After Exxon Mobil recently reported record profits for any U.S. corporation ever, Cato Institute top economist Chris Edwards tried to explain to us how we will all benefit from Exxon's good fortune. Unfortunately, his claims just don't match up with the facts, as a simple check of Exxon's quarterly statement will demonstrate... after the fold...
Hurray for Profits
by Chris Edwards
Good news from the oil industry: ExxonMobil announced a record after-tax profit of $39.5 billion for 2006.
So far so good. I don't begrudge companies making a profit, even a large profit, heck, even a record profit. After all, somebody's got to make the most money, right?
That is great news because it means the company will have more funds to reinvest in exploration, refinery expansion, drilling platforms, chemical plants, and all those other brilliant machines that American families benefit from every day.
The firm invested $20 billion in exploration, structures, and equipment in 2006...
Okay, 20 billion in capital investment sounds good I guess...
High profits are a signal to ExxonMobil management, other energy companies, and Wall Street to feed this industry more capital and to continue increasing energy production. That’s good news for U.S. energy security and U.S. consumers.
To summarize, Cato is saying that the record profits will result in reinvestments which will "continue increasing energy production."
Makes sense, right?
Okay, now let's take a look at Exxon Mobil's latest quarterly report, just to verify the good news.
Gross share purchases in 2006 were $29.6 billion which reduced shares outstanding by 6.6%.
Heh. This is almost $30 billion invested in buying back its own stock, compared to only $20 billion in capital investment. In other words, Exxon itself thinks that its stock is a better investment than additional production capacity.
Hmm, why would that be?
Well, I can think of two rather obvious reasons:
- Exxon expects energy prices to continue to rise, which will increase its profits and ostensibly its share price, and
- Additional profitable opportunities for production simply aren't available.
Remember now that the Cato Institute said that Exxon's record profit was "good news for U.S. energy security and U.S. consumers"... but Exxon's actions demonstrate that it is banking on an environment of higher energy prices and a lack of new energy production opportunities. How exactly this is supposed to be good news for energy security or consumers is baffling to me.
And if we look deeper into Exxon's quarterly report, it's pretty easy to see that Exxon's record profits in 2006 are hardly a result of increased production:
Natural gas production of 9,334 mcfd, increased 83 mcfd from 2005.
Weeeeeeeeeee! An increase in less than 1% in natural gas production. And on to the biggie, oil:
Petroleum product sales of 7,247 kbd decreased from 7,519 kbd in 2005, primarily due to lower refining throughput and divestments.
So Exxon actually produced LESS oil and processed LESS oil in refineries in 2006, and sill had record profits. Earth to Cato... for Exxon to "continue increasing energy production," they would actually have to be increasing energy production to begin with. Fact is, they didn't increase production at all in 2006, despite their record profits.
And there's no reason to expect anything except more of the same in 2007: higher prices, increased profits, and little to no additional energy production.
So much for the propaganda and cheerleading of a so-called "expert" at the Cato Institute.