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Monday, February 6, 2012

Windfall Oil Profits

According to the New York Times on February 1, 2012, Conoco Phillips reported a 66% increase in earnings for the fourth quarter of 2011, “attributed to high crude prices and asset sales.” With the prices of most crudes above $100 a barrel, the company gained a windfall that vastly made up for a drop of nearly 3% in its refining and marketing business. Chevron, on the other hand, reported a 3.2% decline in fourth-quarter earnings due to “poor refining results” that “overwhelmed higher revenue from oil sales.”

Meanwhile, Exxon Mobil reported net income of $9.4 billion for the fourth quarter, up from $9.25 billion the year before. The company’s revenue of $121.6 billion was up 16 percent. According to the Times, the improved earnings reflect the $100 plus prices for many benchmark crudes, which resulted from “continuing unrest in the Middle East and North Africa and strong demand from China and other developing countries.” To be sure, the company’s purchase of XTO Energy for $25 billion in 2010 meant that the plummet in natural gas prices also had a significant impact on the company. Even so, a company making nearly $38 billion on an annual basis raises questions on the sheer size alone, and whether any market can be competitive with such a giant.

Furthermore, the legitimacy of the windfall profits coming from political instability rather than any merit on the company’s part should also be questioned, as well as why Congress balked on a windfall profits tax for the industry in 2011. In other words, the market power is not the only kind of power we should be concerned about in looking at Exxon Mobil. Such a concern could extend to why George W. Bush decided to invade Iraq, given that that that country’s ruler had kicked American oil companies out in 1993 after the U.S. intervened to move the Iraqi army out of Kuwait. We could even ask whether the oil companies, or their agents in government, have had anything to do with the inciting some of the political stability behind the astronomical crude prices.

To be sure, Chevron shows us that even a big oil company can manage not to benefit from a $100-plus crude-price windfall. Moreover, oil executives could argue that windfalls are “necessary” as “cushions” against the prospect of a glut in natural gas, for example, or the need to do major work on aging refineries. Even with the inevitable vicissitudes that come with dealing with raw material markets, however, that the prices of crudes have gone so much higher than the costs of getting oil out of the ground suggests that the market mechanism has not been functioning as Adam Smith would have predicted—meaning an oligopoly has replaced a competitive marketplace.

John D. Rockefeller, whose effort to coordinate the refining industry in the U.S. via a huge monopoly called Standard Oil (of which Exxon Mobil is a descendant), could point to all the bankruptcies amid the “excessive competition” in the 1860s as justifying even a monopoly in place of any competition at all. He used means that would be considered very unethical today to get competitors to “agree” to be bought out by the combination so there would be no “destructive competition.” Even if it was necessary in the early years of the oil industry, we ought not assume that huge oil companies are necessarily the legacy we must pass on to the next generation.

Clifford Krauss, “Higher Oil PricesRaise Earnings at Exxon Mobil,” The New York Times, February 1, 2012.