Three big points, infinitely touted by the biased media, need to be countered.
‘Obscene’ Profits
First, to kill the ridiculous notion of obscene profits. ExxonMobil had ~$138 billion in revenue last quarter, and ~11.7 billion in net income. This net income number may seem huge, but it is just 11.8% of Exxon’s profits, by comparison Google’s profits are 23% of its Revenue, Microsoft’s are 27%, in fact a Google Stock screen turns up over 1,300 companies with net margins of at least 12.2%.
Exxon has huge profits, but this is from huge volume, not from price gouging, in fact if Exxon was stupid enough to price gouge it would probably immediately lose business to other gas companies who are willing to sell their product at an 11% margin.
Exploration vs. Buybacks
The following exchange was the most revealing of the interview:
CHARLES GIBSON: When profits are so high, why is spending on exploration so low?
REX TILLERSON: Well, we're spending at record levels. Through the first half of this year, we have spent $12.5 billion. That's a record level of capital and exploration expenditures for us. We expect we will spend about $25 billion this year. And we have forecast over the next five years that we will invest $125 billion in capital and exploration expenditures. And to give you some perspective on that, that's a little more than half of what all 13 OPEC nations are going to invest as they've announced. So we are investing at record levels and expect that we will continue to be doing that in the years ahead.
CHARLES GIBSON: You're spending more money buying back stock than you are on exploration.
REX TILLERSON: Well, that's a cash flow question, Charlie, in terms of how should we manage our cash flow. And that's important for our shareholders, obviously. It's important for our future health as well.
The first thing we do is invest in all the projects that we have available to us and that make sense to invest in. And the second thing we do is pay all our taxes, pay all our operating costs, all of our employees and all the people that do business with us. And then we see what's left over. And what's left over we try to return efficiently to the shareholder, because it's their money. So we do that through dividends, and we do it through share buybacks. Our shareholders then take all that money, and they're doing something with it elsewhere in the economy.
Tillerson effectively dismantled Gibson’s heinous argument that the buybacks should be lower than exploration, but as Gibson mentioned many more times that Exxon buys back a lot of stock, the arguments needs to be clarified.
ExxonMobil is a business; therefore it is run to produce a profit. Gibson mentions that they: Invest in projects, pay taxes, pay operating costs pay labor then return the rest to shareholders.
This is pretty easy they pay what they need to continue running the business then return the rest to shareholders, who own the business.
Gibson either doesn’t understand this or is too ignorant to care, as he digs himself into a hole by trying to tell an experienced CEO what he should be doing with his business. Let’s return to the business definition: it’s run to make a profit, by that definition everything in which Exxon invests must be capable of producing a profit for the shareholders in the future.
Gibson is of a different opinion and for some illogical reason thinks Exxon should invest billions of dollars in unprofitable investments (something I believe he has absolutely no knowledge of) instead of returning the money to the shareholders, who, through their positions, have the right to it.
Windfall Profit Tax
Later, in the interview Gibson talks about windfall profits taxing and Obama’s plan to tax the ‘windfall profits’ of oil companies $65 billion over the next five years. Again, Tillerson has a simple response that Gibson seems incapable of comprehending, “What would that accomplish.”
This is something Obama has not addressed. Senator Obama: we understand you think taxing is the answer to everything, and that you understand that when uneducated people see Exxon’s large profit dollars they are angered. However what exactly would this accomplish?
In a world where too much government has caused the price of oil to soar, how is more government the answer?
Also, the price of all food related to corn has soared almost the same amount as oil over the past few years. Yet corn farmers are getting subsidies from the government, to produce corn to make ethanol, a fuel that just about every scientist believes has no reasonable use, and would be more expensive than gasoline.
Where’s the difference? Why should the shareholder’s of the oil companies have their money stolen three times: To subsidize the farmers, to pay higher food prices and to kill their dividends?
The Real Problem
The real problem is unrelated to any oil companies, but good luck finding that on any news channels.
There are two big reasons for the high oil prices, the dollar and supply and demand.
The supply and demand issue is not very revolutionary, the demand for oil went up, but the supply did not, as a result the price went up. This is basic economics.
One way to increase the supply of oil is to open up off-shore drilling and ANWR, regardless of how long this would take to produce oil, I fail to see what gives the government the right to forbid drilling.
The dollar issue, however, is more complicated. The US dollar is not backed by any commodity and is currently being printed willy-nilly by the Fed. Whenever more of a currency is printed inflation goes up (this is because if you have more of something it loses its value, if everyone had $150 million, it would not be a big deal to have $150 million).
So inflation is going up, the value of the dollar is falling, and all the oil in the world, with the exception of that under the control of Mahmoud Ahmadinejad, is traded in dollars, as a result the price of oil is up.
This may seem negative as there is nothing the government can do to help (as if there has ever been anything where the government helped), but true Capitalism was shown in June as the demand for oil fell the most in ~30 years, this affected the price of oil and it fell from over$140 per gallon to below $115.
This whole situation reminds me of a conversation between Dagny Taggart and Hank Rearden in Atlas Shrugged
, Dagny was remembering how she was taught in school that eventually the sun would burn itself out and the world would end. Rearden replied that he had always thought that by the time any of this had happened man would invent a solution.Maybe the government should stand aside and let man invent a solution.
Roark will be a college student majoring in Economics in less than one week, until then he will make do with the many books by genius authors he has collected. For more on Roark, please visit out about page.
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