"Socializing" oil companies

[Tex]

Maxine Waters in the show-trial hearings of oil executives:

Guess what this liberal would be all about? This liberal would be all about socializ ...uh, uh ... would be about ... basically taking over and the government running all of your companies.

Welcome to President Obama and the Democrat Congressional majority ... a nationalized energy industry!

http://wizbangblog.com/content/2008/...o-sue-opec.php

[Cali Coug]

Originally Posted by Tex

Maxine Waters in the show-trial hearings of oil executives:



Welcome to President Obama and the Democrat Congressional majority ... a nationalized energy industry!

http://wizbangblog.com/content/2008/...o-sue-opec.php

One person makes a comment, Tex extrapolates that someone totally unrelated to that comment will take the step of nationalizing the oil industry.

That is totally irrational. Maybe you can give us one of your famous analogies to help clarify.

[Tex]

Originally Posted by Cali Coug

One person makes a comment, Tex extrapolates that someone totally unrelated to that comment will take the step of nationalizing the oil industry.

I'll put it to you this way: I'll will be completely unsurprised if Maxine and her fellow Dems attempt to nationalize, in whole or in part, the oil industry, and a President Obama signs off on it.

Originally Posted by Cali Coug

That is totally irrational. Maybe you can give us one of your famous analogies to help clarify.

I'll leave the poor analogizing to you.

[Ma'ake]

Originally Posted by Tex

I'll put it to you this way: I'll will be completely unsurprised if Maxine and her fellow Dems attempt to nationalize, in whole or in part, the oil industry, and a President Obama signs off on it.

I will be completely surprised if they do. There could conceivably be an individual or small number of congressmen who try a bill for "the people" to purchase some part of the petroleum industry, but Obama & the overwhelming majority of Dems would push for a windfall tax, nothing more, IMO.

[MikeWaters]

Yeah, they would tax the hell of it, they wouldn't nationalize it.

I just heard a piece on Mexico's national oil company which is in terrible shape. The president of Mex wants for foreign help and investment, but the left (I guess most of Mexico) is against it. This one company's profit provides for 40% of the national govt. budget. So they have spent money instead of reinvesting in equipment and exploration.

[Ma'ake]

Originally Posted by MikeWaters

Yeah, they would tax the hell of it, they wouldn't nationalize it.

Profit margin percentage - and claims of adherence to a reasonable level thereof - are grotesquely deceiving; the clear incentive is for a higher price paid for oil. You see the same thing with utilities going to the public service commission... "Cost +" pricing

If a windfall tax is levied against the oil companies, and the absolute value of their net profits ends up being on par with what they would have been had the price of oil been, say, $80 per barrell, is this a death blow to an industry? I think not.

I just heard a piece on Mexico's national oil company which is in terrible shape. The president of Mex wants for foreign help and investment, but the left (I guess most of Mexico) is against it. This one company's profit provides for 40% of the national govt. budget. So they have spent money instead of reinvesting in equipment and exploration.

This is true for not just Mexico, but Venuzuela, and others, certainly.

The Russians in particular have double-crossed western oil companies repeatedly, changing the terms of contracts after oil company engineering and technology have proven the feasibility of extracting difficult oil fields.

Oil companies take this risk into consideration when they're looking for new oil in foreign lands... yet they're making money hand over fist. I don't feel bad for them, they'll be fine.

[Ma'ake]

Financial markets work best when there is transparency in the macro-economic numbers, when a nation's appetite for a product, and a supplier's capacity, are more or less predictable.

For a variety of reasons, this is not the case in petroleum. The US demand & supply numbers are fairly transparent & predictable, but the demand & production numbers for China, India, Russia and the OPEC nations are very tough, sometimes impossible to nail down. Most OPEC nations consider their oil inventory & potential find figures to be state secrets (for good reason).

All of this leads to wildly divergent estimates on the upcoming price of oil. Estimates of future oil prices range (between knowledgeable & respected analysts) between $85 per barrel and $400-$500 per barrel. Oil companies are in the position of welcoming this kind of instability, as the higher price pads profits accordingly.

None of this can be laid at the feet of Dems proposing windfall taxes.

[Tex]

Not only is a windfall profits tax clear-cut anti-capitalism, but it also disincentivizes growth. I don't think there's a better way to force the oil companies to turtle down then to pass that silly tax.

Pro-tax people never seem to take into account 2 basic facts: one, companies rarely pay taxes, choosing instead to pass them along to the consumer; two, profit is what drives a capitalist society.

[Flystripper]

[QUOTE=Tex;224937]Not only is a windfall profits tax clear-cut anti-capitalism, but it also disincentivizes growth. I don't think there's a better way to force the oil companies to turtle down then to pass that silly tax.[QUOTE]


Not only does it disincentivize growth it literaly restricts growth given that a firms sustainable growth rate = ROE (Net Income/Equity) x Retention Ratio (% of Net Income not paid in dividends)

[Ma'ake]

Originally Posted by Tex

Not only is a windfall profits tax clear-cut anti-capitalism, but it also disincentivizes growth. I don't think there's a better way to force the oil companies to turtle down then to pass that silly tax.

Pro-tax people never seem to take into account 2 basic facts: one, companies rarely pay taxes, choosing instead to pass them along to the consumer; two, profit is what drives a capitalist society.

Hence the use of the term "windfall". A big part of current oil profits are essentially "unearned"... the additional profit is icing on the cake due to merely following the prescribed, acceptable profit margin and watching their bank accounts balloon, passing along their higher input costs & rationalizing the greater "windfall" profits as merely the market at work.

Have airlines been able to increase their net profits by jacking up prices, keeping the same profit margin and shrugging their shoulders as the price of jet fuel has sky-rocketed? No, like just about every other market with high levels of competition they've attempted to keep a lid on their prices and put short term profitability at risk while hoping for better conditions, have made efforts to mitigate that part of their cost structure (made plans to purchase new airplanes, retired airplanes that are 5 years old because they burn too much fuel, etc.)

Only recently have airlines had to take extraordinary measure to pass along the costs, while the cost of jet fuel has been steadily climbing for years.

What other industries see explosive growth in profits due to inflation in inputs? If the price of beef doubles, does McDonalds see their net profits rise commensurately? No. If a critical memory factory in Taiwan is destroyed by typhoon, does Dell & HP see their profits rise to record levels? Again, no.

All of the standard market-worship reactions are fine & good, but the market model assumes related markets are functioning properly. In this case, the market for unrefined petroleum is badly distorted for the reasons I stated above.

The demand for gasoline is relatively inelastic... we won't see a rapid 30% drop in the demand for gasoline, in spite of price spikes. The entire economy is at risk of inflation yet Big Oil sits up high on a growing stack of cash, ambivalent about the effects their industry has on the nation. Profits have never been this high, life is grand. It's the ideal scenario, really.

Windfall taxes arise as an option when excessive greed emerges, which is exactly what we have now. The threat of windfall profits is a device political leaders can use to encourage more responsible behavior from greedy corporations.