Brookfield Basics

There are some things in life you can just count on. One of them is an endless stream of molten political rhetoric every time Exxon and its corporate siblings do what they exist to do - earn high profits.

No sooner does Wall Street announce the latest earnings than, like lemmings to the sea, politicians like Barack Obama trot out to the nearest bank of microphones, breathless in their self-righteous compulsion to pour out condemnation upon the evil, pillaging robber-barons of the oil business.

Now let’s first recognize some facts before I address the political issues, which are admittedly more subjective.

When oil companies make a lot of money three things happen:

First, their shareholders are enriched through the appreciation of their investment and the receipt of greater dividends. That means every senior citizen, single-mom or dad, middle-aged parent, enterprising college student; EVERYONE who owns stock in those companies experiences an increase to their personal wealth. Let’s stop just long enough to say, “that’s a good thing”.

Secondly – the government is enriched through its three-tiered taxation of this bounty. The corporation pays taxes on its profits; the shareholders pay taxes on the dividends their stock pays to them, and lastly; those same shareholders pay taxes on the capital gains of their stock. The US Government taxes the same dollar THREE TIMES – a racket even Tony Saprano hasn't figured out. So every time Exxon makes more money, the revenues of the Federal Government increase. And I am sure Mr. Obama would say “that is a good thing”.

Lastly, Exxon is now better positioned to take more risks and invest more capital into the task of finding additional sources of oil  - if they are allowed to.  And isn’t that a good thing too?

Think of it - a greedy, evil, pilfering, environment-raping, poor-exploiting energy company making money - and it’s a good thing?!  One imagines that if the good Senator ever grasped this simple reality, the exothermic force of his cognitive dissonance would launch him from the banks of the Potomac all the way back to his home State of Illinois.

Oil is a commodity, the price of which is affected by supply and demand and the geo-political situation. No posturing politician can change that reality; not now – not ever. The emergence of China as a major industrial power has forever changed the dynamic of oil prices, and as the wealth of her people increases, their ability to purchase cars, machines, and all manner of oil consuming products and services will increase. The DEMAND curve for oil has dramatically changed, and it is legislators like Mr. Obama who have artifically prevented the supply curve from responding.  The dynamic of greater demand and flat supply can only mean one thing - higher prices.  It's true whether we are talking about crude oil or golf balls.

Now in fairness to Obama he is only the latest in a long line to do this, and certainly members of BOTH parties have shamelessly gone to this well. The Republicans are no better than the Democrats on this score, and I don’t remember any of them crying for the oil industry when it dealt with years of $20 a barrel oil prices and was barely staying afloat.

I don’t like paying more for gasoline than you do, and I never will.  But let’s not make it worse by listening to a lot of disingenuous claptrap from people who know a lot about politicial pandering, but nothing about economics or markets.  There are solutions to this mess and it's time to hear about them.

So the next time you hear a politician dispensing drivel about “obscene profits”, take a minute to recognize that it has nothing to do with governance and everything to do with politics.

And then ask yourself a question: “When is the last time you heard anyone describing their own profits as “obscene”, like say perhaps, a Hollywood movie star or Oprah Winfrey"?

 

One thing we know for sure about “obscene profits”.  Whenever anyone uses the term, they are referring to someone else’s.