Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Don't Hate Exxon Because It's Successful


Big oil and the beauty of capitalism.

"Oil. that is. Black gold, Texas tea…"
-Earl Scruggs and Lester Flatt

Those lyrics, from one of my all-time favorite television shows, "The Beverly Hillbillies," could have added a descriptive "economic cyanide" tossed in these days. That's the way crude oil is being portrayed these days, as the ultimate economy killer.

Yet the reality is the price of crude and gasoline is a reflection of success. Obviously, there's a point where high input cost leads to diminishing returns, but just think about this: The only way we are going to see gas at the pumps under $2.00 a gallon is if the U.S. economy and the world's economies run aground. This is because the topic is so explosive nobody has the nerve to say: "Hey, high gas prices are good news." There are some environmentalists that say high prices are good as a deterrent but I say they're good in the sense that we can afford them. Some folks are in pain, to be sure, but if the U.S. couldn't afford gas there would be a drastic decline in demand.

One of the most fascinating things about the oil price breakout, which began with crude reaching a nadir in 2002, is that corporate profits and the stock market have also gone on a similar move higher. So the correct correlation is that higher gas prices reflect prosperity, not the headwind so many fear. Interestingly, when gasoline prices were declining at the start of the decade, so too, was the stock market.

Click to enlarge

This brings me to my greatest fear. Attacking oil companies because they make too much money is all the rage in the media and politics. In a capitalistic society this is preposterous. The notion a company or industry should be punished for making money for its shareholders in a fair business environment should scare everyone. I wonder if every person that believes oil companies should be punished would be willing to decline the next raise offered to them at work or to take a pay cut for the greater good of the companies they work for or society at large. Where does the earnings cut off come for any company competing in a global market? Most proponents of attacking oil companies use the word "fair." Yet they ignore the fact that these aren't the most profitable companies with respect to profit margins. In fact, oil companies are far from the most profitable publicly traded companies.

Exxon Mobil (XOM) isn't an empty building with a handful of fat cats sitting around smoking cigars. It's a company made up of over 82,000 employees: people with mortgages, people that want to send their children to college, people that buy goods and services. In the first quarter Exxon Mobil posted earnings that were a disappointment on Wall Street, in part because the company had to pay 49% in taxes on profits. That's shocking and sad. In the meantime Google (GOOG), the "cool" company, enjoyed net profit margins of 25% in part because the company only had to pay taxes of less than 24%.

Another thing that I find alarming, in addition to being unfair, with respect to attacking oil companies is that the rest of the world is embracing capitalism just as America is embracing a form of socialism. The notion that Exxon controls the price of gas is farfetched and unfounded. There's demand, which is growing by leaps and bounds around the world, and there are taxes (G7 nations made $460.0 billion annually from tax while OPEC made $410.0 billion in revenue) and there's also speculation. More than anything else is the fact that Exxon Mobil isn't the 800-pound gorilla that many people believe it is.

In terms of oil equivalent reserves, Exxon ranks 17 in the world, well behind government controlled entities including: National Iranian Oil, Saudi Arabian Oil, Iraq National Oil, Qatar General Petroleum, Abu Dhabi National Oil, Kuwait Petroleum, Petroleos Venezulea SA, Nigerian National Petroleum, National Oil, Sonatrach, Gazprom, PetroChina (PTR), OAO Rosneft, Petronas, OAO Lukoil, Petroleos Mexicanos.

I think Americans need to think twice about tearing down the U.S.' largest busineses and most successful people. I think it's unfair that people that create jobs should be vilified by people that simply draw paychecks but have never created opportunities. This is a scary time. Fairness works in so many ways and it's dangerous for jealousy and envy to get its hooks into capitalism.

Also, Americans are using gasoline and the price will probably go higher even if the Department of Energy is correct and demand over the so-called summer driving season declines from the year-ago period for the first time in two decades. Crude oil inventories have been building but gas inventories are decreasing rapidly.

Click to enlarge
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos