Bashing 'Big Oil': What About Everyone Else?

The brilliant Holman W. Jenkins of The Wall Street Journal editorializes on the real threat of Big Oil to America: that it's getting smaller. He also takes aim at politicians who continually show their ignorance of how markets work -- or that they are aware of basic business principals, but choose to ignore these to gain attention and, possibly, votes:

Sen. Byron Dorgan, who keeps himself deliberately uninformed about the workings of the private sector lest it cast him into doubt about his easy demagoguery, recently castigated the oil industry for "buying back stock, hoarding cash and drilling on Wall Street." He is one of several who've backed legislation to confiscate the industry's "windfall profits" if companies don't reinvest the money in new energy projects.

In fact, the capital markets are in charge of deciding where money is best invested, and oil companies are in charge only of doing what corporate governance reformers insist all companies should be doing--being careful with their shareholders' money. That's why the six biggest oil companies, Mr. Dorgan's fury notwithstanding, are expected this year to allocate more than 60% of their profits to dividends and stock buybacks while reinvesting only about one-third in the oil business.

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Consider the perfected idiocy of Sen. Maria Cantwell of Washington, who bought her Senate seat with a now-diminished dot-com fortune and has reason to worry about whether voters will find her worth re-electing. This undoubtedly explains her sudden and shrill emergence as the most unhinged of oil-industry bashers.

Last month she was quick to confuse the filing of a lawsuit with proof of guilt, denouncing BP and Exxon because they were named in an antitrust complaint by the deservedly obscure Alaska Gasline Port Authority. Ms. Cantwell was likely impressed by the name of David Boies, celebrity lawyer, as counsel for the plaintiffs. In fact, the AGPA consists of three Alaska municipalities whose plan for a gas liquefaction facility in the port of Valdez was recently rejected by the state as lacking any means of financing.

The group has decided to blame its troubles on BP and Exxon for allegedly sitting on undeveloped natural gas reserves in Alaska in order to drive up prices in the U.S. domestic market. This overlooks the fact that the two companies supply just 12% of the natural gas in the lower 48, so any such manipulation would benefit mostly their competitors.

Blasting "excessive" oil company profits is simply a canard. It's like complaining about the U.S. Post Office (which operates remarkably considering the enormous task of delivering the daily mail) or about "typos" in your local newspaper. Everyone agrees with you, so there's no risk in criticizing your target.

But are oil company profits excessive? The answer is: no. (Disclosure: As I've noted previously, I have counted among customers several of the "Seven Sisters" oil companies -- particularly Royal Dutch Shell. However, I no longer have any connection to the industry, outside of very limited individual stock and mutual fund holdings that half of America also has.)

First, let's consider the net profit margins of oil companies. Based on the most recent quarter 2005 earnings statements, ExxonMobil recorded 11 percent profit margin, ConocoPhillips 8 percent and Chevron 7 percent. During this same timeframe, Citigroup racked up a 33 percent profit margin, Microsoft 32, Coca-Cola 21 and Procter & Gamble 14 and General Electric 11. (Imagine Wal-Mart being criticized for charging $1.08 for a bag of potato chips that cost it $1 -- then again, Wal-Mart's profit margin is only 4 percent).

The reason oil companies are such targets is the volume of revenue -- billions upon billions of dollars. But this does not convert to profit. The oil business is a very expensive one to play in. Exploration/production costs are astronomical, as are refining expenses. For a standard gallon of gasoline that costs $2.65, almost 75 cents is tied directly to pulling crude oil from the ground or sea floor and refining it into usable fuel. And along the way, everyone else gets their cut: the transporters (which is constantly increasing because most refineries are on the U.S. Gulf Coast as no one else wants them), marketers, retailers and -- don't forget -- Big and Little Uncle Sams (taxes account for, on average, about 25 percent of gasoline's retail sale price).

Even if you wish to make the argument that oil companies are greedy and should be punished for making money (and if you do, then more than your blood is red), there are other industries in line first to pay the piper. The banking industry recorded 19.6 percent profit in the first half of 2005. Software and services companies came in at 17. Telecommunication services: 9.6. Real estate: 8.9. In fact, the U.S. average was 7.9. The oil and natural gas sector was below this average at 7.6 percent.

Yes, the price of gasoline is high, compared to what we're use to paying. But factored for inflation, it is actually almost a dollar a gallon cheaper than it was in 1981. Oil companies must be allowed to address market forces. Seizing their profits -- the total windfall of which would mean $10 per American family -- will, in fact, discourage them from developing alternative sources of energy.

No one knows better than the oil companies what known crude reserves remain on Earth. It is their future to know. Stripping them of profits in the "boom years" -- I sure don't remember anyone calling to help them out when oil was $10 barrel and half of Houston and Louisiana was jobless -- will mean less fuel in the future. Oil companies work five years in advance. Rarely can they adjust quickly to demand, hence the gigantic price spikes when supply (i.e., the hurricanes) is adversely affected.

Let the markets work. And if you must tinker, Sen. Cantwell, why don't you start with quadrupling the tax on Microsoft and Microsoft alone? Sound stupid? No more stupid than robbing from the oil companies today for votes tomorrow -- and even less energy next week.