Espiner on Happy Ruth
August 8th, 2008 at 12:00 pm by David FarrarColin Espiner blogs on how Ruth Dyson is always seeing the bright side:
Everyone loves an optimist, so Labour’s Ruth Dyson must be amongst the most-loved MPs.
Her press statements on rising unemployment are always full of good cheer, and Dyson somehow seems blithely unaware of the gloomy economic conditions.
Back in May she caused something of a stir by putting out a press release headed “Labour Force Survey Reflects Stability In The Face Of Economic Challenges”. You’d have thought the unemployment rate had defied the economic downturn and things remained sunny. In fact, the survey reported the biggest jump in jobless in nearly 20 years.
Likewise, today’s next quarterly report on the unemployment rate, which finds an additional 7000 people have lost their jobs in the past three months and the unemployment rate now up another 0.2% to 3.9%, is welcomed by Dyson in a release entitled “New Zealand Economy in Good Hands”.
Ruth should have been a Minister when we had the Erebus crash. She may have done a press release highlighting the decline in carbon emissions due to no return trip!
I think Dyson’s skills are being wasted as Minister of Social Development – she could do wonders in the Treasury or the Reserve Bank. Under this minister, Treasury’s report this week warning of recession could have been headed up: “More good news likely on economy” and the bank’s gloomy predictions of 5%-plus unemployment could have been rewritten as “It’s all good here, too”.
Colin does go a bit fuzzy later on with petrol prices though:
Labour will be extremely grateful to whoever bugged the National Party conference for taking bad economic news off the front page. It’s even possible that today’s whitewash from Dyson’s Christchurch colleague Lianne Dalziel on petrol prices will equally disappear with nary a trace, given the media’s perchant for a decent whodunit.
It’s hard to swallow the minister’s recommendation that nothing needs to be done about regulating an industry making $11 billion profits a quarter because it is “fundamentally competitive” and that, essentially, the idea that petrol prices are fast to rise and slow to fall is simply a myth perpetrated by the media.
A more cynical journalist than myself might suggest that the government has several interests in not forcing down the price of petrol; for one thing, the GST take is much higher when prices are high, and for another, the high petrol prices are forcing some vehicles from the road, which is helping with emissions targets.
I think Colin is being a bit hard on Dalziel here. First of all the NZ oil companies do not make $11 billion profit a quarter. The NZ Govt has no power to regulate the global oil companies, which I presume that $11 billion refers to. It is a red herring figure. And a profit figure is meaningless anyway unless one knows what the turnover or capital was. An $11 billion profit on a $1 billion equity company is a universe different to an $11 billion profit on a $100 billion equity company.
Secondly it is a “myth perpetrated by the media” that higher petrol prices leads to much higher GST. Because the money spent on petrol is not spent on other goods and services, reducing GST collected there. Hence overall GST does not rise greatly, if at all, with higher petrol prices.
Colin is right though that the higher petrol prices may help with reducing carbon emissions.
Related posts:
- Saint Ruth
- Espiner on Inflation
- Espiner on Maori and Tertiary Education
- Reasons why Cullen is right about not cutting GST on petrol
August 8th, 2008 at 12:36 pm
“Ruth Dyson is always seeing the bright side…”
Alcohol normally has that effect.
Vote:August 8th, 2008 at 12:41 pm
“Colin is right though that the higher petrol prices may help with reducing carbon emissions.”
That’s a real fucken comfort to working NZers burdened by massive taxation and high interest rates, smothered by oppressive regulation, coping with ever decreasing real wages and struggling to keep afloat financially. A real comfort.
Vote:August 8th, 2008 at 12:55 pm
“It’s hard to swallow the minister’s recommendation that nothing needs to be done about regulating an industry making $11 billion profits a quarter ”
A worthless sentiment and typical of NZ’s ideologically blind mainstream media journalists. The oil companies “profits” represent less than ten percent of turnover. Many other industries have far greater rates of return. Mr. Espiner also ignores the fact that these companies paid 4 times that profit in taxation. Yet apparently he doesn’t see the government as ripping off the public. Get an economic education Colin. Maybe then you’ll be able to see through that blinding red ideological haze.
Vote:August 8th, 2008 at 12:56 pm
I’m extremely thankful the government is not going to intervene. If it does then the instant result will be shortages, queuing, and hording. That is the outcome repeated endlessly around the world wherever it has been tried. And all to knock a few cents a litre of the price. No thanks.
Vote:August 8th, 2008 at 12:58 pm
David
Making fun of the Erebus disaster [give yourself 30 demerits.]
Vote:August 8th, 2008 at 1:02 pm
“The NZ Govt has no power to regulate the global oil companies, which I presume that $11 billion refers to. It is a red herring figure.”
How very wrong you are. Exxon Mobil alone made a profit of $39.5 billion in 2007.
“Secondly it is a “myth perpetrated by the media” that higher petrol prices leads to much higher GST. Because the money spent on petrol is not spent on other goods and services, reducing GST collected there. Hence overall GST does not rise greatly, if at all, with higher petrol prices.”
Err…no – one effect of higher oil prices is to cut into people’s savings. I don’t pay GST on what I don’t spend – at least not yet!
Vote:August 8th, 2008 at 1:07 pm
Suggest to any economist that healthy competition can be seen in an industry where >99% of incumbant suppliers align and adjust their prices in unison… and be ready to be laughed at !!
Vote:August 8th, 2008 at 1:16 pm
“and be ready to be laughed at !!”
Numerous official enquiries have failed to prove any collusion in pricing. Anyway, its small stuff. The real culprit is government and the real reason you’re paying through the nose for petrol is fake environmental concerns and other politically driven restrictions on the oil market and drilling.
Vote:August 8th, 2008 at 1:27 pm
Dyson’s not only wasted in Social Development, she’s wasted in New Zealand full stop. I reckon the IOC could use her skills in Beijing about now…
Vote:August 8th, 2008 at 1:44 pm
Petrol is essentially a commodity so it would be expected that prices are similar. It should be noted that globally (and in NZ) Shell is generally a first mover to reduce prices and a late mover to increase.
DPF is absolutely correct when he says the profit value is meaningless. Last year, Shell’s (and most other majors) profit margin was in the order of 8%. There are dozens of other industries such as Pharmaceuticals, financial and technology that have much higher profit margins than the oil industry and don’t come in for the same amount of scrutiny or vitriol.
Vote:August 8th, 2008 at 1:56 pm
Get staffed
you need to talk to a few more economists. The concept that competitiors prices of a product seen as a commodity are closely aligned is entirely unremarkable.
Also in this case Dalziel can’t blame the media for perpetuating myths about the speed of price movements when she did the same in Parliament and in the media
From the NZ Herald:
‘Ms Dalziel that she was looking forward to the oil industry explaining to the public, through the inquiry, “why it takes so long for price decreases in crude oil to come through to the New Zealand petrol pump and why it is so quick to get the price increases through”.’
Vote:August 8th, 2008 at 2:00 pm
The govt are rich and the people are poor. This is socialism as it is intended. The BS spin from the ministry of misinformation is entirely expected.
Vote:August 8th, 2008 at 2:03 pm
Big Bruv – I was going to use 9/11 but thought that would be too much!
Vote:August 8th, 2008 at 2:13 pm
insider – do you think the fuel market in NZ is competitive? Each time the carefully synchronised and choreographed price adjustments happen I’m convinced otherwise. Each time I travel to Australia, UK or USA I’m convinced otherwise.
Vote:The government (really successive governments) has no interest in price competition as too much of their tax haul would at risk. And so the consumer keeps paying, and paying…
August 8th, 2008 at 2:21 pm
DPF
Again!…thats another 30 demerits, if you do not stop that you will be banned for a month.
You have been warned.
Vote:August 8th, 2008 at 2:41 pm
I’m happy to moderate if he strikes out, bruv.
Vote:August 8th, 2008 at 2:45 pm
Toad
No thanks, I rather fancy that job myself.
You would be about the only “lefty” that would not be banned, mind you its fair to say that your mate Bradford would struggle to get a word in here.
Vote:August 8th, 2008 at 2:47 pm
bruv have you been moonlighting as a moderator on the VDS?
Vote:August 8th, 2008 at 2:47 pm
getstaffed
There is just no evidence that movements are choreographed or carefully synchronised. There have been numerous reports here over the last 10 or so years that say the same. The gradual reductions in margins also demonstrate the impact of competition.
I suggest you think about how consumers behave in response to price. It is well demonstrated that consumers have little brand loyalty based on the intrinsic qualities of Shell v Mobil’s fuel, despite the advertising. They are primarily price motivated. So if you as a consumer see two petrol stations with differing prices, what will you mostly do? In the absence of other motivators (loyalty scheme, company purchasing card etc) most customers will go where the price is lower. So as a retailer if your competitor across the road lowers prices what are you going to do? Most of the time you will match. What you see as coordinated is in fact a competitive response.
On the up side, what tends to happen is that competition keeps prices down until one can’t take the pressure anymore and moves. But because the costs for all are similar it being a commodity market, everyone tends to need the same relief and so takes the opportunity to move. It’s like a sequence of breath holding competitions.
Vote:August 8th, 2008 at 2:50 pm
Lee
Never heard of VDS..who the hell are they?
Vote:August 8th, 2008 at 3:07 pm
DPF: I take some exception to the suggestion that profit as a percentage of equity is a useful measure. You see, the value of a company is set based on its profits – if a company starts making more profit, then its share price will rise and the % return stay the same. The % return profit / equity should only tell you something about the future prospects of a company, or the relative riskiness of their returns.
On the other hand, a similar but more correct argument would be profit / invested capital, or profit / revenue. And, I’m pretty sure that just about anybody who wanted to could buy a supertanker of petrol and set up some petrol stations. Most of the barriers to entry are created by the government – and in so doing they incent oligopolistic behaviour. (refer this comment also today: http://www.kiwiblog.co.nz/2008/08/20_higher_pay_in_the_public_sector.html#comment-472143)
Vote:August 8th, 2008 at 3:16 pm
Redbaiter, on the ball as usual.
WALL STREET JOURNAL EDITORIAL:
What Is a ‘Windfall’ Profit?
August 4, 2008; Page A12
“The “windfall profits” tax is back, with Barack Obama stumping again to apply it to a handful of big oil companies. Which raises a few questions: What is a “windfall” profit anyway? How does it differ from your everyday, run of the mill profit? Is it some absolute number, a matter of return on equity or sales — or does it merely depend on who earns it?
Enquiring entrepreneurs want to know. Unfortunately, Mr. Obama’s “emergency” plan, announced on Friday, doesn’t offer any clarity. To pay for “stimulus” checks of $1,000 for families and $500 for individuals, the Senator says government would take “a reasonable share” of oil company profits.
Mr. Obama didn’t bother to define “reasonable,” and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that “The oil companies need to know that there is a limit on how much profit they can take in this economy.” Really? This extraordinary redefinition of free-market success could use some parsing.
Take Exxon Mobil, which on Thursday reported the highest quarterly profit ever and is the main target of any “windfall” tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we’re missing some Obama-Durbin business subtlety.
Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon’s profits don’t seem so large. Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).
If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.
In a tax bill on oil earlier this summer, no fewer than 51 Senators voted to impose a 25% windfall tax on a U.S.-based oil company whose profits grew by more than 10% in a single year and wasn’t investing enough in “renewable” energy. This suggests that a windfall is defined by profits growing too fast. No one knows where that 10% came from, besides political convenience. But if 10% is the new standard, the tech industry is going to have to rethink its growth arc. So will LG, the electronics company, which saw its profits grow by 505% in 2007. Abbott Laboratories hit 110%.
If Senator Obama is as exercised about “outrageous” profits as he says he is, he might also have to turn on a few liberal darlings. Oh, say, Berkshire Hathaway. Warren Buffett’s outfit pulled in $11 billion last year, up 29% from 2006. Its profit margin — if that’s the relevant figure — was 11.47%, which beats out the American oil majors.
Or consider Google, which earned a mere $4.2 billion but at a whopping 25.3% margin. Google earns far more from each of its sales dollars than does Exxon, but why doesn’t Mr. Obama consider its advertising-search windfall worthy of special taxation?
The fun part about this game is anyone can play. Jim Johnson, formerly of Fannie Mae and formerly a political fixer for Mr. Obama, reaped a windfall before Fannie’s multibillion-dollar accounting scandal. Bill Clinton took down as much as $15 million working as a rainmaker for billionaire financier Ron Burkle’s Yucaipa Companies. This may be the very definition of “windfall.”
General Electric profits by investing in the alternative energy technology that Mr. Obama says Congress should subsidize even more heavily than it already does. GE’s profit margin in 2007 was 10.3%, about the same as profiteering Exxon’s. Private-equity shops like Khosla Ventures and Kleiner Perkins, which recently hired Al Gore, also invest in alternative energy start-ups, though they keep their margins to themselves. We can safely assume their profits are lofty, much like those of George Soros’s investment funds.
The point isn’t that these folks (other than Mr. Clinton) have something to apologize for, or that these firms are somehow more “deserving” of windfall tax extortion than Big Oil. The point is that what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.
It’s what politicians do in Venezuela, not in a free country.”
Vote:August 8th, 2008 at 3:41 pm
insider said
Motorists who pass the same ‘competing’ service stations day after day would probably disagree.
Your logic for consumer price driven adjustments reads quite sensibly, but I’d expect other countries to demonstrate the same ‘four-way 1st equal’ pricing dynamics.. but I just don’t see that.
Vote:August 8th, 2008 at 3:49 pm
big bruv = iprent.
Vote:August 8th, 2008 at 3:51 pm
>>A more cynical journalist than myself might suggest that the government has several interests in not forcing down the price of petrol
correct, its election year and labor are shagged = don’t mention petrol tax.
Vote:August 8th, 2008 at 3:58 pm
getstaffed/insider/and the rest
The retail petrol market is characterised by reasonably high barriers to entry, the sale of a commodity (petrol) and 4 big players with at least 95% of the market.
Accordingly, there are no incentives to compete on price as this will just lead to even lower margins and if one firm competes on price, the others will have to follow right down to where no profit is being made at all.
Therefore, there is a deliberate strategy by each of the big 4 to focus on non-price competition, locational positioning, branding, selling food & drinks, etc etc and it works! The small players (competitive fringe) have no option but to follow as they probably have smaller margins than the bigger players due to efficiencies gained by being a big player..
The behaviour is not illegal unless some extra ‘collusion’ can be proved, which both getstaffed and insider are simply speculating either way (p&ssing in the wind). Where is the ‘credible’ evidence either way? Isn’t the market explanation & strategic and strategic behaviour as above the far better one?
It follows that both Dalziel and C Espiner have no idea what they are on about. You cant “force” prices down Espiner! Removing GST from Petrol is even more silly than moving GST from food. The market is far from “fundamentally competitive” Dalziel given the above characteristics its an oligopoly. Both tryers/spinners need lessons in intermediate level economics.
Espiner you are being cynical and you are quite wrong! You would think political journos could do their economics homework.
Vote:August 8th, 2008 at 3:59 pm
getstaffed
Firstly if you asked those some motorists about a range of logical things re the price of fuel they would probably disagree. One of the key points of the Hale and Twomey report was that perception is not reality.
On pricing, you need to get out or read more because similar pricing dynamics happen pretty much everywhere there is a free market in fuel retailing.
Glubbster
YOur theory is not supported by the evidence. The evidence shows that prices in NZ are highly competitive when compared internationally and that margins have been declining over time. If your theory on price were true you would expect to see the opposite.
Vote:August 8th, 2008 at 3:59 pm
The Aussie price for 91 unleaded is $1-42 translates roughly to $165NZ(fuelwatch). I guess their excise must be lower. NZ has had a competitive market before about 20 years ago when Fletchers introduced Challenge. Challenge imported from Singapore had superior fuel at a lower price as the big four wouldnt allow them access to NZ refined fuel. Caltex offered Challenge a price they couldn’t refuse and the super four returned to their cosy co-existence. Competition has never raised it’s ugly head since. I wonder who actually carried out this enquiry for Dalziel and how much they were paid by whom.
Vote:August 8th, 2008 at 4:22 pm
Insider, you are talking drivel. Your “evidence” could be put down to a whole range of factors. Compared to the US and AUS, our petrol prices are far from internationally competitive. You are alleging a competitive market exists in an oligopoly? Next thing you will say a duopoly is competitive…Have you done any economics? Or do you have a conflict of interest?
The market structure & product differentiation I explain keeps prices equalised across the sector (they are hardly ever not equalised) and its quite obvious by the amount of advertising and convenience services offered that this its non-price competition where the competition really lies…if the market was so competitive, there would be a far greater competitive fringe growing since the “decline in margins”.
Please dont confuse “competitive market” and “competition” with illegal. There actions are (without evidence to the contrary) usual.
As for “the margins are declining over time”…To quote PilU “Um…..! Insider….! Did you think that this is probably a result of additional govt taxes and the steady increase of the cost of the commodity driven by international events ie war….!!
Vote:By the way, PilU, I dont like you nor do I like your usually dumb & dumber comments but sometimes you are funny and your style is certainly unique.
August 8th, 2008 at 4:33 pm
baxter
there is no ‘aussie price’ – there are distinct markets in Aus. Fuelwatch is just Perth – Melbourne is showing a higher price. DOn’t be misled by the ‘price now’, look at the average price which on fuelwatch is more like 1.51. You have to factor in we pay about 10-12cpl more tax plus higher GST. The reality is raw prices are pretty much the same all over the OECD – it is tax that makes a differnece.
Most of the rest of what you said is just not true, demonstrating my point to getstaffed. Of course Challenge were not going to get fuel from the refinery, that was primarily because there is no capacity – NZ has to import a significant percentage of its needs refined. WHy would I sell you product I need when I can’t get enough of it anyway? The superior fuel claim is just another myth. They were buying it from exactly the same refineries that Mobil/Shell?Bp/CT bought their additional supplies from. I think what you’ll find is that Fletchers put Challenge on the market rather than they got an offer they could not refuse. YOu obviously missed Gull’s entry to the market and the sale of hundreds of retail sites to independents.
Vote:August 8th, 2008 at 4:34 pm
“if the market was so competitive, there would be a far greater competitive fringe growing since the “decline in margins”.
Sorry I meant a decline in the number of smaller companies operating..when in fact this has slightly increased. You would actually see smaller co’s being driven right out of the market if margins are declining for the big firms.
Vote:August 8th, 2008 at 4:37 pm
Insider: “You obviously missed Gull’s entry to the market and the sale of hundreds of retail sites to independents.”
Vote:Oh…! but if margins are lowering Insider, why would their be so many smaller independents in play with far less in the way of cash reserves? Firms are encouraged to enter the market due to supranormal profits…not very small profit margins as you try (in vain) to make out.
August 8th, 2008 at 5:01 pm
I’ll be sure to remember this when I’m queueing for Friday discounted petrol in south Sydney… and the service station across the road is selling at the regular price
Vote:August 8th, 2008 at 5:21 pm
Insider: “there is a free market in fuel retailing.” What a paradigm of economic unreality.
LOL so you dont think there are high barriers to entry? Is your head in the sand insider?
Why then do 4 firms own a 95%+ market share? Without significant barriers to entry, the market would be saturated with independents not just two or three.
Or are you just an ‘insider’ with a conflict of interest.
Vote:August 8th, 2008 at 5:33 pm
Glubbster
Before you accuse other of talking drivel, you really need to be sure of your own ground. For instance. of course the US and Aus have lower prices, they have lower taxes. Tax is the key price differntiator between OECD markets. Been the same for years. Look it up at the IEA or AIP or MED or any other of dozens of informations sources. When you look at prices ex tax, they are within a few cents across the OECD. SO how the reflection of differeing tax regimes in retail prices is a sign of more or less competitive markets is a mystery to me.
Are you truly saying an oligopoly is mutually exclusive with a competitive market? And you question my economic credentials? bizarre.
In terms of margin declines, I am quoting the MED’s measure of importer margin – it is effectively the difference between a benchmark price (the import parity price or Singapore MOPS price) and the retail price. Again, go and look it up. Quite what impact wars and extra taxes have I am again unsure given that tax is an add on that should buffer margins and we haven’t had a good war in NZ for years. MY interpretation of a lower such margin is that increased domestic distribution costs have not been able to be passed on, which is usually a pretty good sign of a competitive market. Quite what the non price competition relevance is I;m unsure unless you are saying it is a commercial response to extract value from an asset in response to declining margins. In which case it rather proves my point.
If there are supra normal profits, why would the major oilcos be selling off their retail chains? Exxon has just quit the retail market in teh US, and they and the others have exited hundreds of sites in NZ. The reason I suspect is margins (and profits) are not sufficient for their expectations. But they might be sufficient for others who can operate effectively at a lower margin because their costs are far lower, and those are likely to be smaller leaner organisations. And in fact that is exactly what you are seeing in NZ. You have an overly rigid view of what drives commercial decisions. Life’s a bit different from a textbook.
It’s interesting you say I have tried in vain to make out margins are low, yet you have provided no actual evidence to counter that.
Yes there are barriers to entry. That does not mean the market is not free nor that it is uncompetitive. Are you saying that only a market with no barriers to entry are free? Do you have free money to hand out too? Every market has a barrier. The height of that barrier is often relative.
Vote:August 8th, 2008 at 5:33 pm
Look, glubbster, what happens if, as you suggest, one petrol company DOES charge a consistently lower price or a consistently higher price, if even a few cents? Do customers not react one way or the other?
You can’t complain about a lack of numbers of competitors AND the similarity of pricing. If one company DID manage to be consistently cheaper than the rest, the rest would soon cease to exist. What you are complaining about, is evidence of the workings of a free market just as much as evidence of collusion.
I find Ayn Rand’s despisal of all and any altruism repugnant, but the book “Capitalism” edited by her, is one of the most illuminating books on economics that I have read. She points out that business executives have been jailed in the USA, both for maintaining prices at the level of their competitors, AND for setting prices so low that no competitors could exist, thus leading to a “monopoly”. FFS.
Vote:August 8th, 2008 at 5:42 pm
getstaffed
Aus is an odd market at times – the price cycle defies rationality according to the ACCC – and there are always anomolies to prove the rule. Here we had BP at 2cpl above the rest of the market for about a week recently. My advice, if you see a good deal, grab it. Just make sure they are not watering the fuel down with excess ethanol, xylene or toluene.
Vote:August 8th, 2008 at 6:00 pm
Here’s another way of looking at “obscene profits”. Profits are actually the measure of satisfaction with the product, on the part of consumers. Can you argue with that? How much extra value has been granted to the hundreds of millions of people who use petrol? Can you estimate how many times MORE value than the oil companies net worth, is the value that has accrued to all buyers and users of petrol? Heck, does petrol prices represent “gouging”, when you look at the value of what petrol enables people to do? Or consider this. If petrol did not yet exist, and you were asked what you thought might be the end cost per litre of a liquid that had to be drilled and sucked out of the ground, transported and refined, and distributed to the consumer. What prior experience would you use? How expensive is milk? Or bottled water? And is the price of those liquids comprised of more than 50 % of government taxes?. Look, the prices that petrol has been over the course of its history, is one of the best illustrations of the beauty of the free market in operation, that you would find anywhere.
On principle, the freer the market, the more profits, the more capital, the more investment, the more creativity, the more progress. Socialists make the mistake of thinking that progress is just a benefit of nature that is to be had regardless, and all we need to do is share income equally and make sure that no-one gets too wealthy “at the expense of others”.
I would suggest that most government regulation of the Oil industry has tended to reduce supply and increase prices, in the long term. I suggest that had governments regulated the Oil industry even more closely than they have, supply would be even lower and prices still higher. And had development of an Oil industry in the first place been assumed entirely by government, I suggest that it would still be a scarce, barely-used commodity, used only by the wealthiest and by the military and government itself. Note that even though the Statist USSR could play “follow the leader” regarding technology advances from the free world, they were still completely unable to bring these technologies into general use for the benefit of all.
I guarantee that if huge oil fields were discovered in NZ and the government decided to do the whole job from drilling to petrol pump, the final price would be around 2 to 3 times as much as it is or would be under the status quo where “obscene profits” are being made on the whole exercise by someone.
I suggest if governments want to do something about alleviating petrol costs, they should work with the tax rates. But they want us to stop using petrol because of the Kyoto Protocol, don’t they? Isn’t their “emissions trading scheme” designed to increase the price of petrol to this end? I suspect that if politicians do know that punitive measures against the oil companies profits and a stiffer regulatory regime will tend to increase petrol prices, not decrease them, they are guilty of cynically exploiting public ignorance to their own ends.
Vote:August 8th, 2008 at 6:04 pm
Seeing some of the profit haters seem to have ignored this from earlier, here it is again:
WALL STREET JOURNAL EDITORIAL:
What Is a ‘Windfall’ Profit?
August 4, 2008; Page A12
“The “windfall profits” tax is back, with Barack Obama stumping again to apply it to a handful of big oil companies. Which raises a few questions: What is a “windfall” profit anyway? How does it differ from your everyday, run of the mill profit? Is it some absolute number, a matter of return on equity or sales — or does it merely depend on who earns it?
Enquiring entrepreneurs want to know. Unfortunately, Mr. Obama’s “emergency” plan, announced on Friday, doesn’t offer any clarity. To pay for “stimulus” checks of $1,000 for families and $500 for individuals, the Senator says government would take “a reasonable share” of oil company profits.
Mr. Obama didn’t bother to define “reasonable,” and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that “The oil companies need to know that there is a limit on how much profit they can take in this economy.” Really? This extraordinary redefinition of free-market success could use some parsing.
Take Exxon Mobil, which on Thursday reported the highest quarterly profit ever and is the main target of any “windfall” tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we’re missing some Obama-Durbin business subtlety.
Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon’s profits don’t seem so large. Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).
If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.
In a tax bill on oil earlier this summer, no fewer than 51 Senators voted to impose a 25% windfall tax on a U.S.-based oil company whose profits grew by more than 10% in a single year and wasn’t investing enough in “renewable” energy. This suggests that a windfall is defined by profits growing too fast. No one knows where that 10% came from, besides political convenience. But if 10% is the new standard, the tech industry is going to have to rethink its growth arc. So will LG, the electronics company, which saw its profits grow by 505% in 2007. Abbott Laboratories hit 110%.
If Senator Obama is as exercised about “outrageous” profits as he says he is, he might also have to turn on a few liberal darlings. Oh, say, Berkshire Hathaway. Warren Buffett’s outfit pulled in $11 billion last year, up 29% from 2006. Its profit margin — if that’s the relevant figure — was 11.47%, which beats out the American oil majors.
Or consider Google, which earned a mere $4.2 billion but at a whopping 25.3% margin. Google earns far more from each of its sales dollars than does Exxon, but why doesn’t Mr. Obama consider its advertising-search windfall worthy of special taxation?
The fun part about this game is anyone can play. Jim Johnson, formerly of Fannie Mae and formerly a political fixer for Mr. Obama, reaped a windfall before Fannie’s multibillion-dollar accounting scandal. Bill Clinton took down as much as $15 million working as a rainmaker for billionaire financier Ron Burkle’s Yucaipa Companies. This may be the very definition of “windfall.”
General Electric profits by investing in the alternative energy technology that Mr. Obama says Congress should subsidize even more heavily than it already does. GE’s profit margin in 2007 was 10.3%, about the same as profiteering Exxon’s. Private-equity shops like Khosla Ventures and Kleiner Perkins, which recently hired Al Gore, also invest in alternative energy start-ups, though they keep their margins to themselves. We can safely assume their profits are lofty, much like those of George Soros’s investment funds.
The point isn’t that these folks (other than Mr. Clinton) have something to apologize for, or that these firms are somehow more “deserving” of windfall tax extortion than Big Oil. The point is that what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.
It’s what politicians do in Venezuela, not in a free country.”
Vote:August 8th, 2008 at 6:12 pm
Glubbster – on one comment you tell us that the increase in independents is evidence of a non-competitive market, in the next you tell us that there are no significant number of independents at all, which is also evidence of a non-competitive market. Could you at least try to make your argument internally consistent?
Vote:August 9th, 2008 at 6:29 pm
Firstly, PaulL, I was being sarcastic from memory/made a miskey but to clear it up, an significant increase in independents
Vote:eating into the big players shares would be evidence of a market with lower barriers to entry and a market closer to a competitive one. My argument is that the structure of the market (read first post) means it is not competitive ie the big 4 can increase prices significantly assuming cost of production remains the same and there would be little/no entry.
August 9th, 2008 at 6:35 pm
Insider you are way off mark.
1) “So how the reflection of differeing tax regimes in retail prices is a sign of more or less competitive markets is a mystery to me”
I never said that. I thought tax differences were a given. However, NZ’s retail petrol market is not internationally competitive Insider. Think tax, cost of transport, little of our own sourcing, relatively small market etc etc. The issue was about competitiveness within our market so try not to steer the convo away from this.
2) “Are you truly saying an oligopoly is mutually exclusive with a competitive market? And you question my economic credentials? bizarre.”
Vote:No Insider, not necessarily but consult any econ textbook and you will find an oligopolistic market like this one (as outlined in my first post way above) is usually not a competitive market. There is a strong probability it will not be, but I woul;d not go so far as to say they are exclusive. Name a few though Insider….
August 9th, 2008 at 6:37 pm
Insider you said NZ has not had a good war in years. This is a silly point as NZ is a world price taker re oil and so Iraq, Israel conflicts etc etc have a real effect on prices (instability). Dumb insider, dumb.
Vote:August 9th, 2008 at 6:58 pm
Insider said “It’s interesting you say I have tried in vain to make out margins are low, yet you have provided no actual evidence to counter that.”
I said that non-price competition is the profit earner for the big 4 co’s (you forget this strategic market dynamic or just ignore it/play it down). The margins are low – I dont argue this but with high volumes even the petrol profit is supra-normal as most of the increased costs and taxes etc are passed on to the consumer as its a highly inelastic demand market (consumers cant lower their demand as they would if say the price of apples shot up).
Insider also said:
“Yes there are barriers to entry. That does not mean the market is not free nor that it is uncompetitive. Are you saying that only a market with no barriers to entry are free? Do you have free money to hand out too? Every market has a barrier. The height of that barrier is often relative. ”
I agree but my first post way above argues high barriers to entry. There are few small players in the market. If you are right then explain this effect? And kindly explain the fact that there is no price-comp or adverts re discounting (as getstaffed correctly noted) and all the adverts are branding and on their additional services (non-price comp). A competitive market usually has some form of price comp. I drove past a few stations today and they were exactly the same prices!!
Name an economist who would agree with you that NZ’s market is “competitive”. A competitive market dictates very low barriers to entry, price comp etc etc.
Also note an oligopolistic market where there
Vote:August 9th, 2008 at 7:05 pm
PhilBest: Look, glubbster, what happens if, as you suggest, one petrol company DOES charge a consistently lower price or a consistently higher price, if even a few cents? Do customers not react one way or the other? You can’t complain about a lack of numbers of competitors AND the similarity of pricing. If one company DID manage to be consistently cheaper than the rest, the rest would soon cease to exist. What you are complaining about, is evidence of the workings of a free market just as much as evidence of collusion.
You are right all the others would also have to come down and so none of the big 4 wants that and the smaller ones are pretty much prce takers so they wont be first movers. The problem is that new entrants cant just come in given high barriers to entry so their incentives to engage in price comp is almost non-existent.
Vote:The collusion is not necessarily illegal, its may just be smart pricing decisions from the big 4 ie “tacit collusion” which is legal. This is not ideal for the consumer but unless we have evidence of collusion (that cannot just be explained by market forces) that is just life.
August 9th, 2008 at 7:49 pm
I think you’ll probably find the measure of an oil company’s economic value is more in the share price and less in the profit margin. Oil companies, like mining companies, depend on reserves which is of course why they spend so much time and money investing not only in exploration but in buying political influence. Since they’re multi-nationals their political influence is rather vast. The more contracts they have for fields, even if they’re unexploited, the better their stock price. As a matter of fact you could fairly say that the stock price is more dependent on reserves than any other factor.
The senior people in oil companies get most of their remuneration from their stock options and that remuneration is vast. It also so happens that very powerful people in business and politics also tend to be large owners of oil company stock and/or receive very large donations from said companies and it has been known to happen that sometimes favours are exchanged, wink.
Don’t forget of course the oil service companies e.g. Halliburton and isn’t it particularly interesting that since March 2003 its stock price has gone from $9.72 to $43.52 in August 08. Gee I wonder if that’s because it’s been the recipient of oh so many no-bid military supply contracts and I wonder who could possibly have organised those. Lest someone jump in and cry that Cheney divested himself of his Halliburton interests, I say, believe that if you like.
Additionally, Redbaiter didn’t mention the influence of speculators on the price of oil, that is extremely significant.
Finally, you would have noticed the price has been dropping since about mid-July. Expect that to continue until prices at the pump in Anytown USA are around $3/gallon. It’ll stabilise there and hang around until the US election is over. Then see what happens.
Free market? Yeah right.
Vote:August 10th, 2008 at 11:13 am
David why is it that erbus is ok which directly impacted on more kiwis than 9/11?
30 additional demerits for a crap excuse.
Tasteless.
Vote: