Ben Stein in NYT: Exxon Mobil needs a hug
By Vladimir Posted in Energy | Exxon Mobil — Comments (33) / Email this page » / Leave a comment »
In a response to Mr. Barack Obama's demagogic attack on Big Oil, Ben Stein strikes a couple of chords that may sound eerily reminiscent of your humble correspondent:
Mr. Obama is clearly an intelligent man. So it may not be too early to start a small process of education about Exxon Mobil and other oil companies and why attacking them is not smart. First, Exxon Mobil, like all the other gigantic integrated energy companies in this country, is owned not by a cabal of reactionary businessmen holding clandestine meetings in a lodge in the Texas scrublands (as Oliver Stone so brilliantly illustrated in “Nixon”).
Exxon Mobil, in fact, is owned mostly by ordinary Americans. Mutual funds, index funds and pension funds (including union pension funds) own about 52 percent of Exxon Mobil’s shares. Individual shareholders, about two million or so, own almost all the rest. The pooh-bahs who run Exxon own less than 1 percent of the company.
When Exxon Mobil earns almost $12 billion in a quarter, or $41 billion in a year, as it did in 2007, that money does not go into the coffers of a few billionaire executives quaffing Champagne in Texas. It goes into the pension and retirement accounts of ordinary citizens. When Exxon pays a dividend, that money goes to pay for the mortgages and oxygen tanks and in-home care of lots of elderly Americans.
So, Mr. Obama, which union pension plans — and which blue-collar workers who benefit from them — will be among the first you would like to deprive of the income that flows from Exxon’s rich dividends?
...more...
And then there's this:
And, after expenses, the money hauled in by Exxon Mobil and other companies like it goes vastly more toward exploration and finding new ways of delivering oil and gas to us slobs in our cars than it does to well-heeled oil executives. It may be a scary fact, but we need the oil companies.Meanwhile, all over the world, from Russia to Venezuela to Africa to the sands of the Mideast, nations with large oil reserves are making it harder for American energy companies to get their hands on oil and gas. If they succeed and re-cartelize the price, current prices may look cheap.
We should not be beating up Exxon Mobil and its brethren and making them cry uncle to Uncle Sam. A better policy might be to keep making sure they have no role in price-fixing, and then to encourage them to go after and lock up as much oil and gas as they can for us to burn up. We would be better off with stronger oil companies that can serve our energy needs for the long haul than with weak and overtaxed oil companies that cannot deliver the needed juice.
[emphasis added]
Smart man, Ben Stein.
I'll just add that, whatever alternative technology ultimately leads us to the brave new world of energy independence, American oil and gas companies, healthy ones, are an important part of the transition to that future. The American economy is hugely dependent on fossil fuels, and that fact is unlikely to change for a generation or more, no matter what Candidate Obama, Candidate Clinton or Candidate McCain represent.
The really strange thing is that it works out great for everyone when the game is its most intense most cut throat.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
No one wants Exxon to do poorly. The success of the oil industry is paramount to the health of our national economy. But can you imagine the bonues that are being doled out this year? How much fat is creeping into their ranks. And, meanwhile gas may be heading towards four dollars? The daily drain on the rest of the economy?
I'm not opposed to profits -- profits are great. But obviously something is out of whack. That price of gas is probably enough to push us firmly on to the other side of a hard recession -- notwithstanding the waves from the subprime fallout. Bringing this closer to Stein's argument, how much do pensioners/mutual fund holders care that their Exxon Mobile stock is doing well when the rest of their portfolio is stagnating if not sinking and there are no signs of a rebound?
I'm sure there are no easy answers to the super-competitive profits being raked in within the oil industry. (And there probably won't be one until we have found another competitive energy source.) But I don't see how pretending that there's not a problem helps anything.
Imagine what the CEO job description for an oil company is ?
Must be able to flawlessly apologize for company making money
Should be able to lie through teeth about embracing impractical and useless technologies.
Must be able to deal with the entire world making your business their business.
Should be able to take on the opprobrium of the entire planet all the while trying to find resources they desperately need.
Benefit office will have a padded wall so you may bang head against it.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
Must be able to smile obsequiously while listening to demagoguing buffons pontificating righteously during interminable congressional hearings held explicitly to expose you before the American people as public enemy number one while their office staff shake you down extort demand request donations to their campaign funds.
From my limited view of the situation, most of the governmental action in the oil industry has been counterproductive. But I don't think Stein's article is helpful. Exxon's super-competitive profits, as passed on to the rest of the economy in the price of gas, is killing our economy. Let's admit that and try to find a solution.
I have no idea what the solution is: venture capital in the energy field? Research grants? Changes to patent laws so that they are more supportive of innovation in the energy field (at the expense of the pharma industry)?
I can think of a hundred ideas. I would love to hear an expert in this field shoot through them.
You want cheaper oil??? It is pretty simple...open up American oil fields, stop complaining about the profits of oil companies, and make it easier to build oil refinaries.
By making huge profits, oil companies are able to attract more capital. More capital + huge profits=more money spent on developing new oil fields. More oil fields=increased supply. Increased supply=lower prices.
If oil prices keep rising, sooner or later there is going to be an overinvestment in oil projects and supply is going to skyrocket. Maybe we will get lucky and the oil companies will find a way to turn the oil shale in colorado into a usuable form.
And if you go back and look at when prices really started to rise, it was Katrina. I think most experts (at least the ones that I have heard) say that the fundamentals of supply and demand would indicate a much lower price of oil. But fears over possible terrorists attacks and weather disruptions to oil fields and refinaries have made investors very jittery. Couple that with a large number of speculators and you get the higher prices that we are seeing at the pump.
Finally, it makes no sense to attack the oil companies over the profits they make. It is not like they are earning a higher percentage of profit per barrel of oil. They still are getting an x% cut. And guess what...the government is doing the same freakin thing...but I haven't heard anyone (especially democrats) say we need to lower the gas taxes. The government is raking in way more revenue from gas now that it is at $3/gallon. And if you are willing to take away big oil's profits now...you must also be willing to bail them out when the world finally does switch to an alternative source of energy. Do you support the government stepping in and paying off their capital projects or picking up their pension plans? What if oil drops back down to $1/gallon...do you think the government should have to step in and subsidize their exploration efforts?????
I said make it easier to build them in the first paragraph.
You've used that phrase twice now.
There's no denying Exxon' profits are big, but the company is huge. By most financial measures, the profitability of the company (measured relative to its size), is not extraordinary.
Lee Raymond, who retired as CEO of XOM a couple of years ago, probably knocked down a few hundred million in the process; I'm sure the amount is public record. In the first place, those large bonuses you allude to are almost exclusively stock options that only have value if the CEO builds value for all the shareholders. Second, I would submit that Mr. Raymond's business acumen and overall contribution to our way of life deserves to be compensated on a scale commensurate with Oprah Winfrey or that kid that started Napster. People like that are admired, not reviled.
Plenty of new money is finding its way into the oil patch, by the way. And that's a good thing; more profits attracks more new capital, and more wells get drilled as a result. The successful & efficient companies make more profits; a portion is sliced off for dividends, and the remainder is spent drilling new wells.
Regardless of the hysteria, the price of energy as a percentage of the average person's income is half what it was in 1981. Oil prices were cheap from 1984-2004. We are experiencing the same effect that would be felt if dealers held the same price for cocaine for 20 years, then suddenly doubled the price.
There is more stupidity than hydrogen in the universe, and it has a longer shelf life. - Frank Zappa
than either your state or the federal government does, and neither of them do anything to extract the oil. They make less net profit per item sold than the average retailer; they just sell one Helluva lot of items.
In Vino Veritas
What gets little attention in today's discussions of energy development and energy costs is how much the oil provinces have come under government control since the '86 Price Crash. There is almost no oil left in the World on private land or under the control of countries that have any respect for private enterprise. The new cartel currently developing will be much more powerful than OPEC was in the '70s and early '80s - that in large measure is why prices are so high now; you can't induce anyone to cheat on production and there aren't any big provinces that can be dumped on the market to break the price.
In most of the World, you do business with government through bribery - even here in the US you do most business with government through some sort of bribery. I hope no one believes that the Clinton Administration's "mistake" on those NG leases in the Gulf was accidental: follow the lobbyists and the campaign contributions.
The producers are accustomed to doing business this way. Here in Alaska Exxon's name is currently s**t, but BP is the one that really looks at governments controlling oil provinces as just a bunch of corrupt and avaricious colonials there for the buying. Here through their surrogate Veco, they essentially bought the Alaska Legislature, which unfortunately proved itself to have a fair share of corrupt and avaricious colonials in it, three of whom are currently guests of the Bureau of Prisons.
Frankly, I've lost my ardor for opening ANWR. We have a lot of oil here, but with the current price paradigm, I'd rather just increase production as little as possible in order to maintain market share. Any more causes the price to go down, and I'd rather sell a little oil (relatively) at a high price than a lot of oil at a low price. I feel the same way about developing natural gas on the North Slope. First, we use the NG to maintain field pressure, so producing gas will reduce our oil production. Second, throwing NS gas on the market through a 48 inch line will drive the price of gas down dramatically. Now why would I trade expensive oil production for cheap gas production? If the US government gets tired of the effect of high energy prices on the national and World economy, the US has lots of oil on its own land and it can bring some oil on.
We gave away ANS at 2+MM/bbl./dy through the '80s and early '90s and gave the US twenty years of unprecedented prosperity. In return, when we wanted to start bringing on some of ANWR and our own Arctic Coast reserves to offset our declining production, the US decided we were bad people who wanted to wipe out the caribou and the polar bear and were spending too much money on things like necessary bridges and wouldn't allow it. Right now, I'm feeling really good about ANS at over $100 and State budgets running multi-billion dollar surpluses. Don't see any reason to upset it and am working diligently on getting as much of that money as I can.
In Vino Veritas
"The Double-Cross Company".
It's not so much a paean to XOM as it is to the industry, and a warning that easy political victories that feel good in the short term will come back to bite us in the butt.
There is more stupidity than hydrogen in the universe, and it has a longer shelf life. - Frank Zappa
I was all ready to give Exxon a hug ... until this article caused me to look at Exxon's SEC filings (look for 10-Ks).
1998: 447 wells drilled, and oil at $10.35 a barrel.
2000: 1,035 wells drilled, and oil at $30 per barrel.
2007: 971 wells drilled, and oil over $80 per barrel.
And I looked at what we said when oil first hiked (from January 17, 2000).
BILL RICHARDSON: Everybody was caught napping. Nobody predicted what would happen. But it's not that we didn't have a response. We have a response, but at the same time we don't intervene, the government doesn't intervene in fuel prices and in oil markets.
I can no longer buy that "money hauled in ... goes vastly more toward exploration."
They also may be spending money on downstream projects, or buying reserves in the ground.
Plus, as the cost of the product has increased, so has the cost of drilling & equipping new wells.
Domestically, the number of rigs working has doubled since 2002.
The point being, Obama's policies would punish oil companies and discourage drilling, thereby restricting supply. Does that sound like a good idea to you?
There is more stupidity than hydrogen in the universe, and it has a longer shelf life. - Frank Zappa
...usually means refineries and gas stations. The only company building a new refinery in the US is Saudi Aramco (with Shell). And I would ask "How many new gas stations have you seen lately?"
Instead of building new refineries, outfits like Valero buy up old refineries (eg, Orion and Aruba ) and swap refineries with other refiners (eg, Lima ).
As to new wells ... thanks for the link ... but notice that most of the wells are for gas ... and many are due to exploitation of the Barnett Shale fields around Ft. Worth.
The price of oil, not legislation, dictates drilling activity.
I'm not sure that Obama's policies will "punish" oil companies ... most recent Bush policies rewarded the companies, and they haven't really turned those rewards into more wells, more production, or lower prices. Taking away an unearned carrot is not the same as a beating with a stick.
sharpest knife in the drawer but I did manage to get my MBA in Economics. Could you please explain what you meant by posting the information on wells drilled and oil prices. I suspect that you meant to prove something but I cannot figure out what you could possibly mean.
Oh ... we could get into ROI and ROA and ROE ... but one of the simplest ways to determine if an oil company is going to produce more oil in the future is to look at how many holes it is putting in the earth to get that oil. One might expect that, in a low-revenue year (eg, 1998), the company might not be able to afford to drill many new wells; and when revenue doubles, twice as many new wells might be affordable (eg, 2000).
Once drilled, the cost of lifting oil out of the ground remains relatively steady (allowing for inflation and putting aside the future costs of secondary and tertiary recovery). So, it costs the same to lift a $10 bbl as it does to raise an $80 bbl (admittedly simplified) ... the difference is profit.
The point is: when profits are extraordinary (eg, 2007), one might expect even more wells to be drilled ... and this is not happening. That harms the political case for tax breaks (to produce more energy), and doesn't help the outlook for future earnings.
exxon mobile did indeed drill more wells when the price rose to 30$+ a barrel, but drilled the same number in subsequent years.
The problem is that your understanding of the process is incomplete.
point one: When we went through the long years of very low oil prices, there were many exploration studies which kept adding up on places to drill since actual drilling was reduced due to the low prices. When prices jumped up initially there was a large number of likely sites.
point two: in the last ten years the COST of exploration and new wells has risen almost exponentially, due to many factors
(a) more exploration in deep water sites (b) more political volatility in areas of the world with known reserves, and (c) greater world wide environmental restrictions.
You cannot simply make a causal relationship without knowing all the facts. Just understand this, the Oil companies pay more in taxes than they take in profits, and the profits and shares of stock fund the pensions of millions of Americans.
"Nothing works like freedom, Nothing succeeds like liberty"
Kyle
Yes, lots of likely but unproven reserves were mapped out by Exxon and others during the down years.
I wouldn't say costs have grown exponentially, but they are increasing. In its 2007 report, Exxon itself states that "Nonconventional production utilizing specialized technology ... is expected to grow from about 30 percent to over 40 percent of the Corporation’s output between now and 2012."
In 2006, Exxon paid almost $28 billion in income taxes, leaving them with a modest $39.5 billion profit.
I'll never understand why people constantly pick on a company whose profitability and growth are middle-of-the-road at best.
I've owned XOM stock for a very long time. Over many decades, it has a consistent growth record, but in recent years it's been a dog. Not as bad as Microsoft (a company with far higher gross margins), but still, "fully-priced" is about the best you can say for XOM.
And I've also done business with them as a vendor. The key metric that they manage to is return-on-equity. Their pre-tax ROE is well above average in their integrated-major peer group. To get that number up where it is, they barely spend money on anything. They earn every penny they make.
If you really want to look at a company that is profitable way beyond reason, look at Google. (Oops, maybe not, their stock is down 40% since November.)
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
1) They don't understand business in the first place; and
2) They take all their cues from the MSM, which has even less understanding of business.
There is more stupidity than hydrogen in the universe, and it has a longer shelf life. - Frank Zappa
Well, Blackie beat me to most of it, and it's never workable to argue about quantitative aspects of business with innumerate leftists....
But indeed the net after-tax margins at the oil majors are at best fair-to-middlin'. These days, they're in the 9 - 10% range, and those are historically very high.... for most of the recent past they've been below 5%. If you look at other sectors, e.g., Intel's net after-tax margin is in the 20s, and other varied technology folks turn in much higher numbers.
Last time I looked XOM's annual revenue was something north of $450B, so just using the net after-tax $ number raw is disingenuous.
Meanwhile, I really don't know the extent to which the business has changed for the US oil majors - and here is where Vladimir is invaluable. If I've read correctly, they control less and less of their crude supply (less than 10% now?) and thus are increasingly value-add processors of someone else's extracted raw material.
The last thing I'd like to toss out is the contention that the big run-up in the price of crude isn't due to "running out of oil" or some sinister form of manipulation.... and that insight can be gained by considering as a package the run-up in the price of crude, the crumbling of the value of the dollar, and the run-up in the price of gold. Steve Forbes noted recently that back not-that-long-ago when crude was trading at $25 a barrel, an ounce of gold bought you 12 barrels of crude. Now, an ounce of gold buys you about 10 barrels of crude. In those terms, the "real" price increase is about 40%, not 4x. But debase the dollar and create too much money.... and then the gold price goes through the roof and takes black gold with it.
I remember writing about that several times here last year. Now it's conventional wisdom, showing up in Bloomberg headlines all the time, that oil and gold are up on inflation-hedge buying.
I haven't done the math but I think you'd find a tight negative correlation between oil and the value of the dollar, going back to mid-September. In other words, crude oil futures inversely track short-term US interest rates.
The correlation with gold is close but not as close. Gold started rising weeks after oil did. I think that's because gold is so hard to buy and hold compared to oil that it's just not as good a hedge. There's maybe $300 billion worth of gold in the whole world. Oil is $4 trillion every year.
Regarding Exxon's business mix: their revenue split is roughly fifty-fifty between upstream and downstream. In their most recent quarters, the former is big profitable and they're getting clobbered on the latter, because crack spreads have tightened so much. Two years ago, the pattern was the exact opposite.
Taxes and Go Juice. There's loads of ways petroleum is taxed long before Uncle Sam wants his share on Form 1120. Check out Figure 1, a chart called "Oil Industry Taxes Have Outpaced Oil Industry Profits Since 1977" at http://www.taxfoundation.org/news/show/1168.html
Exxon's popularity in Alaska. Exxon's side of the Valdez lawsuit that's in the Supreme Court now points out that under maritime law, a ship owner is not subject to punitive damages for the conduct of the ship's captain unless the conduct was directed by the ship's owners. According to Exxon's lawyer, "No court has ever upheld an award of punitive damages for either the intentional or unintentional discharge of hazardous substances."
No one's saying the Alaskans weren't damaged, but they better hope for some judicial activism. I could be wrong.
I guess if Exxon would just give it up they would be lots more popular. This approach was tested by several young ladies in the high school I attended but the hoped for result was not forthcoming.
Then they could learn the consequences for themselves without endangering the rest of us.
I don't live in that part of the State or participate in one of the effected industries. My take is that the damages were/are overstated owing to a symbiosis between Greenies who wanted to make it the ultimate catastrophe and Alaskans who are ever eager to reach into any cookie jar.
The Admiralty law in play is an 1814 case. In those days, the owner turned his vessel over to the Master with only the most general direction, often with none other than to go to some area and seek trade, and might not see the ship or hear from it again for years. It was reasonable that the owners not be held accountable for some actions of the Master.
In 1989, even moreso today, a vessel's owners had direct and immediate contact with the vessel at any and all times and the Master is under the strict control of the owners. Times have changed, and in today's world, there is no reason that shipowners should have a more protected status than the owners of airliners, trucks, buses, etc. Consequently, I wouldn't consider it judicial activism for the USSC to overturn or change a holding from 1814 and articulate a new doctrine that contemplates modern communications.
In Vino Veritas
...Congress passed the Oil Pollution Act of 1990 (a/k/a OPA 90) which requires maritime operators to be responsible (via bonds) for the first $35 million in direct damages, but also capped $35 million as the damage limit.
With a highly visible accident like this one, everybody & their brother comes out of the woodwork with some theory of collateral damages, hoping never to have to work again. [N.B.- in this case, dennism is my brother.] The idea of the liability cap is to make sure that there is money in place to cover 99.9% of the cases, while not restricting business activity to just the biggest of the big companies.
There is more stupidity than hydrogen in the universe, and it has a longer shelf life. - Frank Zappa
Yeah I think you're probably right about the Greeneries and the cookie jar.
Re: exempting owners from the negligence of the Master in 1814. All well and good. But if XON had no liability under the law in 1989, they couldn't have even bought insurance to cover the risk. How fair is that? To stick them with a liability they couldn't even have insured against?
"Times have changed" is always the catchphrase for judicial activism. But you could be right. If so, the Legislature should change the law, not the Court.
"Consequently, I wouldn't consider it judicial activism for the USSC to overturn or change a holding from 1814 and articulate a new doctrine that contemplates modern communications." I would think that you'd be in the minority at RedState. Maybe I am wrong.
The Ds here are whipping up the heathen masses about the evil, conservative "Bush Court" more than anything else on this.
As to the final point, it wouldn't bother me to be in the minority on lots of issues here, but I suspect I wouldn't be in the minority among those who know anything about law. A showing of changed circumstance is an essential element in defeating any resort to stare decisis or res judicata. We aren't talking about the Constitution here; I'm not even sure we're talking about statutory law, but rather just Admiralty Court precedent.
In Vino Veritas
Don't you think it would be odd if the Supremes said the law was "no liability" for shipowners for 185 years, up until 3/24/89, then there's a period of "the sky's the limit liability" for a few months that ended when Congress capped liabilities at $35 million in 1990?
(I'm nervous about relying on Vladimir for the informaiton about the law change in 1990. He lies a lot.)
Sometimes the law can seem to defy the law. For example, suppose I'm holding Vladimir's note. If Ivan steals it from me and sells it to Serge, Serge is protected if he bought the note without notice of defect. I could recover the car that Ivan stole from me and sold to Serge... I could recover a diamond ring... but not a negotiable instrument. Supposedly, the free exchange of negotiable instruments is so valuable to society that the law is happy to override any appeal to equity when negotiable instruments are stolen.
Anyway, it doesn't bother me if there's inconsistency in the way damages are laid on a shipowner vs. a Greyhound bus.
not actual damages. As I understand it, and I could be wrong; I'm a labor relations hack, not an Admiralty lawyer, the '90 law applies to actual damages, punitives are in another area, and the 1814 precedent is controlling regarding punitive damages unless the SC says different. I do see how they could say different in manner that would not be offensive to the doctrine of stare decisis.
That said, there's plenty of avarice to go around, and lots of Alaskans see this as pink Bubble-Up and rainbow stew. In point of fact, the money that XOM poured into the clean-up broke the recession bordering on depression that Alaska fell into after the price crash in '86. Lots of people made lots of money not doing much; it was almost as much cash infusion into the State as building the Pipeline.
I don't have a dog in this fight, I wasn't on the jury, I wasn't one of those allegedly damaged, and I have no illusions about how avaricious Alaska's trust fund babies can be. So, we'll see what the USSC does.
In Vino Veritas
that there ain't a whole lotta' love for XOM here in AK these days. Between their sitting on gas reserves and obstreperousness about the Exxon Valdez damages, one wouldn't want to go around introducing oneself as working for Exxon. That said, I agree with you in principle, but I'm not giving them any hugs; they want oil for as little as they can pay and they play rough to get it that way, I want to sell it for as much as I can but politicians can be bought cheaply.
In Vino Veritas