Profitability Seems To Be A Dirty Word

Profits Are The Answer, Not The Problem

Now according to Obama's Boogie Man, you know the Big Oil Grinch, profitability on the part of the big oil companies is a bad thing. It's bad for the stockholders, it's bad for the consumer and it's just down right unfair that the suppliers of oil earn a reward for supplying the ever increasing demand for petroleum products. They're found in just about everything you know and oil does still make the world go round. That's the problem that Obama doesn't like, or is it the profitability issue? He didn't seem to mind when deciding to invest in Brazil's oil exploration. Was a side deal cut that would insure that Brazil makes no profit on its venture? I don't think so.

I'm not an expert on the oil industry but I do like to read, research and investigate. I also have a pretty strong academic background in economics. So lets lay a base here and tie the two together with a smattering of business acumen. Businesses, any businesses, are in business to make a profit. If they don't make a profit, and continue to make a profit, they close the doors. Turning oil companies into the boogie man based upon profitability is so easy to do that a 5th grader can do it. Not understanding the way the industry sustains a profit and the players in the field might contribute to this phenomenon. So lets take a look.

There are low barriers of entry into the industry. That's a plus because it fosters a competitive market. The barriers start to pop up after one begins the process, not before, and if one doesn't hurtle those barriers then the weak go by the wayside. That's one of the pillars of capitalism, which to me isn't a dirty word. There will always be winners and losers in the marketplace.

Who benefits from a profitable and efficient energy producing system ultimately? Consumers do in two forms. The first form comes in affordable energy prices. We aren't exactly in that mode now are we? The second is in an abundant energy supply. From all reports, there isn't an oil shortage out there. There is a shortage in our domestic production but that isn't the doing of the oil industry. That comes in the form of the federal government's interference in the marketplace primarily.

In the case of oil companies, they have to replace their reserves. They are being depleted on a constant basis. The failure to replace reserves in that industry is tantamount to putting out a shingle that says, "Going Out Of Business." That sale can be accelerated even further by not being allowed to operate efficiently. If you make it cost prohibitive to continue to drill crude it won't be being drilled too much longer. So the next question arises. Where does the capital come from to develop new, efficient methods of extracting crude oil from the ground? It takes capital to make more capital.

It comes from profits. Now according to the people over there on the left this profitability is a bad thing. That bad thing needs a government solution according to their line of thinking. The solution to any problem according to that crowd's mentality is always higher taxes. Confused? Go back up and read the last sentence of paragraph 4. They see the accumulation of profits as the end unto itself and that Big Oil is rolling in the dough. First of all, when you're talking about the size of the industry giants you are talking also about the size of the continued capital investments they have to continually make to replace the reserves I previously mentioned. We'll get back to that.

Generally oil profits are used for two main purposes. The first is to replace reserves which is critical and to replace them efficiently. The second is to pay dividends to the company share holders. You know those "speculators" who invest their money with the expectation of making a profit themselves. The chart below illustrates who has a stake in the oil companies.

After examining the chart one can see that the people who run these operations aren't the big, bad wolf. They have a 1.5% share of the total pie. So much for the boogie man theory.

Domestic oil production is a strange animal in reality. That oil is primarily produced, to the tune of about 93% of production, by small independents who are allied with The Independent Petroleum Association of America. These independents, by necessity and not convenience, must grow to thrive. Using that concept they are less inclined to pay high dividends and end up reinvesting the majority of their net income (read: profits) to the tune of 100 - 150 percent.

Free market dynamics can be found in the very active shale gas marketplace. New technologies, which cost money, in extraction methods has led to a glut of natural gas which has led to lower prices. Stable prices are in the range of 4 to 4 and a half dollars per million BTUs. This amounts to about one quarter of the price the same oil input derives. In the long run this is unsustainable as the price of product dampens the exploration of gas for the average company. Their survival will be dependent on better technologies or efficiencies or outright plain old having a head for business - maybe a combination of all three.

Econ 101 enters in here. Supply goes up, prices go down. Has Big Oil placed any bets on the natural gas market? Sure they have. Exxon made a capital investment to the tune of $41 billion and has not had its ROI as of yet. What does that have to do with it? Speculation and market manipulation. If Exxon is manipulating the oil market which is enormous, how easy would it be for them to manipulate the much smaller domestic natural gas market to start seeing a return on their investment of $41 billion? Not exactly boogie man material is it?

Back in the Carter administration, Big Oil was public enemy number one. During the oil embargo of the 70's all sorts of government centric gimmicks were tried. Nixon had his price controls, Carter had his 1978 Natural Gas Policy Act and his Windfall Profits Tax. There is a certain irony that the oil industry experienced one of its biggest booms during those years and gas prices elevated rather than declined while the federal government was waging war on the oil companies again. So along comes Ronald Reagan with a cure. He ended all price controls and revised the tax code. The result was that oil prices collapsed. So much for government interference.

Our domestic oil production is in shambles. Areas of profitable exploration are out of bounds, It is compounded in the international marketplace. Why? Because all trading is conducted using an ever deteriorating US dollar. That pressure makes our suppliers up the ante on gas prices in order to remain viable businesses. Contrary to what Obama and his minions contend the profitability of the big 5 oil companies is not the problem. Those are huge companies making the huge capital investments necessary to continue to deliver what the world runs on - oil. Any increases to their tax liability will cause a disincentive for them to reinvest, not the other way around. So maybe a good question to ask is, "Why are huge state owned oil companies allowed to operate so freely in outr marketplace?" There is no accountability for the likes of Aramco, Citgo (Chavez), CNOOC (China), or Petrobras (Brazil). In fact, Obama wants to become Petrobras' best customer and forked over $8 billion of our tax dollars to help get us there.

Something to think about from The Frog who doesn't ever know what he's talking about. I don't work for the oil industry BTW. My son does, but I don't. Maybe the government should start pointing its finger in the right direct - at itself.

As Always,

The Frog Prince

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Comments 31 comments

nicomp profile image

nicomp 5 years ago from Ohio, USA

Yes! This article should be read into the Congressional Record. Oil company profits end up in the pockets and retirements funds of un-rich people.


The Frog Prince profile image

The Frog Prince 5 years ago from Arlington, TX Author

nicomp - People with socialist tendencies don't have a fondness for capitalists who understand the marketplace and how it works. They'd rather "fundamentally change" things where the state controls the means of production. Of course, many of us have seen the results, and continue to see the carnage that results, in a government wanting to be the savior to ourselves.


Carpefriggingdiem profile image

Carpefriggingdiem 5 years ago

These idiots much of "big oil subsidies" and "tax breaks for oil companies." It's such an easy argument to make because it is such an emotional approach. But it is short of understanding.

Here is an analogy that any liberal/socialist/progressive/Democrat can understand: It's sorta like squeezing a balloon. Squeeze it and it gets bigger at another point. It's the same way with taking away subsidies and tax breaks. The oil companies will simply recoup those revenues by (insert drum roll here) raising prices.

Now here is the real irony: The left is all about "fairness." They are all about "protecting the little guy." In fact, they are all about "wealth redistribution." The subsidies and tax breaks about which they bitch so much are actually a way of artificially lowering the market price of oil to the end user. This is done by collectively dividing the shortfalls created by these subsidies and tax breaks among ALL taxpayers . . . and need anyone be reminded that the number of actual taxpayers is going down. In other words, for those who are a bit slow on the uptake, the people who are STILL paying taxes are sucking it up on behalf of the Democrat base, i.e. those who do not hesitate to take a handout.

The obvious solution is to take away the oil subsidies and unfair tax breaks---and then apply the same policy to the so-called "green energy" sector. Of course, since those damned ugly and highly inefficient windmills can be allowed to litter our landscape, we should also turn the oil companies loose to drill off shore and on shore as well. Make the green energy crowd compete with the dirty old oil companies and see who comes out ahead when it is the market making a rational, collective decision instead of a government choosing winners and losers.


Old Poolman profile image

Old Poolman 5 years ago from Rural Arizona

FP - This one should drag the Corp haters out of the bushes in full force. They will be ranting about record profits, and the fact that Corporations pay NO taxes.

I often wonder where they were when the lessons about how the marketplace works were being taught. They sure were not paying attention.


dahoglund profile image

dahoglund 5 years ago from Wisconsin Rapids

The liberal view is that profit is greed.That business is evil. Subliminally this is the view I also had when I was younger if not so exaggerated.


partisan patriot 5 years ago

Froggy

This Regime is against drilling for oil and oil company profits because this country needs both and this Regime is against this country!

They use statistics as a drunken man uses lamp-posts... for support rather than illumination!


WillStarr profile image

WillStarr 5 years ago from Phoenix, Arizona

You've addressed the crux of the problem.

The left does in fact, believe that profits are evil, and so are corporations and the wealthy. They believe that the wealthy are thieves and that their gains were ill gotten and must be confiscated and redistributed by the state.

They call that 'economic justice'. Obama calls the wealthy the 'more fortunate', as though they just stumbled over bags of money lyng on the street, instead of breaking their backs and taking great risks to earn it!

The left wing dunderheads constantly blather on about corporations and the wealthy as if they were the source of all misery in the world, instead of the creators of all the wonders we enjoy today, including the computers you are using to read this!

The main source of misery is actually the big government they worship and the far left idiots who lie their way to power. The main problem is the jealous left wing idiots, envious of those who worked hard and succeeded!


breakfastpop profile image

breakfastpop 5 years ago

This is all about demonizing the "rich" and stirring up the "little" people. Class warfare works for progressives! Well done. Up useful and awesome.


The Frog Prince profile image

The Frog Prince 5 years ago from Arlington, TX Author

carpe - Emotionalism is a large part of this. That's why I keep hammering away at the Boogie Man approach. It's easy to blame anyone but themselves. When one appeals to another's emotions it's easy to get caught up in it with the absence of facts. Huge corporations have huge outlays in order to provide the world with its basic needs. That's the part of the equation that fails to get mentioned in any of the rhetoric. It costs money to make money.

Poolman - It would seem that many people out there never sat through an economics class. I started out as an econ major and it ended up being my minor. Then some loon wants to contend that I don't know anything about the subject. Oh well...

Dagolund - Being young and feisty has a tendency to be a sometimes short sighted view. I was there once myself. You think you have the world by its tail but you're really empty handed until you grasp the reality of life or you expect the government to do it for you. It just doesn't work that well at all, as we are now plainly seeing.

Will - Economic justice to me means that I am able to keep as much money as possible for the work that I do in my own bank account and out of the hands of the money grubbers in life. Works for me.

BPOP - I think you're onto something there. Even though "The Great Uniter" says one thing, watch what he does and not what he says. We could write a Hub about that in and of itself.

The Frog


Harlan Colt profile image

Harlan Colt 5 years ago from the Rocky Mountains

Froggie,

I worked in the big oil industry for a few years. One of the cards I believe that needs to be on the table here is that the amount of waste in the offshore oil industry is unconscionable.

I watched people in management positions who had no business being there, and little idea what they are doing. I watched them make mistakes (by basically punting on a given situation) that cost the company thousands and thousands of dollars everyday.

When I worked on the BP oil spill as a submarine pilot, there were many days we spent days just sitting there watching all that oil spill out. Our boat costs about $450,000/every 24hours. During that job, the (executives and engineers on shore) would break for 4 hour lunches etc, they would disappear from communication etc then come back and say - try this - try that etc. But in their defense no one had ever had to tackle such a problem, it was new ground and it was also 9000 ft deep. But this is just one example of many.

I watched managers order tools for the sub - hire a helicopter at $30k /hour and fly a $10,000 tool out to sea, etc and when it gets there, it didn't work or was the wrong one etc. Mistakes like this are made all the time - all billed to the oil company. The amount of wasted time and effort is unbelievable.

One problem is you have an offshore manager who is trying to please the client by responding to a their needs immediately, where if they took to the time to work with an engineer and study a situation before acting upon it, it would actually save the company money. (The client is usually someone with 10-15 years offshore experience, but they are not an engineer.)

This situation is due to the possibility that the client will fire the boat and call another if he is not pleased with their efforts to solve his problem - so your offshore manager will due whatever to save a contract. I have seen supervisors fired on the spot and flown off on a helicopter for doing exactly what they were told to do - so the company could save face with the client. You know what flows down hill.

I guess I am trying to say there is a lot that could be done on the oil companies side in terms of waste that would lower costs and increase profits over a year's time, but its really a good ol' boy network out there. You have men out there who have been there 25-30 years with a network of friends and contacts and if you're not part of it, you just wont have any impact in that regard. The industry operates as if its on its own little island, nothing is going to change offshore anytime soon.

You make a lot of good points here, none of which I aim to contest, I just thought some of these insights needed to be put on the table. They are indirectly part of the equation.

Great hub

- Up and awesome

- Harlan


The Frog Princess profile image

The Frog Princess 5 years ago from Florence area of the Great Pee Dee of South Carolina

Frog your research has educated me in oil. Well wrote baby.

It was Great!


feenix profile image

feenix 5 years ago

Frog Prince, how dare you have so much common sense. ;-) Seriously, this is an awesome, highly-educational hub. I wish this could be required reading for "Mr. & Ms. America". One of the big problems in he U.S. today is it is drowning in ignorance and the lack of common sense.


b. Malin profile image

b. Malin 5 years ago

You are a good Teacher Frog Prince...and you have a lot of Eager to Learn Followers. Thank you once again for a Timely and Educational Hub.


The Frog Prince profile image

The Frog Prince 5 years ago from Arlington, TX Author

feenix - Common sense is still alive in some people. Others seem content with being followers of this or that party doctrine. I can think for myself without having some boneheaded politician do it for me. Smoke and mirrors are an illusion and fool a lot of people into feeling warm and fuzzy without plugging common sense into their thought process. Thanks for reading.

b. malin - Why thank you. I write to inform. People can take it or leave it.


Ghost32 5 years ago

The Left does detest profits on principle...UNLESS said profits are going directly into their own capacious pockets. We haven't seen a lot of them bashing Obama for accepting royalty payments on his books (not even the one Ayers wrote for him) or bashing Al Gore for Greening up HIS bank account.

As a former blue collar oilpatch worker, what I'd really like to do is see a program that required every energy-bashing left winger to work one full year as a worm on a drilling rig. Of those who survived the experience, a majority would be singing quite a different tune.


The Frog Prince profile image

The Frog Prince 5 years ago from Arlington, TX Author

Fred - Remember Maynard G. Krebs' reaction to the word WORK?

Need I say more?


lobonorth profile image

lobonorth 5 years ago

A well researched and written article, thanks. However, large corporations in today's market are hardly examples of companies operating in free markets - they have legions of people lobbying for them, lawyers, tax experts and many others making sure that they circumvent tax and other laws. Many large companies resemble oligarchies and when GE and other large corporations making billions pay little or nothing in taxes something is very wrong. Companies rely on infrastructure and many other things that are funded by taxpayers and corporations should not be allowed to get away with paying taxes when I have to!

You make a good case but I do not think it should go unchallenged.

Also, you quote your approval of Reagan's tax policies - are you endorsing all of his tax policies?


alanlsg profile image

alanlsg 5 years ago from The World

Good one FP

Although in the Green camp I ahve no objection to Oil Companies making a profit and a lot of them are investing it in green technologies and diversifying as withinh 50 years they will be out of business if they do not.

Cheers

Alan


The Frog Prince profile image

The Frog Prince 5 years ago from Arlington, TX Author

logonorth - This isn't a defense of corporations at large. This isn't a defense at all. What I wrote here are facts as they apply to this particular industry which Obama and his minions are making the Boogie Man. Many of the things I mention here, like the reinvestment of profits into a business, are how most businesses have to operate. The oil industry is operating on economies of scale as large as it is.

I believe that Reagan was good for the nation. In fact, I know he was. He made some boo-boos but excessive taxation isn't one of them. Taxes dampen an economy and its growth. That's also a known economic fact. Then when we have a federal government that wants to waste our tax dollars and be everything to everybody, it leads down the path of having dire consequences to face. We're now facing those decisions and every one seems frozen in time about fixing the problem.

A good start is for the federal government to be axed by at least 50% and let the individual states and people reassert their rights under the 10th Amendment. That is a whole different subject though.

alan - Green is fine but the reality is that since the oil embargo politicians here have been wagging their chops about it and that's about it. It will now take decades of endeavor to get even close to where it needs to be. The answer isn't for the feds to throw money at the problem. The answer is to allow the marketplace to function as it should. It will allow for the innovation, research and development. The boogie man concept is deflection and unnecessary. Our federal government needs to get their mitts out of the marketplace.

The Frog


Alan Bowman 5 years ago

Hi FP

All Governments need to get out of it, was the same here in UK under Labour and we are suffering but the future jobs will be in Green Technologies and Eco Build Homes once Brownfield Sites are cleared hence my Hub Brownfield Sites which you might like to read.


Alastar Packer profile image

Alastar Packer 5 years ago from North Carolina

Thanks for this enlightenment and breakdown on the oil situation Frog. Taxes, taxes, just heard something about placing 'tax' devices in our cars for the mileage. Appreciate Frog.


The Frog Prince profile image

The Frog Prince 5 years ago from Arlington, TX Author

Alastar - Obama is now toying with the idea of having a mileage tax. I hope the liberals are happy about having been duped and conned into voting for this fraud.


Harlan Colt profile image

Harlan Colt 5 years ago from the Rocky Mountains

You have the constitutional right to travel freely and unencumbered, they don't have the legal authority to levy a mileage tax... like that has ever stopped them before.


The Frog Prince profile image

The Frog Prince 5 years ago from Arlington, TX Author

Harlan - They don't let a little thing like the US Constitution be an obstacle to anything they desire to do. And some people gobble that up. It makes me gag.


drbj profile image

drbj 5 years ago from south Florida

What makes anyone think this administation gives a flying you know what about anything in the U.S. Constitution? They could care less while they make their own rules for running EVERYTHING!


Stu From VT 5 years ago

It absolutely amazes me how liberals think profits are a bad thing. All businesses run on three inputs: capital investment, debt investment, and labor. Capital wants a profit, debt wants coupons, and labor wants a salary.

To the idiots who think companies should lower their prices so they generate a 3-4% ROI, the obvious answer is that the business would never exist, consumers would not get served, nobody would buy the available credit, and no jobs would get created. Why? BECAUSE YOU CAN GET 3-4% RISK FREE IN A BANK ACCOUNT. To compensate for the risk of capital loss, business must have the expectation of earning at least 15-20% in annual free cash flow on cash investment, or it just isn't worth the risk. Absent the hope of earning a decent return, capital owners are likely not to start the business, or if it already exists, sell it, or liquidate it for its net cash after wind-down expenses. An environment where profits are sufficiently restrained means no jobs, no payback to debt providers, and no return to equity investors, because no businesses would even exist. We would have no GNP. We would have NOTHING.

If a libby moonbat was a business owner, I wonder if he would slash prices below what the market would bear so that consumers wouldn't feel "victimized" by his company earning a fair return on capital. If I get even one taker, I'll eat my hat (luckily, I don't have one).


Karen Wodke profile image

Karen Wodke 5 years ago from Midwest

It's deeply disturbing that our tax dollars would go to Brazil for their drilling ventures. Of course, our tax dollars have been wasted on numerous ridiculous things such as bailouts and stimulus that did not stimulate. If the government wants to give away revenue, how about giving it back to the taxpayers? WE will stimulate the economy.


The Frog Prince profile image

The Frog Prince 5 years ago from Arlington, TX Author

Karen - Take a trillion and divide it by 310 million.


Alanlsg 5 years ago

Both the USA and the UK could kick start their economies big time if they cleared all brownfield sites and built eco businesses and eco homes.

They would creat jobs in demolition, recycling, reuse of waste and then the green technology jobs would be created in the properties being built and the industries in , the solar heating, the grey water recycling, the solar electricity, etc. etc.

All this would be internal for both countries and great for both countries but will our short termist politicians do it will they hell they will drag their feet all the time black gold exists.


alanlsg profile image

alanlsg 5 years ago from The World

Please see my Hub on the Brownfield Sites and get the message out there where you can please.

Thanks

Alan


wba108@yahoo.com profile image

wba108@yahoo.com 5 years ago from upstate, NY

Hi Frog- It seems the Obama administration isn’t opposed to profits that benefit them politically; it’s only the profits of the private sector that are outside their control, that they seems concerned with! The liberals make a lot of hoopla about oil profits because their interests lean toward the Republican Party and they contribute to Republican candidates. At the same time there is little mention that the Nation’s largest lawyer’s associations contribute almost exclusively to Democratic candidates and give about 6x’s the amount that oil and gas interests give to Republican candidates.- Regards and blessings-WBA

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