Don't Blame the Oil Companies

Michael McDaniel

Yes. I said don't blame the oil companies for excessive prices at the pump.  For months now I have put up with comments attacking the companies that provide fuel for our vehicles.  I do concede that oil company management teams both past and present may be to blame for a portion of the prices we are paying at the pump. However, I contend that the oil companies cannot be solely blamed for the high prices.  An examination of facts...

The Devaluation of the US Dollar:

• Blame the United States Federal Reserve.  First and foremost our very own FED has been implementing a monetary policy that continues to crush the value of the US dollar (both via inflation and weakness versus other nations currencies).  As our currency becomes worth less, countries selling us oil require us to pay more. 
• The current ill health of our banking system (an extremely important variable in any economy) decreases the demand for US Dollars. Would you be eager to invest in a foreign country which is taking historic means to keep their banks solvent? As our currency appears to be more risky, countries selling us oil require us to pay more.
• Growth in other countries have proven to decrease the demand for US Dollars.  With the global economy growing at a faster pace than the US it is natural to see other currencies strengthen versus the US Dollar. As our currency becomes worth less, countries selling us oil require us to pay more.

Supply and Demand:

• Increased demand for oil by India and China (and the rest of the developing world) force prices higher.
• Our leaders continue to ignore the resources available here at home, ANWR anyone? I expect most cultures are confused that the USA would rather go to war and kill humans in search of oil, rather than put our Alaskan wildlife in jeopardy. 

Education, Values, Ambition:
Where have all the Scientists gone?  Didn't we get a glimpse of the threats/addiction to oil in the 1970's? Am I to old fashioned to expect that the greatest country in the world could design a solution to this issue over the past 30 years? Again I ask, where have all the scientists gone?  We cheer our athletes, actors, musicians... maybe it is time to give some hype to our future scientists/technicians knowing full well that it will be one of them that will answer the call and save the day. 

Profit Margins:

• Where do the energy companies stand in terms of Profit Margin? For every dollar of sales or revenue how much do their owners earn in "profit?"
  
  • Exxon Mobile owners manage to take home approx 10 cents on every dollar of total revenues, or a 10.85% profit margin.
  • Johnson and Johnson is often noted atop lists for exemplary ethics, their profit margin is 18.64%, owners of JNJ profit approx 19 cents for every dollar of total revenues.
  • Microsoft owners earn over a 28% profit margin.

Though I do not give the oil companies a full pardon, I hope these insights provide a more productive discussion than just pointing fingers at the oil companies.

Comments

[Larry Press]

What impact do you think the war in Iraq has had on the supply and demand for oil and the decline of the dollar?

[Russ]

Some thoughts on the dollar rising and falling here at the Fundmastery blog. We have been worse off in the 70 and 80s. The real question is what is next.

[Michael McDaniel]

[Larry Press]My opinions on the correlation between Iraq and the supply and demand for oil and the decline of the dollar may be to offensive to print. However, the 20,000 ft overview certainly links the cost of the IRAQ war to the US dollar printing presses running 24hrs/day. I think a detailed report could be written on the supply/demand effects that the war has/will continue to have. I have not researched supply information to know the changes in supply. I can again only assume that our troops being in the "theatre" demand more fuel than when they are at home. Further, I can only assume the uncertainty inherent during war times has affected the market price of a barrel of oil. I welcome your thoughts.

[Larry Press]

> My opinions on the correlation between Iraq and the supply and demand for oil and the decline of the dollar may be to offensive to print.

In what way?

The Three Trillion Dollar War: The True Cost of the Iraq Conflict by Joseph E. Stiglitz (Author), Linda J. Bilmes addresses the cost of the war, including the its marginal impact on the price of oil.

The book may (or may not) overstate the total long run cost, but there is no doubt it is contributing to those print runs you mention.

[Michael McDaniel]

Amen Larry. My 2nd draft would certainly have an IRAQ bullet point. Thanks for the dialog.