In the last month, at least two members of congress, Maxine Waters (D-Calif.) and Maurice Hinchey (D-N.Y.), called for nationalizing the oil industry. Read that sentence again.
Can someone name for me any private industry that has been taken over by the government where service got better, quality improved, or costs went down? Certainly the government has stepped into a private sector industry and made things better. Maybe health care? How about the school systems?
Heck, the government is only partially involved in health care and education – both considered broken and in need of fixing – imagine if they took over completely.
The private sector really does work quite well, but for the oil industry I argue that the four largest oil companies: ExxonMobil (XOM: Net Profit Margin 9.72% ttm*), Cheveron (CVS: Net Profit Margin 8.02% ttm), Royal Dutch Shell (RDS.A: Net Profit Margin 8.49% ttm) and BP (BP: Net Profit Margin 7.52% ttm) are not operating in a free market.
With all of the regulations here in the United States, plus the fact that oil companies must buy product from government controlled (nationalized) suppliers like Saudi Arabia, United Arab Emirates, Qatar, Nigeria, Libya, Kuwait, Iran, Indonesia, Ecuador, Angola, Algeria and Venezuela; there is no way you can argue that the private oil companies are operating in a free market.
The industry is a partnership between government and the private sector, with government setting – and frequently changing – the rules.
So when a government nationalizes an oil industry, what happens? We do have a recent example where the local dictator-at-large, Hugo Chavez, did just that two years ago. In April 2006, Chavez ordered a government takeover of operations that were previously run by private companies.
Convinced that the companies were making too much money, Chavez changed the rules. If the companies wanted to stay in Venezuela, they needed to play by new rules providing the government with a bigger cut of the revenue.
Did Hugo’s action two years ago – when oil was about $70 per barrel – stabilize or reduce the price of oil? Certainly not, but the current $130-plus per barrel price is quite the “windfall” for the Chavez government, but it does not seem to be getting to the Venezuelan people.
So, the lesson here is nationalize the oil industries and the prices go up. That’s not too good for the consumers, but works quite well for the governments listed above.
So, is big oil experiencing obscene windfall profits? I guess it’s all in how you define profits.
Here’s an important lesson, conservatives measure profit in a percentage where liberals measure profits in dollars. Conservatives use phrases like “oil company net profits averaged about 8 percent during the trailing twelve months.” Liberals use phrases that include dollar figures.
“The top four oil companies had profits of more than $260 billion dollars in 2007.”
“The top four oil companies had total revenues of more than $1.27 trillion dollars.”
Never mind that the $260 billion dollar figure was gross profit and the net profit was about $111 billion. Liberals have no problem tossing around that total revenue figure either; they just seem to conveniently forget the liabilities side of the ledger.
Liberals then compare those profits to the minimum wage in Mississippi – just for affect.
Look, the oil companies sell a lot of fuel. If an 8 to 11 percent profit margin is unacceptable, what would be an acceptable profit margin for the oil companies? 5 percent? 3 percent?
Remember, oil companies are not super-beings, they are made up of employees and stockholders – people. Those people expect to get paid and make a reasonable profit on their investment. If they can get better pay or make a better return on their investment elsewhere, they will move to an other industry or move their investments elsewhere.
Maybe the government should look at Apple (APPL: Net Profit Margin 15.13% ttm) or Google (GOOG: Net Profit Margin 24.89% ttm)? If you think 9 percent profit is obscene, what would you do with Apple and Google – nationalize their industry?
*ttm – Trailing 12 Months