Oil: Profits and Profit Margins

This entry has little directly to do with oil, but it arises because of the demagoguery/stupidity of Democrats in Congress.  No one else can make oil executives look relatively good by comparison.  This is an entry expalining the difference between the total number of profit dollars a single company makes and profit margins.  

Let's make this simple ("this is a football").  Say one person has $100.00 to invest and anouther person has $1000.00 to invest.  Assume that each person makes a 10% PROFIT on his investment. 

That means that the person who had $1000.00 makes $100.00 and the person who had $100.00 makes $10.00 (Nope, this has NOTHING to do with "inceasing the "gap" between the "rich" and the "poor", which remains exactly the same in percentage terms--see a future entry this week).  These two people (the one with $1000.00 and the one with $100.00) had exactly the SAME "profitablility" on his investment.  The real profitability of a company is based on its percentage return on equity and NOT on the basoulute number of profit dollars.   This is NOT a matter of opinion.  It is a matter of fact as certain as 2 plus 2 equals 4. That may explain why Democrats in Congress can't understand it (or expect that other leftists out in the public have no understanding of it, or are willing to go along with a Big Lie that they think helps them).

Let me put it in a different way.   If you have ten people who make $10.00 on $100.00, what have they made.  Right.  They have made $100.00--exactly the SAME as the one person who had $1000.00 and made the same 10%.

Time to addrss Big Oil specifically.  Take the above (objectively true, and not arguable) principle and apply it to Big Oil. 

If you have ten oil companies making 10 billion dollars each, is that any different from 100 oil companies making 1 billion dollars each?   Nope.  It is not any different--except in the one respect I will get to at the end).   In economic terms, the INDUSTRY would be just as "profitable", and even make the same amount of overall profits,  It is just that the larger a coporation is, the more absolute dollars it makes on the SAME percentage profit as a smaller company. As I say, this is 2 plus 2 equals 4, and not arguable (which did not stop Democrats in Congress, and leftists, from trying to demagogue by suggesting that 2 plus 2 equals 5).

There IS one way that it makes a difference whether 10 companies make 10 billion dollars each or a billion companies make $10.00 each (these examples asume these companies are of the same size, and therefore have the same percentage "profitability"). 

While MERGERS are part of capitalism, they are not really a part of free market theory.  In fact, BIG mergers violate free market theory.  That is because free market theory assumes economic units small enough (in coparison with the whole) so that one, or a small number, of market units cannot really influence the "market" directly.  In that case, you have eitehr a monopoly (not an issue here), or an oligopoly, which IS an issue here.

In other words, it is BETTER for free market theory to have 100 oil companies instead of 10.  This, again, has nothig to do with profits. It has to do with absolute SIZE, created by mergers (in th eoil industry:  think Exxon/Mobil, which used to be Exxon AND Mobil AND Gulf, AND so on).

Now Democrats have not done anything about these mergers (Bill Clinton certainly did not while he was President for 10 years).   That is because Democrats are not interested in free markets.  They want Big Government, and for that purpose truly huge corporations are a GODSEND.  They (leftist Democrats) get to demagogue against the huge corporations and argue that only huge government can counter the huge corporations.

Now I don't favor punishing success by suggesting that corporatons can't be above a certain size. But, as I have correctly said before, these MERGED oil companies have NOT gotten big (begger--they were already good sized) by producing, refining and marketing oil and fule.  They have gotten HUGE by MERGER--mergers which we should never have allowed.     Again, this has absolutely nothing to do wtih "profits", as the "profits" for a greater number of oil companies might well have been exactly the same (total, adding them all up). However, we would have more DECISION MAKERS in the oil industry deciding where and when to drill for oil, to the extent Congress lets them, and we MIGHT also have more competition. 

P.S.  Don't you just love Maxine Waters.   In these "bash the evil oi compnay" hearings, Ms. Waters went totally off the reservaton bly exposing that leftists do NOT believe in the free market system, but believe--or profess to believe--in a basically socialistic system.  An oil company executive was making the correct poiht that most of the promising areas for drilling for oil in and around the U.S.A. have been put off limits by CONGRESS.  The oil compnay exectutive was suggesting that IF gasoline goes over $5.00 a gallon, people should BLAME CONGRESS.  Ms. Waters retorted that such might be HIS suggestion, bu tthat the reaction to such a development by LIBERALS like her would be to "TAKE OVER" the oil industry (that his,  have the Federal Government take over that industry, which is not that different from the approach of suggesting that oil company profits belong to the government to use as the GOVERNMENT sees fit.