billions of dollars in profit, it doesn't mean that they are frivolously tossing dollars out the windows and raising every exec's pay. A single oil rig out in the Gulf of Mexico will cost between one-half and three-quarters of "billion" dollars to put into place. It will cost millions of dollars to operate that "rig" over its life. Often, exploratory drilling is a "bust" and millions of dollars are completely lost in this high-risk activity. As these companies drill deeper to find the harder-to-find-oil, the costs go up. It is estimated that the new "rigs" will exceed a billion dollars for any of the deeper drilling activities. Further, most people don't realize that existing oil wells and oil rigs aren't just "forever" money-making machines. Daily, many existing oil rigs and oil wells completely run dray and will no longer produce any oil or profits.

It is true that the oil companies pay their stock holders a dividend. Exxon-Mobil gives a "whopping" 1.8 percent in dividends to its shareholders. By comparison, a bank will give you closer to 3 percent on a high-yield CD (Certificate of Deposit). Most investors in oil companies aren't looking for the return they receive on their dividends. Instead, they are looking for increased business activity which will cause the stock price to go up. Like any other corporation in this country, it all comes down to stock price appreciation. Let's not forget, if a stock price is not maintained or falls significantly, a company can be "taken over" or bought out by another more profitable corporation or investment group. So, stock price appreciation is a required form of self-preservation in the world of corporate business.

The profits that these oil companies take in will ultimately find their way to new oil and gas reserves and other new forms of "marketable" energy. They need to find new oil/gas and alternative energy sources in order to survive and grow as corporations. They are very efficient at what the do so that they maximize their profits. Most of the price of oil is due to factors that even they can't control. They are just as subject to the control of oil prices by the world markets and by OPEC as we are. For example, Exxon-Mobil, while being the largest oil company in the world, only controls less than five percent of the world's oil supply. That hardly puts them in a position to control oil pricing. If they could, they would actually want lower gasoline prices at the pump so that they could "steal business away" from their foreign and domestic competitors like Shell and British Petroleum and Chevron. But, they can't. That's why the concept of "price fixing" is just so absurd.

Oil and gasoline prices are destined to continue to go up as the world demand for this increasingly scarce commodities continues to grow. And, as sure as their is a sunrise, I would expect that Congress will continue to have their useless "get togethers" with the oil execs. There will be no changes and oil prices will continue to go up. That's my prediction.

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