Tuesday, January 31, 2006

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Record profits, amid record prices

Exxon Mobil yesterday reported profits from 2005 of over USD 36 billion, the largest annual profit ever reported by a US company. There are calls for a windfall profits tax, but critics of such a tax say that it isn't fair, that their profits are not that large a percentage of their revenues, and that they're profiting from wise investments made in leaner times.

I could accept those arguments if they were not accompanied by record consumer fuel prices, which have risen shockingly. According to a CBS News article on mass transit use:

Average gas prices rose all summer after breaking $2 a gallon in late March, soaring to $3.07 during the week of Sept. 5, the aftermath of Katrina.
...and, referring to the period from July to September:
The average price of a gallon of regular gasoline was $2.55 during those months, up from $1.85 a year before.
...which is almost a 38% rise. If companies such as Exxon Mobil needed to raise prices that much in order to return a nominal profit, we consumers could understand it. But after being knocked down by the soaring prices, it is particularly galling to then be kicked by a profit announcement like this.

3 comments:

Daniel said...

Welcome to capitalism! If we take away what a company has rightfully earned, we will cause them to be less interested in providing their product. Life isn't fair. It's not supposed to be fair. The laws of supply and demand dictate that as long as a consumer (you and me) is willing to pay the price for the product, the company will sell it for that. If you don't want to pay the price, you don't have to, but stop complaining.

Barry Leiba said...

Indeed; I guess I favour a moderated capitalism. If the price of music recordings, or cigarettes, or snazzy sneakers, is too high, consumers choose not to buy them; if consumers buy them in quantities that make the manufacturers happy, then the price is set that way. But...

...some products are "necessities" in some sense, and there's public good, or at least a perception of public good, in artificially limiting the effect of supply and demand on those items. If poor people can't afford snazzy sneakers, but they can afford other shoes, we're OK. If all shoes are too expensive, so that poor people have to go barefoot (or so that the government must subsidize them), the issue changes.

Fuel is arguably in that category, and there's some public value in assuring that profits taken from the sale of those items should be "reasonable", regardless of the effects that supply and demand might otherwise have.

I'm not an economist, and I haven't thought this out completely, so what I say above is a sketchy opinion that surely has flaws.

David said...

Capitalism would be great! But what we have, and what makes the oil companies so rich, is state cronyism. The oil companies own a significant fraction of the congress (and 110% of the White House); the laws of supply and demand may control the price of oil and gasoline on Planet Xonga, but around here not so much. Try and start your own oil company to undercut the inflated prices charged by the current Big Oil, and see how much the gov't smoothes your way...

(Rant, rant)