Politics & Policy

The Boon of Big Oil Profits

Lawmakers must understand that cheaper fuel is on the horizon.

Last week’s news that ExxonMobil had achieved record profits predictably elicited negative responses from special-interest groups and politicians. Anna Aurilio, legislative director at Public Interest Research Group, said “oil companies are making profit hand over fist as consumers are suffering.” In advance of the news, Sen. Byron Dorgan (D., N.D.) had already introduced a bill that would establish a windfall-profit tax on energy companies. And though he surely knows better, Sen. Bill Frist (R., Tenn.) called for hearings in which oil executives would be asked to testify and defend their profits.

#ad#Sadly, the political class is at least publicly choosing to misread this very positive news. That ExxonMobil is presently thriving means it is successfully doing its part to help ease today’s oil shortage. Subpar earnings would logically be of greater concern to politicians given that low earnings would indicate big oil’s indifference to today’s high prices, and market belief that the problem cannot be solved.

But ExxonMobil’s profits, and the rise in its stock price since oil hit a low of $10 in 1998, indicates very clearly that the markets are aggressively solving the existing oil shortage through the reallocation of investment toward the oil industry. To stifle or tax earnings would be to distort the process by which expensive oil will in time become cheaper.

Back in 1980, in the midst of the last era of expensive oil, oil companies represented 28 percent of the S&P 500’s value. This investment boom stimulated exploration and led to an oil “glut” in the 1980s and ’90s. In this new environment, cheaper oil and lower oil-company profits meant that investment moved elsewhere, and with this asset redeployment, oil-company share of the S&P 500 fell to 7 percent. The latter number arguably foretold today’s energy prices to the extent that they’re a demand, as opposed to a weak-dollar, phenomenon.

Notably, oil companies now comprise 10 percent of the S&P’s value, and the number will presumably rise as oil companies report earnings and are subsequently rewarded with higher valuations. This change in the S&P’s makeup heralds cheaper oil in the future.

Also, record profits attract imitators and innovators. Canadian oil company Suncor Energy is an example of innovation at work. It has devised a way to extract crude from oil sands, and the consensus is that this process will greatly expand the amount of proven reserves around the world. Happily, investors have rewarded Suncor; its stock is up 400 percent over the last five years, a timeframe in which the Dow has been flat while the S&P 500 and Nasdaq have been down.

Returning to the political response in Washington, leaders on both sides of the aisle will hopefully realize that they’re on the wrong side of the oil issue. Rather than calling oil executives to the carpet when they’re making “too” much money, they should instead celebrate the ability of markets to apportion investment properly such that scarcity is dealt with effectively.

John Tamny is a writer in Washington, D.C. He can be contacted at jtamny@yahoo.com.

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