Curtailing profits will only lead to stagnation

Freedom Newspapers

Far too much is being made about allegedly “obscene” oil company profits, most often by demagogues trying to whip up the mob with allegations of “price gouging,” industry collusion and “profiteering.”

We expect this from politicians and pundits of the anti-capitalist stripe, and from greens reluctant to point the finger at a U.S. regulatory climate that helps create energy scarcity in a resource-rich land. But even boob tube blowhards such as Bill O’Reilly have jumped on the “big oil” bashing bandwagon, demanding the companies forego profits and “give consumers a break.”

Even supposedly pro-business, pro-free market Republicans have been jumping on the bandwagon by calling for price-gouging investigations, as talk grows louder on Capitol Hill about imposing a windfall profits tax. Perhaps we should take a few steps back, therefore, and offer a little perspective on the subject of profits.

We might start by asking ourselves a few questions.

What do such snapshots really tell us about an industry’s long-term financial health? What level of profit is permissible for oil companies, and why should it be different from any other enterprise? Who has a right to cap or dictate profit margins, and from where are such powers derived? How does one define a “windfall” profit or “price gouging?” What harm might one do to a company, to its shareholders and to the economy as a whole by tampering with such things?

And what’s so bad about profits, anyway? The quest for profit is what makes the capitalist system work. It’s what motivates seemingly sane executives and engineers in the oil and gas industries to scour the globe in search of the stuff that keeps this modern industrial society going. Take away the profits and you take away their motivation. Take away their motivation … and from where will the oil and gas come?

Under our system — a system responsible for the greatest standard of living in the world — for those businesses that take great risks, there are potentially great rewards. And energy is a high-risk industry in this hyper-regulated, overly litigious, NIMBY-filled country.

We’ll admit it: Exxon Mobil’s $9.92 billion quarterly profit boggles the mind. But it seems less “obscene” when one learns that the company generated total sales of $100.72 billion in that quarter. Is a 9 percent profit excessive? There are companies and industries that do as well or better, we’re sure. But oil companies are dealing in black gold, one of the most coveted commodities in the world, not Barbie dolls or widgets.

The world market, not big oil, establishes the going price for oil. That price can be manipulated by foreign cartels. But it is not dictated by oil companies. If it costs a company $10 to extract a barrel of oil from the ground, but that barrel sells for $30 on the world market, in keeping with the law of supply and demand, the company is making a decent profit. But if the world price rises to $60 a barrel, due to fierce economic competition, wars, regional instabilities and other threats (from hurricanes slamming offshore rigs, port facilities and refineries, for instance), profits rise even higher.

That’s not “gouging.” That’s just economics.

Think for a moment about where those allegedly obscene profits go. They aren’t stored in a secret vault, on a fortified oil rig somewhere, so stogie-puffing oil execs can fondle the stacks. Those profits repay and reward stockholders who took a chance by investing in these companies — and who might have in the past seen those stocks plummet in value.

Aren’t investors entitled to a reward for their risk? Isn’t the promise of this reward what keeps the stock market going, and props up the retirement accounts of millions of Americans? Take away that reward, that incentive to seek profit, and you diminish interest in stock investing. Too much of this and the economy loses its fizz.

In addition, those profits and stock payouts are taxed, increasing government revenues. Some of the profit is reinvested in the company — in developing better and cleaner ways to extract resources, in exploring formerly inaccessible areas, in developing new technologies that will in time help to increase oil and gas supplies, lowering costs.

Curtail profits and you curb reinvestment. Curb reinvestment and technology stagnates, companies stagnate and the economy stagnates. Eliminate the profit margins for big oil and we guarantee that you will have less oil, even higher prices and a crippled economy.