WALSH: Excessive profits? No, we should thank oil companies

Excessive profits? No, we should thank oil companies

Matt Walsh

Editor and Publisher

People who don't understand how the free market works - i.e. Congress, socialists, protectionists, union organizers, government activists, et al - have become predictably shrilll lately over the retail price of gasoline. And, predictably, we have the usual whiners among the news media's editorial writers and in Congress - Chuck Schumer, our own Bill Nelson, Teddy Kennedy, etc. (the list is too long to print) - shouting how unconscionable it is for the oil companies to be earning record profits, charging $3 a gallon and that we should punish the Exxon Mobils and their shareholders (i.e. the pension funds of average Americans) with a windfall profits tax.

Yeah. That'll get those greedy profiteers!

This screeching is totally whacko.

The whiners must have this view that Exxon Mobil's directors and top executives are sitting around an extravagant conference table, smoking expensive cigars, counting their money and laughing at the world. But those who are demanding punishment are clueless to what really goes on - the amount of risk, capital, equipment and people it takes to get a gallon of gasoline to everyone's gas pump.

Nor do they apparently get the whole supply-demand thing. If China, India and the rest of the world are competing for oil, it goes without saying that if demand outstrips the speed at which the oil companies can find, extract and process the oil ... well, we all know what happens then.

The fact is the price of gas is $3 a gallon because we're all willing to pay that price; it's that valuable to us. Nor are there alternatives yet that are easier and less expensive to produce than oil.

When all of the know-it-alls in Washington say we need to develop alternative fuels, they are oblivious again to how creative the free market is. Most business people know that when a product becomes too expensive for the average man, creative entrepreneurs, risk takers and the marketplace figure out how to make that product or another one affordable for the mass market. That's what Bill Gates and Steve Jobs did with mainframe computers.

Likewise, if oil becomes so expensive and out of reach, some creative genius will find a way to make a competing energy product less expensive or at least equal to the price of gas. No amount of legislation or taxation will produce alternative energy.

So we don't begrudge Exxon Mobil and its competitors. We should be thanking them for taking the risks they take and producing what they produce. If they didn't, imagine the world if Exxon Mobil, British Petroleum, Shell and the other oil companies simply said they were sick of all the complaining and decided to shut down. What if they pulled an Atlas Shrugged?

So, are the oil companies ripping off the American consumers with "excess" profits? (What is "excess" anyway?) If you look at the table above, we sampled the pre-tax and net profit margins of seven companies to compare just how "excessive" Exxon Mobil's profits are. The profit margins, of course, are great indicators of whether companies are actually earning acceptable returns for investors.

We selected four major companies from different industries - Microsoft, Goldman Sachs, General Electric and Exxon Mobil - and three prominent newspaper companies whose editorial writers typically rail against capitalism. The latter we chose just to see if the proverbial pot is calling the kettle black.

The results?

Exxon Mobil's net profit margins are hardly egregious. Indeed, if the windfall profits crowd wants to punish anyone for being successful, Microsoft appears as though it should be the top target for price gouging.

But here again, why should anyone begrudge Microsoft for what it earns? It earns every penny! Just as you do, and just as Exxon Mobil does.

+ We should drill in the Gulf

It's a good bet that this squawking about price-gouging gasoline prices would be muted if Congress - in particular Florida's congressional delegation - and the American public would abandon their irrational opposition to oil and gas drilling in Alaska and the eastern Gulf of Mexico.

This is a senseless choice - to ban drilling. We want lower gasoline prices, and we want to be less dependent on foreign oil producers, and yet we're restricting supply - primarily for the faulty reasoning of placing trees, caribou and fish on a higher plane than man himself.

Remember the Exxon Valdez oil spill? It ranks as - get this - the 53rd largest oil spill in the world. The Alaskan shore survived and recovered. And how many sea-based oil rigs spewed major spills as a result of Hurricane Katrina? None.

The environmental argument today is as thin as premium unleaded gas and can no longer be trouted out as the horror that would inevitably come. This is completely false.

In the meantime, American consumers - rich, middle class and poor - suffer because huge untapped oil and gas reserves sit untapped in the Alaskan Wildlife Refuge and below the sand in the eastern Gulf of Mexico. The U.S. Geological Survey estimates, for instance, there is enough oil in the Alaskan refuge to increase the United States' proven domestic reserves 50%.

In the eastern Gulf of Mexico, the U.S. Mineral Management Service says that in federal waters south of Destin in the Florida Panhandle, this area has the potential to produce about 10 trillion cubic feet of natural gas and about a billion barrels of oil.

Further south, say due west of Sarasota and down to the Florida keys in federal waters, this area contains the largest unexplored and untested basin in the continental United States. Exploratory wells drilled in the Florida Keys showed oil in this area. The Mineral Management Service estimates about a billion barrels could be found in this region as well.

Now how about this for nutty public policy: Chevron is prohibited from mining of 2.5 trillion cubic feet of gas on what is known as Destin Dome Block 56, south of the Panhandle.

Chevron spent $125 million in lease bonuses and wells, but it is prohibited from developing and producing a discovery that is worth $10 billion to $12 billion. And here's the kicker: We already have the 580-mile undersea natural gas pipeline from Mobile Bay to Tampa passing near Chevron's gas supply.

The conclusion is this: Florida's congressional delegation is doing a disservice to Floridians and all Americans in their opposition to drilling in the Gulf of Mexico.

The next time you see one of your congressmen or senators, let him or her know. We should have oil rigs in the eastern Gulf of Mexico.

WINDFALL PROFITS

WHOSE PROFITS ARE 'EXCESSIVE'? COMPARE PROFIT MARGINS

The table shows the operating and net profit margins for the past five years. The companies are ranked from highest to lowest net profit margin for 2005. Pre-tax profit margins are after depreciation, amortization and interest expenses are included.

2001 2002 2003 2004 2005

Pre-tax Net Pre-tax Net Pre-tax Net Pre-tax Net Pre-tax Net

Microsoft 45.5% 30.5% 40.5% 27.6% 45.7% 31.0% 33.1% 22.1% 30.7% 41.7%

Gannett Co. 21.5 13.1 27.4 18.0 27.4 18.0 27.0 17.8 23.9 16.3

Goldman Sachs 11.8 7.4 14.2 9.2 18.8 12.7 22.3 15.2 19.0 12.9

General Electric 15.9 11.2 14.5 11.4 15.0 11.6 13.8 10.9 15.4 10.9

E.W. Scripps 16.7 9.5 19.1 11.7 22.5 14.4 25.0 13.9 18.7 9.9

Exxon Mobil 11.6 7.2 8.4 5.6 13.2 8.5 14.0 8.5 16.2 9.7

New York Times 11.2 14.7 15.9 9.7 15.4 9.3 14.4 8.8 13.2 7.8

Source: BusinessWeek