The American Spectator

The Nation's Pulse

I see that the media and the left-wing foundations are in a state of hysteria over oil company profits. Exxon Mobil reported profits of about $10 billion for the last quarter of '05, and this has driven certain people who don't really know a lot about the oil business or how gasoline gets into their Volvos insane.

Kindly allow me to make a few points that won't make those people calm down but might make independent-minded thinkers think.

First, Big Oil did not make these profits "...off the suffering caused by Hurricane Katrina," as I actually heard someone say on the radio on Monday. Exxon Mobil made these profits because it has invested upwards of $10 billion a year in exploration and development for hydrocarbons, in good years and bad, in years when they made as much as they spent and in years when they made less than they spend exploring.

That meant they had oil on hand and the wherewithal to transport and refine oil when Katrina struck. But the suffering of the Katrina victims did not make the price of oil and gasoline rise. That rise came about because oil and gasoline traders at desks in investment banks went into hysteria mode when Katrina struck and bid up the price of oil and gasoline to hysterical levels. Because the big oil companies had a lot of oil on hand to sell despite the damage to refining and production caused by Katrina, they made money on some of that oil. (They had to buy some on the world market and they did not make anywhere near as much on that oil.)

The situation is precisely what happened to U.S. wheat farmers periodically in the 1970s and 1980s. If Russia had a poor harvest and needed to import grain, wheat farmers made good profits because world wheat traders bid up the price. They did not make money off the suffering of Russian wheat eaters. They made money because world wheat traders bid up the price based on Russian wheat conditions. (Before there was a world wheat market that included Russia, Russians and Ukrainians just starved when the wheat crop was poor.)

The oil situation is exactly the same.

Or to put it another way, the oil companies do not come even remotely close to setting the price of oil and gasoline. They either benefit from high prices or get hurt by low prices, but they do not set the price. The largest oil company in the U.S. (a piker compared with many foreign companies) controls less than 3 percent of the world's oil. Does that offer a clue on how prices get set?

Next, isn't it great that there is a world oil market that allocates oil and gasoline by price? Those of us who lived through the early 1970s when low, artificially fixed oil prices meant that there was sometimes literally no gasoline or heating oil, can only give praise that there is a price system to make sure there always is gasoline and heating oil at some price. (And I assure you, I pay a stunning price for gasoline, just as everyone else does, and I am awfully darned glad I can get it, rather than having a low posted price at a gas station with no gasoline to sell.)

Meanwhile, why is it so bad for oil companies to make a profit, even a big profit? That profit doesn't go into the pockets of Dr. Evil. It doesn't go to Saddam Hussein (not anymore). It goes to tens of millions of stockholders who use the dividends and the increase in share price to pay for their RV's and retirements and their (ungrateful) kids' college education. John D. Rockefeller is long gone. Anyone in America with a few twenties in his pocket can become a shareholder of a big oil company and share in those profits. Those profits go to teachers' unions and policemen's unions and to any person on this earth who cares to speculate that the big profits will continue. Or, as my father once said to me, and I have said before, "If you think oil company profits are obscene, buy stock in the oil companies."

Then a huge slice of the profits go to federal and state taxes, running into the tens of billions of dollars. Oil companies in general pay between 30 and 40 percent of their profits in tax. That pays for a lot of textbooks (that no doubt teach how bad oil companies are) and a lot of hospitals for rehabilitating wounded Marines.

And vitally, lots of the money that goes into Big Oil goes to find ever scarcer oil reserves. And without them, we ain't going nowhere.

Big Oil are not our Moms and Pops. They're in it to make money. But they are not fixing prices. They are not restraining trade. They are doing an incredibly dangerous, risky thing: getting oil for us in our gas hogs to cruise down the highway. Let's stop killing the geese that lay the golden eggs -- for the motorist, homeowner, factory worker, and pensioner. Envy never powered one car. If it did, there would be no gas stations in Beverly Hills.

topics:
Taxes, Education, Trade, Business, Books, Russia, Oil, Unions