Monday, January 30, 2006

Big profits for Big Oil... who cares? (And yes, I drive a car)

So there's a big ruckus because the annual earnings reports for the major oil producers are coming out, and it turns out that '05 was a good year for them: they made tens of billions of dollars in profits.

A lot of people are apparently upset at the news; they look at the prices we're paying at the pump, and then at these profit statements, and wonder how these companies have the gall to be charging the prices they are.

That's an understandable reaction, but it's a mistaken one. Why? Because gasoline and other petroleum products are commodities, and because of that, supply and demand can have a much more immediate effect on prices. Go back to September for a minute... when Katrina hit, the demand for gas skyrocketed, because people wanted to get the gas while they could (the supply was going to be pinched). The only way for oil companies and their products' distributors to ensure that they didn't run out of gasoline et al. was to raise prices. While that obviously meant we had to pay more, at least there was gasoline to be purchased! I remember reading about a service station here in the Sioux Falls area that was really lowballing their prices... they were consistently running out of gasoline! Let's face it: would you rather pay 50 to 100 cents more per gallon for gas, or not be able to get any gas because the supply is depleted? When demand is high, high prices are the only way to ensure that the supply of a commodity isn't exhausted. The fact is, what many of us saw as price gouging was simply the market ensuring an adequate supply of gasoline. (For a great primer of the reality of "price gouging", see this 2004 column by Thomas Sowell.)

That's one thing to remember. Here's another: if you consider the profit margins of these oil companies are making (profits as a percent of revenue), you'll find that the oil industry actually tends to lag behind other industries, in some cases by more than ten percent! (See this.)

ConocoPhillips has a webpage devoted to explaining oil profits; while you might consider the source biased (for obvious reasons), note that the data they use for their points is a matter of fact and is verifiable in the public record.

Remember, I'm not at all invested in the oil industry (well, apart from the few shares of a mutual fund I currently own in my 401(k)). Nor do I like having to pay $2+ for a gallon of gasoline. I simply think that while blaming "Big Oil" might be easy, it's not quite that simple.


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