Does the date July 11, 2008 ring any bells? On that day, crude oil prices reached an all-time high of $147.27 per barrel. If you don’t remember that specific date, you probably remember paying north of $3.50 for a gallon of gas that summer with some unlucky drivers in parts in the Midwest shelling out over $4.00 per gallon. While the rest of us were very unhappy watching prices at the pump double in a matter of months, the oil companies were absolutely raking in the cash. During the second quarter of 2008, ExxonMobil’s profits were $11.68 billion. To be clear, the figure above is profit, not revenue, it’s for the quarter, not the year, and it’s billion with a B.
To put that quarterly profit figure in perspective, a company with annual sales of $11.68B would have ranked 229th on the 2008 Fortune 500 list of US companies just behind household names like General Mills and Kellogg’s and just ahead of companies like Reliant Energy and DISH Network. Someone at the NY Times figured out that Exxon’s profits were nearly $90,000 a minute during the quarter. No surprise, but the other big oil companies were making truckloads of cash that summer too.
A lot of people thought this was terribly unfair and many politicians agreed. The chorus of a windfall profits tax was heard for the first time in Washington since the late 70’s to ‘correct’ for the obscene profits the oil companies were making. After all, the oil companies made their exploration and production investments when oil prices were much lower. Their investment models told them they could make a profit with prices in the $50 to $70 a barrel range. If you consider that the US alone consumes something like 20 million barrels of oil per day, at $140 a barrel, the oil companies were making silly amounts of money.
At about the same time the big oil companies were be vilified for their big profits, some gasoline retailers were accused of price gouging. In some cases retailers had purchased unleaded gas, and by the time they took delivery, the prices at the pump had risen dramatically allowing the retailer to make big profits. Many angry voices argued that it was unfair for retailers to make so much money selling gas as prices spiked during the late spring/early summer of 2008 when those retailers had purchased their gas when prices were low. According to their argument, price increases from retailers are only justified by an increase in prices at the wholesale level.
Is it unfair for oil companies to make more money in a quarter than most companies can sell in a full year? Is it wrong for the corner gas station to benefit from a big jump in retailer prices when their inventory was purchased when prices were low? Should the government step in and ‘fix’ this situation by enacting a windfall profits tax on oil companies or gasoline retailers ‘unfairly’ making piles of cash?
I say no. We’re better off letting supply/demand forces in the marketplace determine prices.
Oil companies have to place enormously expensive bets with very uncertain outcomes to find, drill, pump, and transport oil to the marketplace. I didn’t hear much complaining back in the early 90’s when oil was selling for under $20 a barrel and oil companies were struggling. And just as prices and timing worked in favor of the gasoline retailers in the summer of 2008, the same market forces can and do work against them were they have to sell gas at little or no profit when retail prices fall. How about this, you’re in your car and notice your needle is sitting on E. Fortunately, you spot two gas stations on either side of a nearby intersection. One gas station has prices for all grades that are 25 cents per gallon higher than his competitor. Curious, you pull into the expensive gas station to ask the manager why his prices are so high. “Well”, he explains, “I bought gas to replenish my inventories a month ago when prices were higher, and I’ve got to make a profit.”
For whatever reason, some people resent companies making money.
What if the roles were reversed? Let’s consider a very fictitious scenario where you buy a house in a small town for $100,000. The day after you close on that house, a large company announces plans to build a large distribution center in that same town. The new distribution center will bring 500 new jobs to town. That’s 500 families who’ll need a place to live, so that little town will get a lot bigger very quickly. Now your new house is worth $150,000. The house is the same, you haven’t painted the house or installed hardwood floors or done any landscaping. You haven’t even moved in, but supply/demand forces have worked in your favor, and you’re sitting on a $50,000 profit. Should you be allowed to sell it for $150,000 and pocket the windfall? The people who support the price gouging laws would say no, unless they’re the ones that just paid $100,000 for the house.
Supply/demand forces are the fairest way to set pricing. Government attempts to regulate pricing or tax companies that make too much money (whatever that means) don’t benefit the public in the long run. Prices movements communicate very important information to marketplace participants. When prices jump dramatically, as oil prices did in the summer of 2008, the message to suppliers or would-be suppliers is find more or come up with alternatives, and the message to buyers is conserve or use less or check out alternatives.
While I’ve come to the defense of oil companies and the money they’ve made, I’m not suggesting we continue down the current path. Beyond the environmental arguments, the economics of our current oil dependence don’t make sense. The US has a huge trade deficit (we import more than we export) and a large component of that deficit is all the foreign oil we buy (we import a lot of what we use) so the development of home-grown energy alternatives is something we must pursue for the sake of our long-term economic health.
A Solution to Concussions in Football
The Unrepentant Capitalist has interests outside of the thrilling world of economics…he likes football too.
Concussions in the NFL have become a big topic in the last year. The incidence of dementia and Alzheimer’s among the ranks of NFL alumni is way out-of-whack compared to the general population. Players having suffered multiple concussions, especially concussions closely spaced in time, seem to be at a much higher risk of brain related problems later in life. It was very sobering to watch former Baltimore Colts great John Mackey and his nonsensical rambling on the recent ESPN special on concussions. Very scary stuff.
I have a solution. Most people will see my solution as radical, but I think it will help greatly. Leather helmets.
The problem with today’s hard shell helmets is that players tend to use their helmet as a weapon and will often lead with their head when they tackle a player. Players gain a false sense of security because of their ‘protective’ head gear. What they’re not thinking about is the very sudden deceleration of their brains against the front of their skull’s when they make these hard hits. If the deceleration is sudden and hard enough—concussion.
If you’ve ever watched a rugby match or old highlight reels from football’s leather helmet days, you’ll see a very different tackling technique. Like current day rugby players, old leather helmet wearing football players would lead with their shoulders when tackling. I’m not arguing that concussions will go away (football is a tough game, big bodies flying around, and lots of hitting) but the concussion rate will surely go down when players stop using their heads as weapons.
There’s one addition to include when going old school with leather football helmets. Old football players commonly had broken noses, broken cheek bones, and summer teeth (some are there, some are not). Dentists probably didn’t mind a football player clientele in the 40’s as that probably meant the dentist was making a lot of money fitting football players with dentures, bridges, etc. A key addition to the leather helmet would be a form-fitting Plexiglas face protector similar to what basketball players wear if they’ve broken a nose or a cheek bone. Rip Hamilton of the Detroit Pistons has worn one of these for several years.
Think leather football helmets in the 21st century is a crazy idea? Go to YouTube and take a peek at how John Mackey is doing these days.