5/5/2008

Oil Market & Gasoline
By Charles Payne, CEO & Principal Analyst

"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 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 is a point where high input cost lead 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 our economy and the world's economies run aground.  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 nation couldn't afford gas there would be a drastic decline in demand.

What most people don't realize is the fate of the stocks market has been tied to the fate of the stock market.  Not, as one would imagine, in fact totally contradictory to common perception. 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 of prosperity not the headwind so many fears.  Interestingly, when gasoline prices and were declining at the start of the decade, so too, was the stock market.

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 do 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 profit margins.  In fact oil companies are far from the most profitable publicly traded companies. 

Exxon Mobile (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 Mobile posted earnings that were disappointment on Wall Street in part because the company had to pay 49% in taxes on profits.  That is shocking and sad.  In the meantime Google, the cool company, enjoyed net profit margins of 25% in part because the company only had to pay taxes of less than 24%. 

	Exxon Mobile	Google
Net Profits	$10,890,000,000	$1,307,086,000
Net Profit Margin	9.32%	25.01%
Number of Employees	82,000	16,805
Effective Tax Rate	49%	23.5%

By the way another thing that is really alarming in addition to being unfair with respect to attack the 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 is demand, which is growing by leaps and bounds around the world (you know, those companies that are embracing capitalism) and there are taxes (G7 nations made $460.0 billion annually from tax while OPEC made $410.0 billion in revenue) and there is also speculation.  More than anything else is the fact that Exxon Mobile isn't the 800 pound gorilla that many people believe it is.  

In terms of oil equivalent reserves Exxon Mobile ranks 17 in the world, well behind government controlled entities, including: National Iranian Oil Co, Saudi Arabian Oil Co, Iraq national Oil Co, Qatar General Petroleum Corp, Abu Dhabi National Oil Co, Kuwait Petroleum Corp, Petroleos Venezulea SA, Nigerian National Petroleum Corp, National Oil Co, Sonatrach, Gazprom, PetroChina Co, OAO Rosneft, Petronas, OAO Lukoil, Petroleos Mexicanos, then Exxon Mobile.
I think Americans need to think twice about tearing down our largest business 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. 

By the way 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.