28 February 2006
Oil Company Profits
In "What Is an Oil Company, Anyway?" in the 26 February 2006 New York Times, Ben Stein accurately points out the irony of criticizing commodity companies, like oil producers, for the profits they earn because of price fluctuations in a market over which they have little control. After all, what do well-run corporations do with windfalls like that? In the interest of their shareholders, they reinvest them in future production in order to assure long-term profitability for those widows and orphans.
On the other hand, since windfall profits owing to commodity markets are matched over time by risks of losses, it is debatable whether oil companies are good investments for fixed-income dependents. It is one of the primary goals of oil company executives to minimize the vulnerability of their shareholders to these market challenges. However, that objective can be achieved not just by hedging their risks with wise capital investment in diversification, research and development. It is also done by spinning their companies' outlook in order to affect the stocks' valuations, a skill for which CEOs are often highly rewarded by their boards of directors.
Criticism of oil companies for not using their serendipitous wealth to solve the world's other problems, like global warming, is undeserved to the extent that they devote profits when they are rich to anticipating the next downturn. It is misdirected when it does not take to task any of their executives who obfuscate the unpredictability of their industry and their need for large reserves in order to guarantee survival.
In "What Is an Oil Company, Anyway?" in the 26 February 2006 New York Times, Ben Stein accurately points out the irony of criticizing commodity companies, like oil producers, for the profits they earn because of price fluctuations in a market over which they have little control. After all, what do well-run corporations do with windfalls like that? In the interest of their shareholders, they reinvest them in future production in order to assure long-term profitability for those widows and orphans.
On the other hand, since windfall profits owing to commodity markets are matched over time by risks of losses, it is debatable whether oil companies are good investments for fixed-income dependents. It is one of the primary goals of oil company executives to minimize the vulnerability of their shareholders to these market challenges. However, that objective can be achieved not just by hedging their risks with wise capital investment in diversification, research and development. It is also done by spinning their companies' outlook in order to affect the stocks' valuations, a skill for which CEOs are often highly rewarded by their boards of directors.
Criticism of oil companies for not using their serendipitous wealth to solve the world's other problems, like global warming, is undeserved to the extent that they devote profits when they are rich to anticipating the next downturn. It is misdirected when it does not take to task any of their executives who obfuscate the unpredictability of their industry and their need for large reserves in order to guarantee survival.
16 February 2006
Overcompensating
In response to James Surowiecki's comments in the February 13 & 20 New Yorker, CEOs' compensation must be understood to accord with their accomplishment of the objectives of their companies' shareholders. Performance will always be the primary criterion of merit for CEO pay packages. It's just that financial performance -- stock-market valuation -- outweighs microeconomics in the eyes of many companies' shareholders.
More and more frequently, stock market valuations reflect hype as much as audited growth or profitability. The better a CEO is able to convince the market and its opinion leaders that his company is succeeding -- for whatever reason -- the more he is worth. Fraud cannot be rewarded, but spinning the outcome of operations is a skill that has become valuable in today's economy.
It's sour grapes to blame CEOs in certain industries, like oil, for their good luck. Some have it and some do not. Some know how to take advantage of it, and should be even better compensated.
In response to James Surowiecki's comments in the February 13 & 20 New Yorker, CEOs' compensation must be understood to accord with their accomplishment of the objectives of their companies' shareholders. Performance will always be the primary criterion of merit for CEO pay packages. It's just that financial performance -- stock-market valuation -- outweighs microeconomics in the eyes of many companies' shareholders.
More and more frequently, stock market valuations reflect hype as much as audited growth or profitability. The better a CEO is able to convince the market and its opinion leaders that his company is succeeding -- for whatever reason -- the more he is worth. Fraud cannot be rewarded, but spinning the outcome of operations is a skill that has become valuable in today's economy.
It's sour grapes to blame CEOs in certain industries, like oil, for their good luck. Some have it and some do not. Some know how to take advantage of it, and should be even better compensated.
02 February 2006
State of the Union 2006
In his State of the Union address on 31 January 2006 George W. Bush repeated his emphasis on the war in Iraq as the defining feature of his Presidency. It was the centerpiece of a speech that conceded defeat or ineffectuality in several other policy areas—social security, corruption, deficit spending, disaster relief, even (thankfully) the constitutional definition of marriage.
However, his framing of the war as the vehicle for establishing democracy in the Middle East continues the wrong-headed ideal of the neoconservative and military-industrial complex ideologues who rule the Bush Administration. The speech espoused democracy as the instrument for establishing Western values in cultures such as the Arab Muslim world. It will never be the case that democracy leads to liberal values—the other way around is the only way it can work, if promoting those values is an ideal at all worth losing lives and spending billions for.
In his State of the Union address on 31 January 2006 George W. Bush repeated his emphasis on the war in Iraq as the defining feature of his Presidency. It was the centerpiece of a speech that conceded defeat or ineffectuality in several other policy areas—social security, corruption, deficit spending, disaster relief, even (thankfully) the constitutional definition of marriage.
However, his framing of the war as the vehicle for establishing democracy in the Middle East continues the wrong-headed ideal of the neoconservative and military-industrial complex ideologues who rule the Bush Administration. The speech espoused democracy as the instrument for establishing Western values in cultures such as the Arab Muslim world. It will never be the case that democracy leads to liberal values—the other way around is the only way it can work, if promoting those values is an ideal at all worth losing lives and spending billions for.
