02 February 2007

The threat to punish productivity continues.

If you’ve read, or heard the news then you know that oil companies have posted “huge” annual profits ($39.5 billions for Exxon Mobile). Senator Clinton wants “to take those profits” and put them to work on researching alternative fuels.

It doesn’t matter to me what she wants to do with those profits. What matters to me is whether she really knows what ‘profit’ is. Those profits reflect net income, that is ‘revenue’ minus ‘expenses’. ‘Expenses’ includes taxes. That’s what concerns me. After these oil companies pay all their bills, including taxes, Senator Clinton, unsatisfied, wants to take what’s left – the income.

That income belongs to the stock holders. And you’d be surprised to find who some of the stockholders in some of these oil companies are. Many retirement funds own stock in oil companies. TIAA-CREF does.

Here’s a list of some of Exxon Mobiles largest shareholders:

Barclays Global Investors 4.0
State Street Global Advisors 3.1
Vanguard Group 2.6
Fidelity Management and Research 1.5
Northern Trust Company 1.4
AllianceBernstein 1.4
JPMorgan Chase 1.3
Wellington Management Company 1.1
Capital Research & Management Company 1.0
Merrill Lynch Investment Management 0.9
Bank of America 0.8
TIAA-CREF Investment Management 0.7
Mellon Financial 0.6
Goldman Sachs 0.6
State Farm Insurance 0.6

Together those dirty thieves own a 21.6 percent stake in those $39.5 billions, or $8.532 billions. Still sounds like a lot, but BGI’s take as a 4 percent shareholder amounts to $1.58 billions, which still sounds like a lot until you start dividing it up among their shareholders. That huge looking pie gets smaller and smaller as it gets divided up among all of those who, through various means, own a piece of it. So it’s not like Senator Clinton’s plan is only going to hurt the dirty, rotten, rich and none of us little people.

Yes, stockholders really only get that money if boards of directors declare a dividend, but stock value is a function of profitability. Exxon Mobile’s profits amount to $6.62 per share. She’s not a major player by any means, but my wife has a stake in that and it puts my knickers in a bunch (H/T: Q!) to think that Senator Clinton would like to help herself to a portion of my wife’s stock value.

It’s easy to why people might cheer the senator’s plan: they are
innumerate. They really don’t know, or care to know what a number like $39.5 billions really means to a company that does business on the scale that Exxon Mobile does. It sounds like a lot of money, but profit is not absolute; it’s relative. In this case that $39.5 billions amounts to a 10.5 percent profit. That’s right: Exxon Mobile’s total revenue for 2006 was $377.6 billions. After Exxon Mobile paid all of their bills – and they have a lot of bills (i.e., $338.1 billions!) – they had 10.5 percent left over. Relative to $377.6 billions, $39.5 billions is far from huge.

To illustrate, imagine yourself in some business. You are one of the owners. In one year your business’s net income (i.e., profit) comes to $1,248,000. That’s a lot of money, right? Perhaps. But is it a lot of money if your business’s revenues were $62,400,000? Sure, if 2 percent strikes you as acceptable.

But remember I said that you are one of the owners. You have 99 partners. Still think $1,248,000 is a lot of money? It won’t be when you split it with your partners. Your share, assuming all of the partners own 1 percent each, comes to $12,480. And remember: that is your profit, your income for the year. You probably wouldn’t object to having to divide $6,552,000, would you? That would leave you with $65,552. If you would like to make that $65,552 then you’re going to have to accept a 10.5 percent profit margin on that aforementioned $62,400,000. Do you object? If not, then why object to Exxon Mobile’s making a paltry 10.5 percent profit?

We have too many people with their hands in our nation’s financial and tax policies who seem not to know a darn thing about business. They seem to have no idea what the word ‘profit’ actually means. These are people who have no idea what numbers as astronomical sounding as $39.5 billions truly signify in comparison with $377.6 billions. Too many people are innumerate and functionally illiterate when it comes to economics. But heck, they’ve been to law school and spent their entire lives in politics, so they must know something, right?

Apparently, they know how to steal and make it look good.


About Me

James Frank Solís
Former soldier (USA). Graduate-level educated. Married 26 years. Texas ex-patriate. Ruling elder in the Presbyterian Church in America.
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