October 8, 2005

Speaking as an oil tycoon...

Duane D. Freese at TechCentralStation dissects the economic ignorance of Bill O'Reilly, who blames high gas prices on "gouging" by oil companies, who should give up part of their profits. I won't repeat Duane's arguments, but here's one point he makes to keep in mind...

...Think about it. Who owns oil companies? It isn't just the John D. Rockefellers or oil sheiks anymore. It's also investors with money in mutual funds and pension funds and retired people. Consider that CalPers, the giant public employee retirement system, had such a presence in energy giant Shell last year that it pressured the company for an independent audit of reserves...

Charlene and I own shares of a mutual fund that specializes in energy stocks. We own the greedy oil companies!

And speaking as an oil tycoon, I would like to mention that there are times when oil prices FALL (hopefully after we've moved into a different Fidelity Fund) and oil companies that have purchased high-priced oil futures, or invested in high-cost oil fields, or ramped-up exploration and drilling....get killed. SO, Mr O'Reilly, would you say that we should be able to increase our profit margins then, to help cover those losses? Hmmm?

Of course these populist types never want it to go both ways. When profits are high, then companies are stealing from the little guy. But when losses occur, they never care that the little guys are "stealing" from the companies. Both ideas are silly; over the long run, and if competition is unhindered, oil companies make the amount of profit necessary, and no more.

And it IS necessary. Profit is just one of the costs of a business. It's the cost of capital. It is a necessary cost, just like labor and materials are costs. Peter Drucker pointed this out long ago (Here's a re-print of a 1975 article, thanks to Alan) Every business has capital investment. Even a kid's lemonade stand has a table and a pitcher tied up for a period of time. Even in the Soviet Union there were profits, because the state enterprises kept part of what they took in to pay for buildings, equipment, etc. In fact, their profit-margins were much higher than in the West, because they used their capital less efficiently!

Reading that was one of the ah-ha! moments of my youth. As was Drucker's point that America is now a socialist country, because the majority of shares in its big businesses are owned by pension funds and mutual funds, which are the investment instruments of ordinary folk, not the rich.

Once you know that stuff, the lefties who ascribe all ills to profits are seen for the drooling idiots they are.

Posted by John Weidner at October 8, 2005 8:38 AM
Weblog by John Weidner