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.
Comments:
Post a Comment
