Why Big Oil Cannot Just Cut Profits

RUSH: E-mailers: ‘You are still skating on the question you were asked yesterday from the woman in Flint about why Exxon can’t lower its profits a little bit to be fair.’ I’m not skating it. I thought I explained it, and I thought, frankly, that most everybody wouldn’t need that stupid question explained. But I will be glad to endeavor to answer it. The first thing you’ve gotta do, is you’ve got to throw out this concept of ‘fairness.’ There is no word fair in market economics, at least as a guiding principle. Businesses don’t go into business to be fair. Everybody knows businesses go into business to screw other people. Is that what you think? (laughing) Burger King wants to kill its customers, folks. It’s serving trans-fat. They want their customers to die. Big Tobacco wants their customers to die. Wal-Mart, they hope that something happens to you so that you die, too. That’s what we’re being told. It’s absolutely absurd. Now, as to this concept, ‘Why can’t they lower their profits?’ In the first place, if they gave away… If you take Exxon’s profit, $39.5 billion dollars, the most reported profit, divided equally among every man, woman, child, and illegal immigrant in this country, it would be enough for maybe every man, woman and child and illegal immigrant to go out and buy three or four gallons of gasoline. You could do it one time, because after you take their whole profit, Exxon’s going to say, ‘Why should I stay in business in this country?’ It isn’t going to happen. It’s not that much money.

The big profit is being made by taxing agencies, the states and the feds. But here is another way to look at this. If the managers of, say, ExxonMobil — and they work for the owners, and do you know who owns ExxonMobil? Shareholders. It’s a publicly traded company. If the managers, the CEO and all of that, start charging too little for their product, they would lower profits, and guess what? The company’s owners would toss ’em out. The shareholders would not be happy, nor would the board of directors. It’s the same answer if the company charges too much. They’d have unsold inventories, and the firm would under-perform. Profits would be lower than would be possible, and the short answer to this is that Big Oil — which is a citizen of the world; Big Oil, 30% of its profits derive from operations in the United States, 70% around the world — they’re constrained by market forces. They have to charge the market rate. If they don’t, one way or another it’s not going to work out. A lot of people see the competition exists that in the retail market, and they see that Exxon would have trouble charging ten cents a gallon more than BP. But what people fail to see is that competition in the capital markets also constrains managers to maximize profits. Capital markets, the commodities markets, there are so many factors that go into the costs of doing business, and in setting the price based on what the market will pay, and hopefully making a profit here.

But you people have been led to believe by a Drive-By Media and the Democrats, that Big Oil, alone — maybe Big Drug, too — is able to magically set its price for every product to guarantee itself not only a huge profit, but that you get screwed, and that they are not part of the market, that they somehow are independent of market forces. They have so many market forces preying on these companies. If I were Big Oil CEO, I would call members of the government up, and I would conduct hearings and I would ask them, ‘Why is it you are making it so hard for us to do business? You won’t let us drill. You will not let us build any new refineries. You will not let us do one thing to expand our operations in your country, and you turn around and you’re blaming us for gouging customers.’ Market forces totally constrain Big Oil just like any other business. You’re going to have to shelve this belief that there’s some wizard behind a curtain that can do whatever he wants price-wise, independent of the market.

He does not exist.

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RUSH: Here’s Barry, Watertown, Connecticut. You’re next, sir, on the EIB Network. Hello.

CALLER: Hi, Rush. Good to talk to you.

RUSH: Thank you.

CALLER: Like you, I am frustrated with the people who don’t understand the pricing of oil and they look to point blame, and I think that they just feel helpless with the commodity nature of oil and how, on a whim, it can jump up and down, and I have a thought whereby we could use that dynamic to our advantage. We can create the wind in the marketplace that turns prices down in our favor, and it’s very simple. If today we passed all kinds of laws about how we were going to take oil out of our own soil, in Alaska and we were going to explore the Gulf, and we had a mandate of how many millions of barrels we were going to get out of our own soil per day at some future date, we wouldn’t have to put one shovel in the ground, and tomorrow the commodity price of oil would dive down, I bet. We could save prices on gas quicker than any other method of trying to squeeze it out of the corporations or however else they feel they want to do it.

RUSH: Oh, well, yeah, but just proposing the legislation would not accomplish that. It has to pass. When you talk about affecting the markets, when the Democrats and the environmentalists rev up to just the proposal, that’s going to alert the markets that it isn’t going to happen in the US, and the price is going to go up. Anything that can cause the price to go up, like fear of Ahmadinejad nuking Israel. There’s all kinds of things out there that cause the futures market to go crazy, the commodities market, and what we really need to do is do the drilling and do the exploration and become more independent. I hear the Democrats talking, ‘We need energy independence,’ but we never do anything to actually get us there.

CALLER: Well, this is my point. I’m not saying stop short of doing it, but I’m saying many people probably feel that we could propose that, we could start to drill it but we’re still never going to see that oil and that gasoline impact our supplies. I’m saying that if we are determined, if we’re unified and we make a pledge and pass it, then the world price is going to have to recognize it, and supply and demand would take over. I agree with you that, you know, perhaps technology and alternate fuels one day are going to save us, but in the interim we need a lot of oil and it’s ultimately up to, ‘What do we want to pay for it?’

RUSH: The interesting thing about what you said. I’m more interested in tracking what it is that causes the jitters for people on the price of gasoline — and, frankly, I’m not buying the notion that everybody’s out there wringing their hands over it in the first place. I look at the driving statistics, and driving is up. Gasoline consumption is up. All of these fears, these stories about angst among drivers, I don’t believe it exists to the extent that it’s being reported. I think Drive-Bys report things through their political prism. As to the futures market might bid down the price based on a future increase in supply, that might also cause them to bid up the price to get as much as they could before it comes online. I understand what you’re saying. You’re using market forces to bring down the price, rather than as people say, ‘Exxon and Shell ought to just lower the price out of fairness.’

Your point is valid, and I appreciate it.