Should Oil Be Profitable?

...operations will be as high, as a percentage of sales or equity, as serve the vital function of telling capital industries that use a lot of energy don't use and labor to switch to new techniques or products...

...Tom Wicker even managed to get a column by letting gasoline prices rise by about as much as the total price here (the U.S...

...Yet both newspapers a few months ago were assuring us that the free press would be dead without absolute privilege...

...WVe should consider taxing excessive profits wherever they occur," says Senator Jennings Randolph of West Virginia, "not only petroleum or energy companies, but across the board and throughout industry...

...down to a "fair r e t u r n " - - a variant of the "just price...

...Well, if we knew for sure that the corporate tax was completely shifted to consumers, rather than also coming out of stockholder income and funds available for growth, then we might be able to say that reductions in the corporate tax only benefit consumers...

...refineries from drawing foreign oil away from Europe's relatively free markets...

...Profits must be free to deviate from the norm, because such deviations are signals for capital tomove from losers to winners...

...If the outcome had been widely anticipated, it would not have were clearly "excessive...

...The brokerage house of Wagenseller & Durst compared the return on stockholder equity of eleven oil majors with the combined return of ABC, CBS, the New York Times, Time, Times Mirror, and the Washington Post...

...But Exxon's stock rose only 8 percent last year, Mobil's fell 28 percent, and Texaco's fell 22 percent...

...Now they are denouncing the President for daring to claim "executive privilege" for himself and his White House tapes...

...The Washington Post found that: the President's assertion of executive privilege "comes very close to an assertion that certain aspects of the presidency are apart from and above the rule of law" (July 29, 1973...

...ConAmerican Petroleum Institute in Los An- versely, reducing the depletion allowance geles, December 4, 1973: 'WVe are all going to have to really tighten our energy belts," said Frank Ikard...

...Note that this compares with a 93 percent profit increase for the New York Times during the same period, and 57 percent for the Washington Post...

...The conclusion is absolutely wrong, of course...

...Third, the oil companies don't just sell oil...

...New models are carrying an extra couple of hundred pounds of costly bumpers, which few would voluntarily pay for, and this too cuts mileage...

...And people a r e talking economics even when they don't realize it...

...Try Alchian & Allen's University Economics or Roger Miller's Economics Today...

...My weight is up 25 percent--am I fat or thin...

...But it is incredible to claim that only profits would be affected...

...derwriting of losses (e.g., airlines, trucks, railroads, telephones, stock b r o k e r s . . . ) . Have you ever heard of a regulated industry asking to be deregulated...

...So why don't they have the decency and humility to just shut up...

...Exxon's 59 percent profit gain translates into an 83 percent gain in earnings from over 100 foreign countries, and a 16 percent gain in the United States...

...The real motivation behind the use of energy is the desire to have more goodies with less work...

...Typically, Walter Cronkite declared (May 2, 1973) that reporters' sources must be granted an absolute privilege or the free press is finished: '~he only remedy is a law that states simply, and therefore eloquently, that the First Amendment means what it says and no reporter can be hailed before any government body and forced to reveal confidential sources of information...

...Contrary to the prevailing demonology, i t . i s very hard to make as much money on a much smaller volume...

...Banks do control a lot of oil stock (through pension funds and the like), but it is a simple matter to switch to something more profitable, like soft drinks...

...News & World Report says, "The oil business is h u g e . . . its total profits are larger than for any other industry...

...Those who are buying at this late date get no net advantage...

...price, if you subtract excise taxes, is still about the same as for distilled water...

...Profits last year were generally exaggerated and overtaxed because of temporary inventory profits, depreciation being allowed only on the preinflation costs of machinery, and the general erosion of the purchasing power of a buck...

...These caveats aside, the oil companies definitely did earn %vindfalr' and "excess" profits in 1973...

...If we levy Stiff U.S...

...Gulf operates the new town of Reston, Virginia, and is considering buying Ringling Brothers-Barnum & Bailey Circus...

...I have been accused of simply making "a concise summary of the oil industry's arguments," and favoring "artificial devices which interfere with the free-market mechanisms" (B~it Hume, the New York Times Magazine, January 6, 1974...

...Most journalists and newspapers were demanding "absolute privilege" for themselves last spring...

...Thus, while many t a x breaks may have been a mistake from the start, they are not easy to get rid of...

...Before we get into the prospects for oil profits, several complications should be mentioned...

...Second, with all the loose talk about big fish swallowing little fish, it isn't widely noticed that the big fish are foreign: Burmah Oil (London Exchange) acquired Signal, the half-nationalized British Petroleum company will soon have a controlling chunk of Sohio...

...There are some," wrote Brit Hume (Jack Anderson's Sancho Panza), "who believe the major oil companies conspired to bring about these results...

...Energy-intensive industries should not be artificially insulated, through "priority" allocations, from resource scarcity...

...So, I will now demonstrate the proper way to attack the oil industry...

...He reasons that "as power has been increasingly introduced there has been a comparable decrease in labor needed . . . Thus, as power productivity declined [sic], labor productivity increased . . . . . Profits depend on labor productivity...

...When inventories have been purchased at a low price, and rising demand allows these inventories to be sold at a high price, the r e s u l t is an unanticipated "windfall...

...If oil is so profitable, one would expect critics to put their money where their mouths are...

...i s will mean . . . fuels allocation, and it probably will mean fuels rationing . . . . But any rationing program must be predicated on a sound priorities system . . . . Personal comfort and convenience must--of necessity--rank below the priority c l a s s e s . . . " Ugh...

...About 55 percent of capital and exploratory expenditures were in the United States in 1973...

...out of being outraged about Gulf's best quarter...

...The latter, after all, was the intended effect...

...are not talking about 1973 profits, but about 1974 and beyond...

...Cities Service and Continental Oil are definitely conglomerates...

...But been possible to purchase the inventories at a low price...

...Such profit increases, reports the National Observer, "set off a wave of criticism from lawmakers concerned that the industry may be reaping a windfall from the hardships of millions of citizens...

...If things can change so fast, it just goes to show you shouldn't take the present mess too hard...

...John Winegar of Chase Manhattan's Energy Economics Division estimates that even the 1973 oil profits will fall short '2)y more than a billion dollars" of meeting capital needs...

...Banks turn out some pretty scholarly research, as a service to their customers (banks, like all industries where competition is banned, compete in frills): But "asking Chase's view of oil compnay profits," according to ' John Lee of the New York T/mes, "is like asking Herbert Stein's opinion of President Nixon's budge message...

...There are more than enough critics to drive the stock prices sky-high...

...Texaco earned 65 percent of its profits abroad, and had only a 3.6 percent gain in profits from U.S...

...This is true if an industry behaves in a competitive manner...

...Thus, oil profannual profit ever earned by any industrial i t s , at least for these twenty-two firms, company...

...Once a monopoly has found the wealthmaximizing combination of price and output, it responds to changing supply and demand conditions exactly as a competitive firm would...

...Of course, it isn't too hard to beat the industry's own average return on equity, which fell each year from 12.5 percent in 196.7 to 8.7 percent in 1972, and was usually below the average for manufacturing...

...So far as we can see," says the Journal, %he only possible interpretation of this is that profit margins in the oil industry have been under competitive pressure, and because of the same pressure the effect of tax breaks has been passed along in lower prices t o t h e consumer...

...As energy costs rise, events may follow Commoner's prescription...

...The other side of keeping some profits down, as we noted, is keeping others up...

...I have seen few things that I their prices and lowers the yield...

...That may be a necessary cost of reasonable air quality, though even Congress is having doubts, but it is hardly a result of the "profit motive...

...Given this shortage of capital, which in' vestment adviser T.J...

...If you believed what you read in the newspapers and saw on the newscasts, it looked as if the White House and Justice Department were about to abolish the First Amendment and put all the journalists in jail...

...The percentage increase game was played again in the fourth quarter, but one had to be even more selective...

...Booming profits were common in 1973, partly because everything expressed in dollars went up (dollars expressed in terms of everything went down...

...Most industry spokesmen have also supported government allocation (with favoritism to big business) and rationing, which is hardly the essence of my position...

...Taking the first nine months of 1973 as a whole, Exxon's profits rose 59 percent above the level of a year before, and sales were up 40 percent...

...Significantly, Sohio ranks first among oil companies in domestic reserves per dollar of common stock...

...In view of the threats of nationalization, even here, there isevery reason to expectmore and more oil companies to move out of oil and into other fields...

...Commoner must own a very old car...

...George Shultz, my favorite treasury secretary, figures that the rate of return for twenty-two large oil companies averaged 15.1 percent in 1973...

...Okay, one--natural gas--but no others...

...But is there competition in the American energy industryT' Freeman doesn't bother to answer the question, but it's a red herring anyway...

...Yet those who are talking about taxing-away the windfall profits (windfalls to governments are apparently o.k...

...When the oil companies go to replenish their inventories, all concerned--from foreign governments to domestic laborers---will get a piece of the action...

...There's enough risk in the oil business without adding political caprice...

...taxes on oil produced and sold abroad, that would put U.S...

...Resources can be devoted to current consumption (making food or fuel) or to expanding capacity for future production Ecologist Barry Commoner wrote a column entitled, "Profit Motive is Root of Our Crises...

...This surely contributed to the paucity of investment capital in the industry, which is sometimes (e.g., by Tom Wicker) called a "failure" to build sufficient capacity...

...The New York Times declared, '~Phis new Nixon Doctrine virtually sets the person of the President above law and public ethics" (July 24, 1973...

...I seriously doubt that 1974 oil industry profits on U.S...

...Gulf's 1972 profits were a modest 3.2 percent of sales, so they too showed a sizable (79 percent) increase...

...These are the oil companies with the highest profit gains in the fourth quarter...

...Firms substituted energy for labor partly because energy has been cheaper (not that one can make paint out of labor alone...

...Italy, like the United States, tried %ough" (stupid) price controls, and thus drained the blood from its economy...

...Land, labor, and machinery can't be doing two things at the same time...

...If one must reduce matters so, it should be noted that when the oil companies can't finance operations out of profits, they borrow from banks...

...Well, these are complex matters...

...Even in a hypothetical stationary equilibrium, some profits must be above average to compensate for risk...

...Just listen to some of them...

...As an illustration of his theory, Commoner complains that '~we now use . . . high-compression smog-generating engines instead o f low-compression smog-free engines...

...To imply that third quarter profits resulted from scarcity ignores the fact that unit sales of the big seven oil companies were up 6 percent in the first three quarters of 1973...

...That is, big oil cut supplies to increase supplies, and raised prices to squeeze competitors...

...Now while windfall profits from devaluation or inflation are just a lucky break, excess profits are the stuff that spark, fuel, and lubricate our economy...

...Steel's profits were up 91.1 percent, not to mention MGM (profits up 289 percent--I told you not to mention it...

...First, most multinationals sell more abroad than they do here...

...Finally, the monopoly issue is as irrelevant as it is implausible...

...Holt estimates at $75 billion, we should nonetheless want to see a sizable chunk being attracted to oil and other goods that are getting scarce and therefore profitable...

...coal companies...

...That's the definition of an increase in the real wage...

...Low labor productivity can be very profitable if wages are also low (e.g., Hong 6 The Alternative May 1974 Kong...

...The Department of Commerce attributes 42 percent of the increase in pretax profits of nonfinancial corporations in the first nine months of 1973 to "inventory profit" i.e., the effect of inflation in raising the value of inventories...

...Most European governments With this in mind, it is not as easy t o attracted ample supplies, and cut demand, be upset because Del Monte's profits were up 82.5 percent in the fourth quarter, or because U.S...

...Third, the Wall Street Journal (February 7, 1974) notes that after-tax profits in oil have not been quite as high as elsewhere, despite supposedly preferential tax treatment...

...Between 1970 and 1985, says Winegar, the petroleum, industry will need $1.35 trillion to keep up with demand--which implies an annual earnings growth of 18 percent...

...If that sounds strange, you have been listening to the Big Lie too often, instead of browsing through any good economics text...

...Commoner's theory would lead one to believe that labor productivity (and real wages) should fall, and that we should substitute human for nonhuman energy--a strange conclusion indeed...

...Excess losses also (making fertilizer plants or refineries...

...If they can't bid oil away from competing uses, that means consumers prefer the other uses--including driving t h e i r cars...

...It wouldn't surprise me a bit if the scoundrels were behind all this talk about federal regulation, since everyone (except" Tom Wicker) knows that's the road to minimum price enforcement and taxpayer un...

...previous decade, and about 13 percent for all manufacturing in 1973...

...Federal Energy Office favoritism for industries that use a lot of energy is a serious obstruction to necessary adjustments...

...The flood of government bonds is a drain on the private capital market---not a "fiscal stimulus...

...Profits depend on the difference between how much money you take in and how much you spend...

...operations...

...That would certainly be my advice to the oil majors--if they must stay in countries where they aren't welcome, like the United States...

...Similarly, when the depletion allowance was introduced in 1926 it presumably increased the price of oil Stock, and attracted producers who would otherwise be unable to c u t t h e mustard...

...Exxon's 80 percent gain in the third quarter was well above the 46 percent average for the "seven sisters...

...The result: 14.7 percent for oil, 22 percent for the oil critics...

...In theory," says S. David Freeman, director of the Ford Foundation Energy Policy Project, '~higher prices will not only dampen demand but provide the incentive for increased supply...

...Adjusted retained earnings, after paying dividends, fell from $19.2 billion to $2.1 billion--which is surely a major explanation for the widespread "failure" of industries to invest enough to eliminate shortages...

...Now it looks as though the journalists are about to abolish the Administration and put everybody in the White House and Justice Department in jail...

...Banks, for example, aren't allowed to offer more than about 6 percent interest to small savers--even during a 9' percent inflation...

...Only 16 percent of Exxon's production and 32 percent of its sales are from the United States...

...I don't think that we should be unnecessarily pressuring mulThe Alternative May 1974 tinational corporations that are based here," warns Attorney General William Saxbe, '~they'll just base someplace else...

...1 Eugene H. Methvin The Hypocrisy of Absolute Privilege Jus-r A F~W MONTHS ago, it seemed as if every reporter in the nation was being chased by a sheriff with a subtx~na...

...These people simply don't understand the significance of statistics, the role of profit, or the nature of taxes and monopolies...

...Among stockholders, howevdisagreed with more strongly than an ob- er, only those who got in before the tax noxious speech by the president of the _9 break would stand to benefit from it...

...Edmund Burke (1777) You ALREADY know the story...

...More than half the new cars sold are compact or mini, but they don't get better mileage than a 1954 Cadillac...

...Tax and monetary policies encourage consumption and indebtedness, while many government policies discourage or even penalize saving and private investment...

...But it seems silly to blame special-interest legislation on the special interests rather than on (a) the mixed economy which allows such things, and (b) corrupt and foolish legislators...

...George Terborgh has adjusted accordingly, and found that after-taxprofits of nonfinancial corporations, expressed in 1965 dollars, fell from $36.1 billion in 1965 to $18.6 billion in 1973...

...Since the Clean Air Act of 1970, cars have had inefficient low-compression engines with elaborate smog devices, and these changes have increased gasoline consumptionby some 300,000 barrels a day...

...Thus, tax advantages for homeowners drive up the price of houses and residential property...

...Costs will rise to eliminate the windfall...

...Oil companies created the shortage to drive up prices, push the Alaskan pipeline through, soften environmental roadblocks, and weed-out those pesky independents...

...Excess" profits seems to mean above the average for either the industry or nation...

...Labor has been relatively costly because 'r productivity rose, which in turn is largely due to the use of energyusing machines...

...They'll have to" With huge national oil companies developing in most of the oilrich nations, current congressional proposals could help translate the names of the biggest companies into Arabic or Spanish...

...About a fourth of the cost of operating a refinery, for example, is fuel to run its boilers: Ironically, this fuel is usually imported from Venezuela, and the cost has soared...

...What wasn't mentioned is the fact that Occidental's 1972 profits were only four-tenths of one percent of sales, and that Occidental's petroleum operations are almost entirely overseas...

...multinationals at an enormous disadvantage in competition with foreign-based giants like British Petroleum and Royal Dutch Shell...

...Fourth, the enormous size of the industry simply means that people ~ choose to buy a lot of their products...

...The rationale, as always, is to "save jobs...

...The trouble is that the discussion is so uniformly poor, especially when conduct~ by natural scientists and journalists...

...Few investment advisers are confident that oil company profits are secure, and most are suggesting investing in companies that supply the oil companies (e.g., by building refineries...

...I don't recall any headlines about the fact that Standard of Ohio's profits were down 40 percent...

...Many oil companies continued to do well, however, and Exxon's profits maintained that 59 percent lead...

...Second, the oil industry wrongly blames high consumption on naughty consumers rather than on low prices...

...A hint: If the oil industry could increase profits by cutting supply, why did it wait until 1972-1973 to do so...

...The apparent paradox is explained by the fact that stock purchases are geared to future earnings, not to the recent past...

...In the New York Times (January 13, 1974) Tom Wicker reported that Occidental Petroleum had a 417 percent increase in net profits in the first nine months of 1973...

...This isn't an either/or decision, but a matter of marginal adjustments: a decline in the use of plastic containers and aluminum beer cans, an increase in the use derlying notion is to level every firm up or of cotton textiles instead of polyester...

...The result of this sort of thing is that people have the dollars and desire to buy more than can be produced...

...But tax subsidies, and direct subsidies, are usually at least partly capitalized within the price of the favored commodity...

...The una lot of labor...

...Yet Congress would, on a dare, tax away excess profits and subsidize excess losses (e.g., Lockheed, Penn Central...

...But percentage increases convey no information whatsoever...

...In the space of three months, we areseeing some of the wackiest reveri i sals in the history of circus acrobatics...

...The oil majors "wallowed in profits," added T/me, "after-tax earnings at Exxon in the third quarter, for example, soared 80 per cent...

...But third quarter profits obviously had no bearing on the oil crunch, which wasn't even announced until the fourth quarter...

...First, I have always openly opposed oil import quotas, and would have few objections to eliminating depletion allowances on new wells...

...A sizable part of last year's "windfall" (about 30 percent of the increase in Texaco's foreign earnings) was due to the effect of dollar devaluation on foreign currencies held by foreign subsidiaries...

...Time said something equally cute, and equally libelous, implying that it's all a matter of opinion and bank opinions are too biased to deserve serious consideration...

...Tom Wicker complains that "Exxon recently announced the largest in 1973...

...Making municipal bonds tax-free drives up in 1969 imposed a rather unfair windfall loss on those who had purchased stock at a price reflecting any tax advantage...

...This indicates that costs are expected to rise more than revenues...

...My income rose 100 percent in two years---am I rich or poor...

...Yet we are now assured that freedom will The Alternative May 1974 7...

...To the degree that this is tried, and it has been, resources are immobilized and entrepreneurship is stifled (congressmen should be required to read Israel Kirzner's Competition & Entrepreneurship...

...These statements have no economic significance whatsoever: both are logically compatible with inadequate profits, or with the absence of a dominant firm within this large international market...

...No other country has matched our insanity in allocating fuel according to "priorities" (favoritism) and 1972 use...

...That compares with 10.9 percent for those companies in the The Comparison of Profits to Investment for Texaco ($ millions) Year Capital & Exploratory Net Income Expenditures 1973 1,292.4 1,333.9 1972 889.0 1,192.9 1971 903.9 1,162.2 1970 822.0 906.1 1969 769.8 791.9 1968 819.6 1,065.3 1967 750.5 893.7 1966 671.8 737.4 1965 590.9 718.9 1964 540.7 604.8 Note: Direct taxes (foreign and domestic) exceeded net income in every year since 1967...

...If we keep domestic crude at half the price of foreign crude (Henry Jackson's brainstorm), foreign producers will be able to attract the lion's share of equipment and expertise...

...Sohi0, Continental, and Occidental own very sizable U.S...

...The "socialist" government of West Germany relied completely on a free-market solution, and now faces the highest growth and lowest inflation in Europe...

...Total dollar profits will drop sharply if federal allocation and price controls keep U.S...

...This is why windfalls are, by definition, ephemeral...

...So much for self-sufficiency...