Monday, May 12, 2008

Demonizing Big Oil

I am certainly no fan of the current level of corporate power and influence on our society and government, but placing the blame for gas prices on oil companies alone is unhelpful oversimplification at best. Most of the oil that comes out of the ground is controlled by states, not companies, and the price of that oil is set by commodity exchanges and the oil traders who populate them. The price of gasoline is influenced by a multitude of factors, only one of which is corporate greed.

So before we decide that the oil companies need to be tarred, feathered and ridden out of town on a rail, let’s take a breath and try to think with the rational side of our collective brain.

You cannot scoop crude oil into the tank of your car and happily drive to the corner grocery store. Even if you could, you don’t have any convenient way to get that crude oil out from under the sands of Saudi Arabia and into the tank of your car in downtown Los Angeles.

Somebody has to pump the crude oil out of the ground, transport it across the ocean, refine it into useable form, transport that finished product and make it available for the consumer to conveniently pump it into the cars and trucks that will convert it into high-speed motion. Doing all of that requires a massive investment in capital equipment and a vast expenditure of money to purchase the raw material, pay the workers and maintain the equipment involved in that effort.

When the investment cost of equipment rises because the equipment becomes more expensive; when the oil becomes more costly to remove from the ground; when the governments that own the oil charge more to allow its removal; when the costs of transporting it increase; when the wages of the people involved in that industry have to be increased; when the costs of refining the product increase; when pollution controls become more strict and more expensive; and so on, then the selling price of the final product increases.

As the cost increases, which results in selling price increases, then the revenue increases and one would certainly expect the amount of profit would also increase. It has to do that for the companies to be able to continue providing the essential service of turning a useless mass of subterranean goo into a useful product at the point of sale.

Are the increases in profit disproportionate to the increases in cost? That is not an easy question to answer. The revenue statement of Exxon Mobil that I researched in an earlier post suggest that the profit levels certainly cannot be described as anemic. Neither would I describe them as outrageous, assuming that the books they publish are accurate and complete.

We need to keep watch on the practices of oil companies; the financial practices, bookkeeping, and the operations in the field and marketplace. When demand outpaces supply there is opportunity for greed and honest overenthusiasm to do harm to the public interest. Openness and fair regulation are essential, and it is by no means certain that we have those today.

When the public suffers, blame must be apportioned where it is caused and not merely to the companies most visible and easiest to point at. They may indeed be the cause; they may be only part of it, or they may be as much along for the ride as the rest of us. We need to find out before we start applying punishment.

In the meantime, the media blaring the “record amounts” of oil company profits in a manner devoid of context is inflammatory and diversionary. It detracts from the real problems of undersupply and overuse, and fixates on the lesser problem of what oil companies may or may not be doing. They certainly should be making profits.

“The worker is worthy of his hire” and a business is worthy of a fair profit earned on the delivery of goods and/or services.

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