Dumb politics, on energy

Five executives from Big Oil are set to be grilled today by Congress on why it is that they are so greedy that even though they made record profits last year they still think they qualify for tax breaks of $18B.

Unquestionably, these are great times to be in the oil business. Sunk investments from the past are now reaping high rewards as the developing world has pushed oil prices over $100/barrel. However, let's think just a bit about what's really going on here.

Say you got a raise last year and made more money than you ever have. (By the way, the whole idea of things is that each year you try to make more money than last year since things just keeping getting more expensive, so one hopes that every year is a record year.) You did well last year, perhaps even collected a handsome bonus at the end of the year for your hard work. Now the IRS calls you in for an audit. They'd like to reneg on deducting your charitable donations and your mortgage interest. "Wait a minute," you say, "I played by the rules and was planning on those deductions. Without them I'm going to have a hefty income tax bill."

"Well, that's only fair. You made good money last year. You should pay more."

"But I did pay more. I pay a percent of my income, and that percent goes up as I make more."

"Yeah, but it's still not enough..."

Let's strip apart what Big Oil has really done.

If you held Exxon Mobil for the last five years, you'd be really happy. Their stock price was around $36/share five years ago and is now over $82/share - over a 100% increase over five years or 18% per year - that's very good.

However, if you'd held their stock for the previous five years you would have bought at $35/share - a $1 increase over five years. Pretty miserable. So in the most recent five years things went well, but over the entire ten year period you would have had a return of 9%, which is basically the market average.

And those record profits? Exxon Mobil made $39.5B last year!!! To calibrate that, you have to know they are the largest company in the world, with revenues of $377B, which means their net margin is 10%. AT&T made 12%. Kraft made 8%. Is 10% unreasonably high? Should they give some back?

My concern with these profit witch hunts that happen from time to time is that they undermine one of the things I like about capitalism and that is that it basically follows the law of the harvest. That which you sow, so shall you reap. Or better said in this case, as you explore and drill, so shall you pump and refine. If you take away later returns, you stifle earlier investment. As (yet another) aside, this is precisely the logic that comes down from time to time when a pharma company makes huge profits off a blockbuster drugs. After billions of dollars of R&D and ten years of regulatory hoops, they hit the jack pot and then everyone gets mad, often even those whose lives and lifestyles they are improving.

So Congress would apparently like Big Oil to do one of two things (in the name of Big Government):
1) Give money back to the government, give up on the tax breaks. All of you that would decide to give a little something extra to the government if you get a good bonus this year, please raise your hands. Anyone? How about $18B? Where's the love? Where's the gratitude?
2) Cut price and give money back to the people. Supply and demand are balanced by price. If you cut price you increase consumption. Do we need to consume more oil? Is higher consumption something we want to encourage?

I do agree with one assumption underpinning this procedure. If someone wastes the people's money - they should give it back. After wasting all this time and money, shouldn't members of Congress take a pay cut? And as long as we're at it, I feel they should void their pensions after their baseball steroids probe.