Exxon Mobile is in the news again, as they released more information on their 2005 financial results. This one is interesting: in 2005 Exxon spent more money buying back stock than exploring for oil. So is investing in Exxon a better bet than investing in oil? Hmmm. Meanwhile, Exxon is not taking the bad publicity sitting down. They’ve been running full page ads saying, in effect, hey, other industries are better at making money than oil! Look at pharmaceuticals. Banking. Software. All higher margin. But none of these industries are selling commodity items. They are service or high tech (where the value comes from knowledge, not from the value of the raw materials). Commodity businesses, in a free and open economy, are supposed to be low margin. So why isn’t oil?
But the comparison to the drug industry is interesting. Drug companies spend far more money winning, dinning, and effectively paying doctors to prescribe their drugs than they do researching new ones. Here is why such behavior is similar to the oil companies. Taxpayers are asked to subsidize two of the worlds most profitable industries – oil and drugs – through massive tax breaks, below market rate (or free) royalties on government property (government land for drilling, government patents for drugs, etc.), relief from environmental regulations, and numerous measures to protect these industries from competition. Why? We are told that these subsidies are needed to promote oil exploration and drug research. Really? At cursory examination of the financials of these two industries shows how ridiculous that assertion is.
Company profits are good. Big company profits are even better. But profit gained by the subversion of a free market just means the consumer is in for a soaking. Fill-er-up.

A few days ago, Exxon Mobil, the world’s largest corporation, announced their 2005 financial results. And what results they were. Revenues were over $370B (that’s more than the GDP of Saudi Arabia) and profits were $36B. That’s over a billion dollars a day in revenues, and profits of over $100M per day! A pretty good year, though Exxon was quick to point out that the pharmaceutical industry was doing better (an interesting argument: “don’t complain, the drug companies are price gouging worse than us”). But I shouldn’t begrudge a company its profits – making money is a good thing. What gets me is I don’t understand why they were so profitable this year. After all, they experienced record high costs of their raw materials (crude oil) and major disruptions of the refining and distribution operations during the hurricane season. Shouldn’t that have hurt their business, at least a little?
It seems that the basic principles of a free market economy don’t apply here. And that’s the problem, with two parts. First, the US oil industry is massively protected and subsidized by our government (even more than most other big industries). When things go bad (or at least appear bad, since obviously 2005 was not a bad year for Exxon), we can count on congress to give tax breaks and price subsidies to the big guys. Second, and more importantly, us consumers are so hooked on oil that we have become total immune to price changes. Raise the price 50%, and we don’t lower our consumption one bit. That’s not what they teach us in Economics 101. Why do we act this way? Maybe we will change our oil consuming habits, it just takes us a while. I can only hope.

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