Don’t leave it to the FTC or the Democrats to investigate the oil companies
We believe in obscene profits. This may be particularly true in boom and bust industries, where you better make hay while the sun shines or not at all. Oil refining is such a business. In the last few years, the oil industry has seen both boom and bust in refining. For example, Exxon Mobil’s refining profits plunged in the latter part of 2001 to a billion dollars or so. The sun was shining in the second quarter of 2005, however, and Exxon Mobil made hay: profits from refining soared to over $2 billion, double what they were only a few years ago. We expect that the third quater will be even higher.
We believe in obscene profits, but we also believe that the oil companies will not like some of the results of any political investigation. Companies have to make decisions about what percentage of capacity to run refineries at, what levels of buffer inventories to hold, and similar matters. In a boom and bust industry, you would not want to get stuck, for example, with huge inventories of gasoline or heating oil that have just declined massively in price, as happened to gas after 9-11, so a prudent manager would want to keep inventories as low as made sense. Similarly, oil company management would like to pass along any higher prices they have to pay for crude oil as soon as they are announced — and apply those new, higher prices to the gas that is already at, or on its way to, your gas station, even though the crude oil price applicable to that gas would be quite a bit lower. After all, they have to pay for the new oil they buy at the higher price. These are reasonable business decisions, but, in 20-20 hindsight, at a time of rapidly escalating prices, they may look awful on NBC Nightly News or page one of the NYT.
Decisions that appear prudent to managers at the time can look very suspicious in retrospect. Undoubtedly this would be true in any investigation of oil company profits. (And this is without any malfeasance — such as was alleged in Enron’s $1.57 billion settlement with the state of California.) Ah, yes, Enron.
We believe in obscene profits. But consider today’s situation, via Reuters:
U.S. gasoline prices will rise in the near term because as much as 15 percent of U.S. oil refining capacity “could be out for at least another couple of weeks” due to Hurricanes Rita and Katrina, the government’s top energy forecasting agency said on Wednesday.
Another 15%? That would put gasoline at over $3.50 in southern California, for example. In such an atmosphere, oil company executives had better be prepared to directly take the public relations heat, and not hide behind corporate spokesmen. We note, in that regard, Bill O’Reilly’s comment the other night in a discussion with Jack Welch, former CEO of GE, that the chief executives of several oil companies have shunned appearences on his program — worse yet, even the corporate spokesmen won’t appear. Very bad PR indeed.
For its part, the Bush administration has the FTC saying it will investigate price gouging. Whoop dee do. In our view, there may be political hay to be made by taking a serious look at the oil companies, and we don’t think it should be seconded to a government agency, or left to the Democrats, who can then turn around and call Republicans shills for big business. For President Bush to make it clear he is aggressively taking the side of the average consumer, and making sure everything at the oil companies is on the up and up, is not political grandstanding, but a sensible move from both political and substantive perspectives.