Citizen Tom

Just how out of line are the profits of the oil companies?  They are probably somewhat inflated, but why?  Let’s look at the biggest American oil company, EXXON MOBILE.  How profitable is Exxon? 

Forbes Magazine is, of course, a place you expect to find answers to business questions.  So if you want to get a rough idea of the profitability of Exxon, it is a good place to check.  According to Forbes, Exxon is doing quite well.  Exxon has the industry’s leading return on investment.

Exxon has spent at least $3 billion on technology since 2002. The company plans an average of $20 billion a year in total capital investment through 2011, most of which will fund exploration and production. A combination of size and superior manufacturing processes create a low cost structure, representing competitive advantages for both the production unit and downstream businesses.

The result? Industry-leading return on investment. Exxon’s 2006 ROI of 32.6% is the second-highest among all integrated oil companies and nine percentage points higher than that of the next-most-profitable oil major. (see here) 

Exxon reinvests its money back into the oil business.  To the consternation of critics, Exxon is single-mindedly focused on its core business.   Why?  Fortune Magazine says Rex Tillerson, Exxon’s president, is not interested in alternative fuels or alternative anything.

At least one group of investors thinks Tillerson is missing the bigger picture. By not investing in new energy technologies, Exxon “lags far behind its competitors in developing a strategy to plan for and manage” the potential impact of climate change, argued a group of pension fund chiefs in a letter to the board. If governments around the world begin to bear down on Exxon’s oil-based business – through heavier regulation or taxation – then the company’s return-on-investment calculations get turned upside down. Its whole future would be in jeopardy.

That will not happen, says Exxon, because it cannot happen. Exxon is certain that oil, gas and coal will remain the world’s dominant energy sources for decades to come.

That belief drives the company’s critics crazy. But Exxon’s projections are not radical. A forthcoming report from the U.S. Climate Change Science Program cites three of the most widely used models for climate change analysis: one from MIT, another developed jointly by the Pacific Northwest National Laboratory and the University of Maryland, and a third created by Stanford University and the Electric Power Research Institute. The studies do not agree on everything but they do agree on this: Fossil fuels will remain the planet’s No. 1 energy source through the 21st century, supplying 70% to 80% of the total by 2100, vs. about 90% today. Exxon forecasts only as far as 2030; in that year, it projects, primary energy sources such as coal, oil and gas will account for 81% of global demand.

That’s another reason Exxon isn’t investing in alternative energy sources: They don’t look big enough. For a company Exxon’s size – No. 2 on the Fortune 500 – businesses of less than mammoth scale don’t merit troubling with because they can’t nudge the bottom line.  (from here)

Yet with all the money that oil companies have, all the effort, and their single-minded efficiency, why is price of oil going up?  Somebody at the Washington Post thinks they know the answer.  They consulted Jay Hakes, who was head of the Energy Department’s Energy Information Administration from 1993 to 2000.

Hakes, who has just published a book titled “A Declaration of Energy Independence,” said his view on Exxon Mobil’s profits goes something like this: “My basic explanation is that most of the oil reserves in world are controlled by state-owned oil companies,” he said. “It’s the explicit policy of OPEC to keep supplies tight and prices high. And other countries like Russia agree. So Exxon becomes kind of a free rider to that problem.”

As a result, he said he has a problem with both sides of the recent vociferous political debate over oil company profits and their connection to high oil prices. Recent ads, he says, sound “strangely familiar” to the ads taken out in magazines in the late 1970s. Hakes said, “The historical perspective is that the oil companies always blame the environmentalists. The environmentalists and consumer groups blame the oil companies. And no one points the finger where it belongs, which is OPEC.”  (from here)

OPEC, is that the answer?  Is OPEC the reason oil prices are going up or are Democrats just looking for someone besides themselves to take the blame?  If OPEC is to blame, then there is only one solution; we have to seize the oil reserves we need.  For example, we have to invade Saudi Arabia.  Is that the answer?  I think not. 

The solution is to recognize that industry does what it finds profitable.  To the extent OPEC controls the price of its product, it will reduce it to snuff out any serious competitiion from alternative energy sources.  To give alternative energy sources a leg up, we have to tax pollution.   How?  I suggest two things.

• A tax strategy that favors clean energy sources.  To encourage companies to use clean energy sources, the cost of pollution has to be included in their bottomline price.  One way to put that cost there is a Pollution Added Tax.
• Drilling now, drilling here!  Like it or not, with current technologies fossil fuels provide us our most efficient and cleanest energy source.  If we do not intend to go to war, then we need to use home grown sources.