Political hot air about "windfall" profits

There has been a lot of media attention to the fact that Exxon's shareholders made big profits last quarter, and lots of hot air blown around by politicians about "obscene" and "windfall" profits. But I've noticed that the same politicians are not shedding any tears for the shareholders of General Motors who lost $15 Billion last quarter.

I think it's obscene that politicians, most of whom have never held a real job providing real products to real people, talk a lot about it when risk takers make profits by providing value for money, but they don't have a word to say when those same risk takers lose money. What makes this doubly annoying is that the shareholders who are being accused by politicians of making "windfall" profits are. . . us. . . because we own the oil companies through our 401K plans and pension funds.

Ken Mayland, one of the country's best economics forecasters and a long time friend of mine, makes the case about "windfall" profits much more eloquently than I can on his website clearvieweconomics.com.

Here's what Ken had to say about "windfall" profits. . .

Let’s get one thing straight here. It has been said that in the current situation the oil
industry “did nothing” to earn today’s windfall profits. This is blatantly false! Years ago,
the industry took the risks—the whole production process—in an uncertain price
environment in order to produce the supplies that currently come to market. Profits and
prices do not go in only one direction.

As previously mentioned, oil prices plunged in 1986. The industry and its shareholders
were clobbered. Investors were punished again in 1998, in the wake of the Asia economic
debacle, and in 2002, a feeble and halting recovery that was frozen by the upcoming conflict
with Iraq. None of these price and profit dampening events was generally anticipated.

Profits ARE booming in the energy industry. Tax revenues ARE swelling (a windfall!) along
with these profits. And capital spending in the industry IS growing by leaps and bounds.
But high energy prices in the industry are NOT a sure thing. It is not just me saying this.
The price-earnings (P/E) ratio of major producers falls into a 8 to 11 range, well short of the
Market P/E ratio of around 19 (through Q2, based on trailing year’s earnings). The best
investment minds in the business are essentially saying that these profits are not
sustainable, presumably because current energy prices are not sustainable.
(For what it is worth: my bet is that the Market is wrong.)


You can read the whole thing if you're interested in the Special Topics section at http://www.clearvieweconomics.com/ and you would be wise to do so if you invest. Ken has won a lot of major league prizes for economic forecasting over the years. I was at a speech he gave last year when he was being awarded one of those prizes by a Nobel Prize winner in Economics. During that speech Ken had the guts to go directly against the then common "wisdom" that the economy was already going into a recession. Well, here we are a year later and the recession almost everybody else was predicting still hasn't appeared. Ken is a lot less optimistic now about what the economy will do later this year but last year he was exactly right when he bucked the common wisdom.