Oil Pushes Exxon Mobil (XOM) and Peers Higher

One beneficiary, and there are few, of a spike in the price of crude is the large oil companies, including their shareholders. The share price of Exxon Mobil (NYSE: XOM) is up by 6% over the past three months, which means it has substantially outperformed the S&P 500. Profit forecasts for the oil giants are likely to rise. So will demands for higher taxes on oil company’s “windfall profits.”

The issue of windfall profits is at least four decades old, going back to the Arab Oil Embargo in 1973. OPEC was not the only beneficiary of the rise in prices, critics argued. Oil companies aggressively passed along price increases to consumers. They may have even inflated the price of gas more rapidly that crude prices moved up, though that was never conclusively proven. Critics and congressional investigators never were able to make a solid case.

The windfall profit accusations surfaced again in 2008 when crude moved above $140. Exxon’s stock price did reach a record high early that year. And the price was supported by record profits. Exxon made money. People could not afford $4 gas.

The question about big oil company profits is no different than in most other industries. How much should a company be able to make on scarce products and services? The airline industry believes that it can take capacity out of circulation and increase ticket prices along with extra charges. Car dealers sell vehicles above sticker prices when there is enough demand. Few businesses decide to hold prices down when supply is low.

Oil companies are no different from most other corporations. Their products just reach enough people to make it seem that they are.

Douglas A. McIntyre