Thursday, July 10, 2014 Tammuz 12, 5774

Oil's Not So Well With Congress

December 8, 2005 By:
Fred D. Snitzer
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In the overheated rhetoric that now passes for debate in our nation's capital, the oil companies of the United States have been accused by some members of Congress of committing the unpardonable sin of being too successful.

Charges of "excess" profits have rained down on the heads of oil-company CEOs, who were dramatically and publicly summoned to Washington to explain their egregious perfidy.

Like politics at a dinner party, there are some topics that certain people should not talk about at certain times - one of the best examples being preening politicians criticizing large corporations in front of television cameras, or two competing politicians debating the health of the economy during a heated political campaign. In each case, you can be guaranteed one thing: a simplifying distortion of an often complex situation that, despite demanding thoughtful and reasoned debate, invariably falls victim to easy explanations and crass soundbites.

In an ironic twist, these corporations - which are usually accused of employing accounting shenanigans to improve their reported earnings for Wall Street analysts - will now have an incentive to weaken these same earnings to gratify Washington politicians. Executives will now be caught between the vise of pleasing aggressive Wall Street analysts and placating anti-profit politicians.

Imagine the price if oil continues to go up. To avoid even higher profits, should these oil executives employ accounting tricks to increase their costs and hide their revenues? Or should they double their payroll, spend money on extravagant projects, and just generally throw their money around so as to avoid record profits and the wrath of Washington?

For the People?
Faced with global competition, volatile oil prices and burdensome regulation, oil execs can now add another competitive threat to their list of worries: their own government, in the form of morally outraged poll-watchers, poised to slap a tax on company profits.

What incentive would oil executives have to spend that money on new exploration or higher salaries for their workers if they knew that they might need that same cash in a few months to pay for this new tax?

What standard, you have to wonder, are these peacock politicians using to level this charge of excess profits? At what point do profits become excessive? At what point are they reasonable?

Perhaps the politicians would prefer that these companies go bankrupt; no price-gouging there!

General Motors will not have to worry about a tax on its excess profits any time soon.

Maybe the politicians can just tell the companies exactly how much money they should make each year, not a penny less or a penny more.

That would simplify things, even if it wreaked havoc with free markets and drove the economy into the toilet.

As long as companies are making these profits legally by engaging in fair competition with their competitors, and as long as they are using these profits in a responsible and financially sound way, they have nothing to apologize for.

If they pay exorbitant salaries and bonuses to top executives, or spend the money on extravagant and foolish capital projects, then people should be fired.

If they engage in collusion with their competitors, they should be prosecuted.

But if they make record profits, they should be congratulated.

Fred D. Snitzer is chief operating officer in the investment-management firm of Prudent Management Associates, specializing in high-net-worth and tax-deferred asset management.

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