The feeding frenzy that the media has been salivating over for days can begin, now that Exxon-Mobil (XOM) as announced quarterly profits. They reported net income of $8.4 billion on $88.98 billion in sales, for a net income margin of 9.4%. Previously I observed that 9.4% for a peak profit in a cyclical industry is pretty average, and that over the last decade oil company profits have been below average for the whole of US industry.
In fact, most investors found these profits to be disappointing. You know you have a fun CEO job when half the country is pounding on you for profits being too high and the other half are pounding on you for profits being too low. The fact is that XOM and other large US oil companies don't get the benefit of rising oil prices that they did, say, 40 years ago. US oil companies no longer own most of their overseas reserves since many of their foreign operations were nationalized by countries in the 1960s (with the US government refusing to lift a finger to protect these US assets, one of the early instances of the no-blood-for-Exxon argument). Today, XOM must pay near market rate for much of this crude, either in arms-length purchases or through royalty agreements stacked in the favor of local governments.
So what can you folks who are screaming about high gas prices and obscene oil company profits do? Well, you could tax all these "windfall" profits away, like Ford and Carter did in the late 1970s. Of course, you would still be paying $3 for gas, but the profits would go to the US Congress to spend, who I am sure will do an excellent job. Probably could pay for another bridge in Alaska. Or, you could somehow ban oil companies from making a profit, and drop gas prices by that 9.4%, or about 28 cents. This would get you $2.72 gas instead of $3.00 gas. Feel better? Of course, in either scenario, oil companies would stop making any investments in refining or oil exploration. Supplies would quickly begin to fall (I won't go into it now, but take my word for it that refineries and oil wells require constant reinvestment just to keep running at current capacity) and I would bet it would take less than a year for that 28 cents to be right back in gas prices due to shrinking supply.
OK, what else could we do? Well, we could cap gas prices. Which is a fabulous idea, as long as no one who drives a car has anything better to do than sit in lines all day. Or, we could regulate oil like we do telephones and electric utilities. Highly regulated electric utilities make a net income margin of 7.1%. If we regulated oil companies down to 7.1%, then this would reduce gas prices from $3.00 to $2.93. So a huge and inflexible and costly national regulatory structure would save about 7 cents a gallon. Oh, and since for most of 10 years oil company profits have been less than 7.1%, then, a utility type regulatory environment would likely raise gas prices and profits in most years. And of course you would get all the business flexibility, creativity, and customer service currently demonstrated by your local electric and phone company.
So what government action should a irate gasoline customer demand? Well, I know this answer goes against years of education that the role of government is to step in and take over when any little aspect of life is not quite what citizens want it to be, but the correct answer is "none". Its like the line from Wargames: "A strange game. The only winning move is not to play."