More on Oil Prices

As I caterwauled, Senate Leader Bill Frist and Speaker of the House Dennis Hastert have forgotten how the market works. They want to hold hearings on "why oil companies posted such big profits?"

Let me refresh some memories. High profits are an important market signal. They tell other companies to compete in the field and they direct capital toward new and existing companies in that market space. Ummm, they're good. They make stockholders happy and they direct capital to its best use, which makes the world better.

Larry Kudlow is on the case with some interesting stats:

The key point is that oil profit margins are completely moderate. Exxon, for example, posted just under $10 billion in third quarter net income, on revenue of $100 billion. This means profits as percentage of sales are running around eight to ten percent, only slightly higher than ongoing run averages. This is obviously a result of the bulge in oil prices over the past year.

A deeper look will also show that energy and oil profit margins rank in the middle of the ten major S & P 500 major sectors like financials, health care, and technology, which run around fifteen to twenty percent profit margins. So the current windfall profits campaign, heralded by politicians on both sides of the aisle, is nothing more than a stupid, anti-capitalist, anti-market political barrage. It is politics at its worst. It is Republicans at their worst.

Hear that Bill O'Reilly? These companies make a lot of money because they are VERY BIG, as a percentage of market cap, they are dogs, who've enjoyed a good run on high prices. If you want to lower the prices, boys, reduce the regulative cost-of-entry of would be competitors.
Larry's more Republican than I could aspire to be, but he is pulling no punches on our misguided leadership:

In particular, Republicans Hastert and Frist should be ashamed of themselves. They are catering to snap polls. What are energy companies supposed to do? How are they supposed to invest in and build new refineries when they can’t get regulatory approval to build them? Burdensome environmental regulations and other governmental red tape issues stymie them. This is especially the case in the refining area.

Economics and Markets Posted by John Kranz at October 28, 2005 5:58 PM