About 25 years ago, as an oil company soldier I attended a public political gathering assembled by an Illinois congressman outside of Chicago to hear discussion about - among other subjects - government plans in DC to deal with the calls for “windfall” profits taxes to “punish” oil companies for the “obscene profits” they were getting as a result of the skyrocketing oil prices caused by the Iranian revolution. There was much deep brooding and earnest thought in evidence all session; at least until financial journalist and TV commentator Louis Rukeyser began speaking at lunch. Rukeyser, at least, was having none of the “whoa is me, chicken little” tone to the meeting. An ardent capitalist and believer in free markets, Rukeyser said:
Everybody is complaining about oil companies’ obscene profits… Not me. I hope they become positively pornographic!!!
This defiant outburst in favor of markets helped cleared the air. Of course a company dealing with a commodity will see its revenues (and profits) spike up with short term market fluctuations! So what? Rukeyser reminded everyone such commodity prices would surely go down soon enough, which would be true as well in the case of the oil industry when oil price decontrol and deregulation of gasoline supplies helped caused the collapse of the oil price in 1986 and the overwhelming depression in the oil industry as a result. Yesterday’s announcement by ExxonMobil of its earnings for the 4th Q and full year 2005 brought all this back. (CNN, EM) I mean, let’s face it: ExxonMobil’s $36 billion profit for one year is a lot of loot! But hang on a sec. Is the proper response to a fantastic quarterly and annual result, a political attack on the company or industry that accomplished the task? For political operatives whose existence is devoted to anti-market, collectivist and anti-economic growth policies the answer is yes. For the rest of us: let's not gag on ExxonMobil's numbers.
In the spirit of a healty digestion of these results, let’s recall how all felt last week when GM issued a report on its 2005 results: losses of $3.4 billion! (GM, GM2) Coupled with the bankruptcy of GM’s parts flagship Delphi weeks earlier, Ford’s announcement that it was closing 14 plants and laying off 30,000, and predictions that GM and Ford would be idling armies of workers and continue to lose market share for the foreseeable future… Zowie. (Ford, Ford2) When the political and social commentators discussed these auto industry developments, the question on everybody’s lips: what shall we do? Seems to me that the question in the case of both ExxonMobil and GM is not what should be done today, but what did the managers of these companies and their industries do years ago that led to such a spectacular financial success for ExxonMobil and spectacular financial ruin for GM today?
In the case of ExxonMobil and the oil industry, look back a decade ago, in the wake of the collapse of the Soviet Empire and the rise of the state companies in oil producing countries, when the free market’s oil industry -- the for-profit corporate enterprises exemplified by ExxonMobil -- faced soft commodity prices, excess industry capacity and weak earnings that could not attract the investor dollars required. Ten years ago, the executives and managers from proud, long-standing companies with iconic names, Amoco, Arco, Mobil, Conoco, Unocal, Texaco, to name just a few, were all independent and running their companies' assets to compete in an emerging globalized world market. On the lips of every executive at those companies and also at Exxon, Chevron, Phillips was the same question: do we buy or do we sell? In time, the executives of these companies worked out values, and the investors in the oil industry cheered while massive corporate enterprises were vaporized (sending soldiers like me who saluted the shield like that above to wander on the road). Let me put this simply: the oil industry (exemplified by ExxonMobil) made decisions that organized their infrastructure for profitability. The auto industry (exemplified by GM) did not. The oil industry shrunk, idled excess capacities, rationalized redundancies, sacked armies of employees and otherwise went through a painful industry retrenchment that was devastating to its participants and cheered by the shareholders. The auto industry did not. Granted, because of its vast labor force, the nature of its products and technology and the political impact of its operations among influencial constituencies resistent to change, the auto industry did not have the flexbility enjoyed by the leaner, more capital intensive and more ruthlessly efficient oil industry, where 9 of 10 exploration wells are dry as dust, busting all involved, including the ever-optimistic wildcatters who, despite the odds, keep coming back for more.
Still, a corporate executive must face the realities at hand. For whatever reasons, GM executives did not take the steps required to meet their market challenges. As ExxonMobil’s chief Lee Raymond explains the trick for an oil company is to organize itself to survive when oil prices are high and when oil prices are low. That’s what it takes to maintain a technological, engineering and financial institution that does what ExxonMobil aspires to do – reliably provide an essential commodity at prices the customer can afford. This requires a competitive return on investment (profits) over the long haul, the ability to respond to market fluctuation in supply costs and move product prices up and down (no price controls), and to satisfy shareholders and investor’s demands for earnings (be competitive on Wall St.). Stable earnings are a must! This demand of the investor market requires a corporate energy company to be profitable enough to reassure energy producers and their customers who invest in their projects that they can expect the corporate partner to deliver affordable fuel for the life of their investment (which can last more than 50 years). This is what big-time, adult corporations based in America do better than any in the world. One of the results of these management skills is that the American people are the most properous in human history, and capable of defending freedom for themselves and all who aspire to join in.
Of course, ExxonMobil is a convenient political target - it's the biggest and the most successful outfit in history. The oil industry – because of its size, scope and universal presence in today’s economy – also stimulates arguments about issues of war, peace, economic development, environmental impacts, social justice among other tangled matters. The oil industry is Big Time: its operations are woven into the fabric of modern life. Political soldiers working on the anti-market, collectivist side of public policy arguments will use ExxonMobil as their favorite whipping boy.(Exxpose Exxon, Cartoon) A look at the backers of the Exxpose Exxon campaign is a list of the leftists and the extreme environmentalists who seem today to dominate the Democratic Party. (EE Patrons) ExxonMobil's operatives are prepared to explain their embarrassment of riches. (Release) They are armed with the background information that will give context to any discussion of profits and losses. This essay is good. TCS is among those free market commentators having some fun with the issue. (TCS, That 70's Energy Policy). Quillnews advise: let's just remember to keep it simple: success is good, failure is bad.