QUOTE(So hard for the Money )
Jonathan Weiler (8:28PM) link
As I am sure many of you have seen over the past couple of days, ExxonMobil announced record profits for 2005 – roughly $10 billion for the fourth quarter and $36 billion for the year. That's a lot of money. Defenders say that ExxonMobil is merely reaping the hard-earned benefits of market forces, which have conspired to drive up demand. According to Ben Stein, appearing on CNN on January 21st, people should not be berating oil companies because the companies are performing a critical, and difficult service, and should be well-compensated for it. Stein's contention is:
"…they [oil company executives] make much less than Hollywood stars, they make much less than Wall Street traders and they do a much great[sic] service. I mean, what is the service that is done by Brad Pitt or Angelina Jolie compared with the service of putting oil in our house's furnace or gas in our cars? There's no shortage of people who get paid a great deal more than oil company executives for doing a lot less work and a lot less useful work. They're paid well compared to me but they're not paid well compared to many, many, many executives and entrepreneurs in this country."
Stein doesn't clarify the "they" in his defense of oil company executives. But, according to the Executive Pay Watch database, in 2004, ExxonMobil CEO Lee Raymond made "$38,076,382 in total compensation including stock option grants from Exxon Mobil Corp…[and] from previous years' stock option grants, the Exxon Mobil Corp. executive cashed out $43,649,925 in stock option exercises. And Lee R. Raymond has another $65,077,965 in unexercised stock options from previous years." One has to assume that Raymond will have done better in 2005 than he did in 2004, when all is said and done. Now, I know top movie stars make a lot of money, but $81 million in compensation and cashed out options – that'd be a heck of a year for any movie star, or for any Wall Street trader, for that matter. Leaving aside Raymond's personal compensation, a WSJ industry survey found that oil and gas executives' compensation was 16.5 million for 2004, a 109% jump over 2003 and the largest for any industry profiled by the Journal. (thanks to Think Progress for that nugget)
Naturally, because Stein was talking to the amateur hour of business journalism, CNN's In The Money, no one questioned this claim, nor any other Stein made.
But, what of Stein's claim that oil executives are providing such a valuable service? Do they really earn their money by outperforming other people in a competitive market where the meritorious swim and the less competent sink? And, in the process, do they provide an invaluable service to consumers that otherwise would go unfulfilled, or would be done much less cheaply and efficiently? On the question of a merit-driven, level-playing field, it appears that, according to this recent analysis in the Times, oil companies have a major, non-market head start.
The Times writes:
"At a time when energy prices and industry profits are soaring, the federal government collected little more money last year than it did five years ago from the companies that extracted more than $60 billion in oil and gas from publicly owned lands and coastal waters."
Furthermore:
"But an often byzantine set of federal regulations, largely shaped and fiercely defended by the energy industry itself, allowed companies producing natural gas to provide the Interior Department with much lower sale prices - the crucial determinant for calculating government royalties - than they reported to their shareholders…. As a result, the nation's taxpayers, collectively, the biggest owner of American oil and gas reserves, have missed much of the recent energy bonanza."
Now, Stein could still contend that the road to record profits was paved with good intentions – but the assumptions underlying his defense of the oil companies are depressingly common and flawed – that the energy bigwigs are really no different than the ma and pa businesses that Adam Smith was defending over two hundred years ago. But, of course, the major corporations of today, whose profitability is inextricability linked with their ability to exact favorable legislative concessions from lawmakers, often to curtail, rather than stimulate, competition, cannot be understood to be bound by the same rules of market competition as the typical small business. Nor is it clear that they are serving the same functions for overall societal efficiency and well-being that was at the heart of classical (including Smith's) defenses of self-interested economic behavior.
Because there is no clear case that the extractive sector, which has gamed the political system to maximize profit to a staggering degree (and here are a few more examples of political giveaways to energy giants), is serving the public economic good.
As an aside, it's worth considering how many times we are told that business just wants simplicity and transparency and minimal government interference so that it can pursue efficient profit-making endeavors. But, the Times quote above gives the game away – the energy companies themselves shape and defend these byzantine rules. In fact, what the big boys want is to use every lever at their disposal to extract profit, regardless of the sorts of bureaucratic structures necessary to realize that profit. In fact, the Times makes clear, the more complicated the reporting procedures from which royalties are supposed to be paid to the government, the more difficult it is to follow the money. This is exactly as the companies and, it seems, the Bush administration, want it.
None of this, of course, merited even a mention, as CNN's pathetically ill-informed team sat starry-eyed at Stein's knee while he dispensed his cold-eyed wisdom about the way the world really works. As I've commented before, this is a common-place response to presumably no-nonsense "tell-it-like-it-is" economic analysis which, while elegantly common-sensical often contradicts the way the business world actually works. But, why do the work to actually understand the way the world works, when you can mouth simple-minded platitudes about supply and demand and make stupid jokes about Angelina Jolie performing a service, at least to Brad Pitt, har, har, har?(note: actual snippet of repartee on above-mentioned CNN broadcast)
In congressional testimony last Fall, Dean Baker testified in favor of windfall profit taxes. He observed that neither Katrina, nor increased demand from China, nor lost production from Iraq, was anticipated by the oil companies, and crucially, if we are to follow the logic of the most stirring justifications of capitalism: "the industry has done nothing, it's not as if they've developed great new products or people have suddenly gotten an urge to buy their gasoline that they hadn't got previously….But obviously what is bad luck for the rest of us is great news for the oil companies."
Baker also pointed out that the windfall profit tax of the early 1980s netted the equivalent of $70 billion in tax receipts in today's dollars, while having no impact on the availability or quality of oil. Baker further reminded Congress that the companies were perfectly profitable at $25 a barrel. Therefore, Baker contended, the idea that, at $65 to $70 a barrel, the oil giants are only reaping that which they need to remain competitive and efficient is, simply, a ludicrous claim. This is found money, Baker observed and the companies are not going to use it to drill for more oil. Consequently, Baker asked rhetorically, what is the larger economic benefit of such profits. His answer – well, none really – the found money isn't going to go to investment in new wells – it's simply going to be dispersed to company shareholders. Again, remember that a key premise of Stein's claim is that the oil companies deserve what they get because they are performing a larger social good. But, there is no case that they are reaping rewards in direct proportion to the public good they serve. Instead, the evidence suggests, they are reaping rewards far in excess of any good they are currently providing.
Bob Burtman's excellent analysis further fleshes out the flawed premises of Stein's logic. Referring to defenses of oil company profits in the immediate aftermath of Hurricane Katrina as the simple workings of supply and demand, Burtman argues that:
"Th[ese] analyses ignore the basic fact that the oil industry does not operate in a free market, at least in any traditional sense. Rather, the major oil companies have systematically constricted gas supplies over the last 15 years to the point where any disruption--even planned maintenance at refineries--causes prices to leap, reaping massive profits for the companies at the expense of the consumer.
Lest this sound like another paranoid rant by the anti-corporate liberal media, consider a few facts and figures: According to the National Petrochemicals and Refiners Association, capacity to refine crude oil into gasoline and other products in the United States fell by about 9.3 percent between 1981 and 2004, from a peak of 18.6 million barrels per day to 16.9 million. Since 1981, the number of refineries has dropped from 324 to 153; most of those lost were independent operators."
Worth noting is that these developments run directly contrary to typical criticisms by free market advocates about taxes. When a windfall tax was in effect in the early 1980s, capacity was FAR HIGHER than it is now. Taxes are supposed to, always and everywhere, depress incentives to invest and produce. Except that, evidently, this is not always unqualifiedly true. It would appear that tax rates cannot explain the depressed number of operating refineries today, since one key tax that existed a quarter of a century ago, when capacity was far higher, no longer does, and that companies are paying lower fees and royalties relative to profits now than they were five years ago. The reduced capacity instead appears to be driven by the prospect of windfall profits by an oligopoly leveraging distortions in the functioning of a typical, competitive, market. This analysis bears out Baker's observation that there is no reason to expect windfall profits to be plowed back into investment, innovation and development, as is supposed to happen in a well-running free market.
So that the point is not missed, the seeming fit between supply, demand, oil company profits and free markets unravels once one understands the terms under which oil companies are actually doing business. Burtman writes:
"In a free market, new competitors would enter the marketplace to capture some of this profit, thereby increasing competition and eventually driving prices down. But the barriers to entry at every level are virtually insurmountable, and the existing players are content to split the huge pie while avoiding scrutiny from antitrust regulators by continuing the merger mania of the last decade--flush with cash and nowhere to spend it, ExxonMobil, BP Amoco or Shell would certainly swallow the remaining independents--and each other--if they thought they could get away with it."
There's no meaningful resemblance between the politically-connected mega-corporations of today and the businesses of classical political economy. Consequently, there is no compelling reason, under the terms of good economic and moral sense, to continue to defend self-interested behavior that so clearly fails to serve the larger good.
Copyright © Jonathan Weiler. Material presented on The Gadflyer is the opinion of the respective author and not that of The Gadflyer, the web host or any other entity.
As I am sure many of you have seen over the past couple of days, ExxonMobil announced record profits for 2005 – roughly $10 billion for the fourth quarter and $36 billion for the year. That's a lot of money. Defenders say that ExxonMobil is merely reaping the hard-earned benefits of market forces, which have conspired to drive up demand. According to Ben Stein, appearing on CNN on January 21st, people should not be berating oil companies because the companies are performing a critical, and difficult service, and should be well-compensated for it. Stein's contention is:
"…they [oil company executives] make much less than Hollywood stars, they make much less than Wall Street traders and they do a much great[sic] service. I mean, what is the service that is done by Brad Pitt or Angelina Jolie compared with the service of putting oil in our house's furnace or gas in our cars? There's no shortage of people who get paid a great deal more than oil company executives for doing a lot less work and a lot less useful work. They're paid well compared to me but they're not paid well compared to many, many, many executives and entrepreneurs in this country."
Stein doesn't clarify the "they" in his defense of oil company executives. But, according to the Executive Pay Watch database, in 2004, ExxonMobil CEO Lee Raymond made "$38,076,382 in total compensation including stock option grants from Exxon Mobil Corp…[and] from previous years' stock option grants, the Exxon Mobil Corp. executive cashed out $43,649,925 in stock option exercises. And Lee R. Raymond has another $65,077,965 in unexercised stock options from previous years." One has to assume that Raymond will have done better in 2005 than he did in 2004, when all is said and done. Now, I know top movie stars make a lot of money, but $81 million in compensation and cashed out options – that'd be a heck of a year for any movie star, or for any Wall Street trader, for that matter. Leaving aside Raymond's personal compensation, a WSJ industry survey found that oil and gas executives' compensation was 16.5 million for 2004, a 109% jump over 2003 and the largest for any industry profiled by the Journal. (thanks to Think Progress for that nugget)
Naturally, because Stein was talking to the amateur hour of business journalism, CNN's In The Money, no one questioned this claim, nor any other Stein made.
But, what of Stein's claim that oil executives are providing such a valuable service? Do they really earn their money by outperforming other people in a competitive market where the meritorious swim and the less competent sink? And, in the process, do they provide an invaluable service to consumers that otherwise would go unfulfilled, or would be done much less cheaply and efficiently? On the question of a merit-driven, level-playing field, it appears that, according to this recent analysis in the Times, oil companies have a major, non-market head start.
The Times writes:
"At a time when energy prices and industry profits are soaring, the federal government collected little more money last year than it did five years ago from the companies that extracted more than $60 billion in oil and gas from publicly owned lands and coastal waters."
Furthermore:
"But an often byzantine set of federal regulations, largely shaped and fiercely defended by the energy industry itself, allowed companies producing natural gas to provide the Interior Department with much lower sale prices - the crucial determinant for calculating government royalties - than they reported to their shareholders…. As a result, the nation's taxpayers, collectively, the biggest owner of American oil and gas reserves, have missed much of the recent energy bonanza."
Now, Stein could still contend that the road to record profits was paved with good intentions – but the assumptions underlying his defense of the oil companies are depressingly common and flawed – that the energy bigwigs are really no different than the ma and pa businesses that Adam Smith was defending over two hundred years ago. But, of course, the major corporations of today, whose profitability is inextricability linked with their ability to exact favorable legislative concessions from lawmakers, often to curtail, rather than stimulate, competition, cannot be understood to be bound by the same rules of market competition as the typical small business. Nor is it clear that they are serving the same functions for overall societal efficiency and well-being that was at the heart of classical (including Smith's) defenses of self-interested economic behavior.
Because there is no clear case that the extractive sector, which has gamed the political system to maximize profit to a staggering degree (and here are a few more examples of political giveaways to energy giants), is serving the public economic good.
As an aside, it's worth considering how many times we are told that business just wants simplicity and transparency and minimal government interference so that it can pursue efficient profit-making endeavors. But, the Times quote above gives the game away – the energy companies themselves shape and defend these byzantine rules. In fact, what the big boys want is to use every lever at their disposal to extract profit, regardless of the sorts of bureaucratic structures necessary to realize that profit. In fact, the Times makes clear, the more complicated the reporting procedures from which royalties are supposed to be paid to the government, the more difficult it is to follow the money. This is exactly as the companies and, it seems, the Bush administration, want it.
None of this, of course, merited even a mention, as CNN's pathetically ill-informed team sat starry-eyed at Stein's knee while he dispensed his cold-eyed wisdom about the way the world really works. As I've commented before, this is a common-place response to presumably no-nonsense "tell-it-like-it-is" economic analysis which, while elegantly common-sensical often contradicts the way the business world actually works. But, why do the work to actually understand the way the world works, when you can mouth simple-minded platitudes about supply and demand and make stupid jokes about Angelina Jolie performing a service, at least to Brad Pitt, har, har, har?(note: actual snippet of repartee on above-mentioned CNN broadcast)
In congressional testimony last Fall, Dean Baker testified in favor of windfall profit taxes. He observed that neither Katrina, nor increased demand from China, nor lost production from Iraq, was anticipated by the oil companies, and crucially, if we are to follow the logic of the most stirring justifications of capitalism: "the industry has done nothing, it's not as if they've developed great new products or people have suddenly gotten an urge to buy their gasoline that they hadn't got previously….But obviously what is bad luck for the rest of us is great news for the oil companies."
Baker also pointed out that the windfall profit tax of the early 1980s netted the equivalent of $70 billion in tax receipts in today's dollars, while having no impact on the availability or quality of oil. Baker further reminded Congress that the companies were perfectly profitable at $25 a barrel. Therefore, Baker contended, the idea that, at $65 to $70 a barrel, the oil giants are only reaping that which they need to remain competitive and efficient is, simply, a ludicrous claim. This is found money, Baker observed and the companies are not going to use it to drill for more oil. Consequently, Baker asked rhetorically, what is the larger economic benefit of such profits. His answer – well, none really – the found money isn't going to go to investment in new wells – it's simply going to be dispersed to company shareholders. Again, remember that a key premise of Stein's claim is that the oil companies deserve what they get because they are performing a larger social good. But, there is no case that they are reaping rewards in direct proportion to the public good they serve. Instead, the evidence suggests, they are reaping rewards far in excess of any good they are currently providing.
Bob Burtman's excellent analysis further fleshes out the flawed premises of Stein's logic. Referring to defenses of oil company profits in the immediate aftermath of Hurricane Katrina as the simple workings of supply and demand, Burtman argues that:
"Th[ese] analyses ignore the basic fact that the oil industry does not operate in a free market, at least in any traditional sense. Rather, the major oil companies have systematically constricted gas supplies over the last 15 years to the point where any disruption--even planned maintenance at refineries--causes prices to leap, reaping massive profits for the companies at the expense of the consumer.
Lest this sound like another paranoid rant by the anti-corporate liberal media, consider a few facts and figures: According to the National Petrochemicals and Refiners Association, capacity to refine crude oil into gasoline and other products in the United States fell by about 9.3 percent between 1981 and 2004, from a peak of 18.6 million barrels per day to 16.9 million. Since 1981, the number of refineries has dropped from 324 to 153; most of those lost were independent operators."
Worth noting is that these developments run directly contrary to typical criticisms by free market advocates about taxes. When a windfall tax was in effect in the early 1980s, capacity was FAR HIGHER than it is now. Taxes are supposed to, always and everywhere, depress incentives to invest and produce. Except that, evidently, this is not always unqualifiedly true. It would appear that tax rates cannot explain the depressed number of operating refineries today, since one key tax that existed a quarter of a century ago, when capacity was far higher, no longer does, and that companies are paying lower fees and royalties relative to profits now than they were five years ago. The reduced capacity instead appears to be driven by the prospect of windfall profits by an oligopoly leveraging distortions in the functioning of a typical, competitive, market. This analysis bears out Baker's observation that there is no reason to expect windfall profits to be plowed back into investment, innovation and development, as is supposed to happen in a well-running free market.
So that the point is not missed, the seeming fit between supply, demand, oil company profits and free markets unravels once one understands the terms under which oil companies are actually doing business. Burtman writes:
"In a free market, new competitors would enter the marketplace to capture some of this profit, thereby increasing competition and eventually driving prices down. But the barriers to entry at every level are virtually insurmountable, and the existing players are content to split the huge pie while avoiding scrutiny from antitrust regulators by continuing the merger mania of the last decade--flush with cash and nowhere to spend it, ExxonMobil, BP Amoco or Shell would certainly swallow the remaining independents--and each other--if they thought they could get away with it."
There's no meaningful resemblance between the politically-connected mega-corporations of today and the businesses of classical political economy. Consequently, there is no compelling reason, under the terms of good economic and moral sense, to continue to defend self-interested behavior that so clearly fails to serve the larger good.
Copyright © Jonathan Weiler. Material presented on The Gadflyer is the opinion of the respective author and not that of The Gadflyer, the web host or any other entity.
