Baseball Crank
Covering the Front and Back Pages of the Newspaper
August 7, 2008
POLITICS: Windfall

Beldar notes that ExxonMobil in the second quarter of 2008 paid three times as much in taxes as its after-tax profits.

You know, if there is one thing - one thing - that will encourage the development of alternative fuels, it's the same thing that led to the mad scramble of capital into internet and telecom in the 1990s: the belief by investors that whoever got ahead in the race to market would reap fabulous profits.

The best possible way to blunt that belief is to slap additional taxes on today's energy producers for being too profitable. Especially when they aren't even all that profitable on a returns-on-investment basis; those humongous profit figures are just due to massive market share:

Exxon's profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that's what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery -- both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau's industry rankings.

(That WSJ editorial also notes that Google had a 25.3% profit margin).

Anyway, I'll probably get into this further when I have time for a longer post on energy, but I laid out the case in 2006 for some ideas on how government can do more to strengthen the confidence of investors that the winners of any alternate-fuel gold rush actually get to enjoy the spoils of their investment and labor.

Posted by Baseball Crank at 6:22 PM | Business • | Politics 2008 | Comments (8) | TrackBack (0)
Comments

ROI is one measure, but 10% of a very large number is much, much better than 12.7% of much smaller number. The percentages aren't a strong argument in this case, unless you can show me huge raw numbers for those other industries too.

You write:

"You know, if there is one thing - one thing - that will encourage the development of alternative fuels, it's the same thing that led to the mad scramble of capital into internet and telecom in the 1990s: the belief by investors that whoever got ahead in the race to market would reap fabulous profits."

Investors can't reasonably fear that Congress would pass a windfall profit tax on an industry that it is trying to encourage. The biggest fear investors have is that given all the alt fuel alternatives, they might find themselves backing the wrong horse.

Posted by: MVH at August 7, 2008 8:00 PM

1. That's my point: the big profit # is just market share, or more properly market size.

2. The fear isn't today's Congress, it's the Congress down the roal. Oil was an alternative fuel once too. What investors don't want is to lay in money in years when there's little return and have to worry about getting socked in the pocketbook once the next big technology takes off and the money starts rolling in (see: Microsoft antitrust case).

Posted by: The Crank at August 7, 2008 8:04 PM

MVH, investors chase a rate of return, as such "10% of a very large number is much, much better than 12.7% of much smaller number" is both true and irrelevant. Raw numbers are important but industry lives on the margins.

Posted by: abe at August 8, 2008 7:55 AM

"Raw numbers are important but industry lives on the margins."

Yes, with most industries, investors weigh ROI considerations more heavily. But oil is a special case because of the huge raw numbers and of the relatively fixed market shares involved. In short, investors know that the big oil companies have little competition. Ask yourself this question: if investors base their decisions heavily on ROI, and the ROI of oil is roughly in the range of other industries, then why have investors flocked in droves to the oil companies relative to other industries? It's certainly not because investors are stupid.

Which brings me to Crank's point:

"the big profit # is just market share, or more properly market size."

Yes, oil companies have huge market shares, but not necessarily because they are the best run businesses in their field but because they are the only ones in their field! Those markets have nowhere near the kind of competitive pressures that affect most other industries. There are huge barriers to entry. And investors know this.

This is why I treat regulation of oil companies differently from other industries, and it's also why investors treat it differently.

Posted by: MVH at August 8, 2008 9:52 AM

Well, if you own stock in ExxonMobil, you only care about your own returns, not on how many other people are also getting a 10% return.

Investors look for two things: risk and return. Clearly, a lot of people think the oil companies have little risk right now, which may not necessarily be true.

Posted by: The Crank at August 8, 2008 10:34 AM

I have little sympathy for them, but oil companies face tremendous risks just now. They've recently raised their hurdle for developing new fields and that's going to require prices to stay high for a long time or they recoup nothing.

...then why have investors flocked in droves to the oil companies relative to other industries?

What exactly do you mean by this? Do you have any figures to support your contention that investors are flocking to oil companies over other investments?

It's not that I don't think they are, I just think it's been asked and answered by ROI. What other factor is at work here?

See, oil may be percieved as a low-risk business but it isn't. Investors need to look back at historical returns for that business and they may not be doing so. It wouldn't be the first time the wisdom of crowds turned out to be foolishness.

Posted by: spongeworthy at August 8, 2008 11:21 AM

Crank,

"Well, if you own stock in ExxonMobil, you only care about your own returns, not on how many other people are also getting a 10% return."

On that point, I was responding mainly to Abe's post, which said that investors chase a rate of return, and because they do, industries live or die on those margins. Unless I'm misunderstanding him, he is saying that if an investor has $1, he would prefer to invest in an industry that has a higher ROI than a lower one. My point is that the oil industry does NOT live or die on ROI because the market is an oligopoly, and because it is an oligopoly, investors do not have the same number of fears that they would face in investing in a more competitive market where industries have a comparable ROI.

Posted by: MVH at August 8, 2008 11:43 AM

"What exactly do you mean by this? Do you have any figures to support your contention that investors are flocking to oil companies over other investments?"

A fair question, and no I don't have any figures. My evidence anecdotal. The more I think about it, it would be really difficult to empirically demostrate anyhow. I'll back off that particular argument, it really wasn't aimed at Crank's post anyway.

I don't perceive oil to be a low risk business, it just has some investment advantages (being that it is an oligopoly) that aren't accounted for strictly by ROI.


Posted by: MVH at August 8, 2008 12:42 PM
Site Meter 250wde_2004WeblogAwards_BestSports.jpg