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By Robert Rapier on Jul 28, 2006 with no responses

The Demagoguery Continues

I have been watching the news closely to see who would be the first politician to attempt to score political points as oil companies released profits this week. The prize was won by Nevada Senator Harry Reid:

Reid: The Republican Congress Puts Big Oil Before Working Families

Source: U.S. Newswire

WASHINGTON, July 27 /U.S. Newswire/ — The following release was issued today by the Senate Democratic Communications Center:

Once again, Big Oil is reporting stunning profits as Americans pay skyrocketing prices for gas. With ExxonMobil today reporting $10 billion in second quarter profits, the second largest quarterly profit ever recorded by a publicly traded U.S. company and only the latest of the sky-high profits reported by Big Oil this week, Senate Democratic Leader Harry Reid issued the following statement. A breakdown of current oil company profits is attached below.

“Americans are paying near-record gas prices, oil companies are reaping billions in profits, but the response from the Oil Men in the White House and the Republicans in Congress has been billions for Big Oil and a backhand to the American people. It would be shocking in normal times, but it is standard procedure for Republicans in Washington.

“It is time for a change from the Bush/Cheney energy plan that put Big Oil’s interests ahead of working families. For five years, this Republican Congress has failed to adopt a forward- thinking plan to deliver affordable and clean energy, and it is time for a new direction. Democrats have offered the Clean EDGE Act. It is the comprehensive legislation needed to address the current energy crisis, and the right way to help the American people.”

First, I hate to break it to Senator Reid, but “Big Oil” is composed primarily of “working families”. It is not a bunch of fat cats sitting around in a conference room smoking cigars and counting their money. It is made up of hard working women and men that span all backgrounds. The shareholders of “Big Oil” – the true owners – span the gamut from the proverbial widows and orphans to retirees with money invested through mutual funds to those “working families” Reid is trying to protect. When you complain about “Big Oil”, these are the people you complain about. So don’t paint with such a broad brush.

Second, I don’t know if Reid actually understands the difference in a profit and a profit margin, and I don’t know if he wants to understand the difference. I think a big part of the problem is that too many people don’t understand the difference. Take this blurb from a Cincinnati Post article:

Profits Surge at ConocoPhillips

Source: Cincinnati Post

Publication date: 2006-07-27

HOUSTON — ConocoPhillips pumped more oil and gas and commanded sharply higher prices for its energy in the second quarter, boosting profits by nearly two thirds to more than $5 billion.

Its acquisition of Burlington Resources in March appears to have paid off, too, accounting for more than a quarter of the earnings growth in its exploration and production business.

ConocoPhillips, which announced its results Wednesday, far surpassed Wall Street’s expectations and its shares climbed close to 2 percent. The nation’s third-largest oil company earned $5.18 billion in the April-June quarter — a 65 percent increase from the $3.14 billion profit during the same period a year earlier.

Revenue only rose 12.6 percent, to $47.1 billion, highlighting how staggeringly high profit margins for oil, gasoline and other fuels accounted for the bulk of ConocoPhillips’ bonanza.

“Staggeringly high profit margins”? Here someone has once again confused “profit” and “profit margin”. The profit margin was $5.18 billion/$47.1 billion, or 11%. That doesn’t seem “staggeringly high” to me. The oil majors are gigantic companies. Their profits are gigantic, because they move gigantic quantities of product.

However, the public really sees two things: Their gas prices are at record highs, and oil company profits are at record highs. Are the two related? Of course they are. But gas prices are not at record highs because oil companies have just now decided to gouge because there is a Republican administration in the White House. Gas prices are high because supplies are extremely tight. I don’t believe this situation would have been much different if someone else was in the White House, unless they were willing to commit to a major overhaul of energy policy. Actually, gas prices would probably have been a bit lower with the Democrats in, because our incursion into Iraq took a lot of oil off the market and tightened supplies up. But that’s a road I won’t go down right now.

The core problem, which neither Republicans nor Democrats seem willing to confront, is that gas demand is too high. Unless the demand issue is addressed, gas prices will remain high, and escalate higher as demand continues to outstrip supplies.