Friday, April 06, 2012

Are Oil Company Profits Excessive, Even In an Oil Price Bubble?

When global oil prices rise, so do oil company profits. And yet, oil companies do not control global oil prices. Market prices depend upon supply, demand, the value of the dollar, political policies and actions, and the market's machinations in response to investors' actions.

The global price of crude oil – the critical factor that many things collude to affect – translates directly into higher gasoline prices at the pump. We all know this. But, contrary to popular belief, the major oil companies have little control over the price, high or low. Nobody complains about low prices and low profits, the economic knock-on effect of high oil profits. But high oil profits, which mean new exploration, cheaper domestic shale production, not to mention the economic ripple effect (often forgotten) of high profits on pensions, stocks etc, almost always means the proverbial hits the media fan every time there’s even a whiff of large oil profits in the air. But honing in with venom on Big Oil or Big Gas, a much-beloved pastime of politicians, simply helps skew Joe Public’s opinion as to how the economics and the markets work. industry profit margins are cyclical. According to Robert Bradley Jr., CEO for the Institute for Energy Research, between 2006 and 2010, the largest oil companies averaged a profit margin of around 6.5 percent. As Bradley states, “This pales in comparison to profit margins in just about every other industry” the “pharmaceutical industry, for example, routinely averages a profit margin of about 16 percent. The soft drinks market is even more lucrative.” In short, oil companies in the States make around 7 cents per gallon, while the U.S. Government “extracts more than 48 cents, on average, per gallon...nearly seven times more out of the drivers’ wallets via taxation than Big Oil”...

...When it comes to understanding how the energy markets work, focusing on times of larger profits may light a fire under the anti-capitalist left and green activists. But that should not sway Joe Public to go to war against their imaginary pantomime villain. The sheer fact of the matter is that the real Mr Big behind the oil profiteering racket is Big Government, not Big Oil. But it’s just not in the interest of the anti-capitalist Big Green to target high-taxing, good-cause, Big Government oil profiteers; that’s the goose able to lay their leftist social engineering ‘eggs’. _EnergyTribune
US President Obama will say anything to get re-elected. He has a great deal more to do, before he is finished with the US economy and US industry.

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