Exxon Has Most Profitable Year in World History

Exxon Mobil had a pretty good 2005. Its profits were $10.71 in the fourth quarter and $36.13 for the entire year, the most ever recorded by a company ever. Its revenue of $371 billion makes it bigger than the value of all goods and services in the nation of Belgium. Other oil companies are doing well, and there are rumblings about windfall profits taxes. The current situation cannot persist, but the solution is almost invisible.

Those who believe blindly in the wisdom of the market see no problem with oil companies raking it in hand over fist. It is the reward for risking one’s capital in the oil market. Were the oil market a real market, one might be persuaded. However, it lacks two of the four required conditions to make it so. While the product is definitely homogeneous and while one can argue that entry barriers are low, there are not many producers (and there is a cartel called OPEC) and information in the market is far from perfect.

As a result, the power within the oil game is skewed in favor of the producers. Adam Smith was a profound believer in the general good that the market can do, but he always posited a general equality of power among market actors. His most vehement criticisms of businessmen came when talking of their efforts to fix prices, which he maintained was part of their nature. Since this isn't a fair or free market, Exxon has accumluated $33 billion in cash that is has to recycle. It has bought back shares and handed out dividends as well as drilled for new sources of oil. Yet, it will continue to have more cash than it can digest.

This situation is bad for Exxon and other oil companies just as it was bad for the OPEC countries that found themselves awash in cash in the late 1970s and early 1980s. They couldn’t absorb the wealth, had to put it out on the world market through western banks (as well as BCCI), and with so much money available, highly risky projects in Latin America got funded. The debt bomb almost exploded taking Argentina and Citibank with it, and the OPEC nations have virutally nothing to show for all that money now.

A tax on “excess” profits would merely take money away from the shareholders of the oil companies and give it to the government – wasting the money in this way is hardly a solution. Letting the oil companies invest in “green, sustainable, renewable” energy sounds good, but they aren’t being rewarded by the pseudo-market for doing that; their rewards come from pumping out oil. If there were a 20-year plan, that might work, but American business focuses on the quarterly earnings report. What the country has is a lopsided energy sector, a build up of cash that is needed elsewhere with no effective mechanism for moving it, and a complete lack of government leadership. Grounds for optimism are hard to find.


© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent.
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