Managing Leadership^®

Briefly, the answer to this question is: No, a company can never make too much money. In fact – presuming that robust competition and intelligent regulation are in place, as is, despite everything, generally the case in the US – a profitable company indicates that everyone involved with it is benefiting, from suppliers to customers (not just shareholders). Otherwise, the company wouldn’t be able to maintain profitability.

Consider the current symbol for excessive profit: Big Oil. The caricature of this industry is as a greedy acolyte of Mammon unconscionably ravaging the earth’s natural resources and shamelessly exploiting international events to ruthlessly gouge innocent and helpless consumers in order to amass unfathomably huge quantities of profit. While there may seem to be an awful lot packed into that sentence, it is a reasonable summation of criticisms made of the industry. Our purpose here, however, is not to mount a defense of Big Oil, but rather to look beyond the highly-charged rhetoric in order to examine the question of excess profit by taking a brief look at how this particular industry works.

The oil industry spends money principally through investment in production and distribution. These are very long-range enterprises, and are not affected by current market conditions either for the purchase of raw petroleum or the sale of refined products.

Oil companies lack the operational flexibility to ramp up production – putting new oil fields or refineries on line, for example – to take advantage of high prices, or to take them off line to save money when prices are low. Moreover, the cash flows from their expenses and from their revenues run according to different timelines. Generally speaking, the timelines on the expense side are longer and more predictable, and those on the revenue side are shorter and more erratic, varying according to less predictable stimuli. They are able to be profitable companies only because these flows are sufficiently foreseeable to manage, and the attendant and exceptional risks can be coped with or transferred to insurance carriers and other financial institutions with appropriate products.

Certainly, the profits of such companies can appear to be unseemly, especially when they tend to coincide with natural or political crises that put oil futures at risk, such as the war on terror and fears about a nuclear-armed Iran. This can create a public relations conundrum, as the profits appear to come as a result of such incidents, as though the companies benefit from political and natural events that create such actual misery (never mind the high prices) for normal people. Nevertheless, that is indeed all rhetoric. The companies are profiting because they are in a good business and they are, generally, well-run.

There is another consideration, here: While the oil companies indisputably are making extra profits from current uncertainty about futures markets, what would the public think if they realized how much of the higher prices they’ve been paying for gas recently actually goes to government, and not to the oil companies? Moreover, the taxes, and overall gas and fuel prices, in the US are among the lowest in the world.

For example, in Turkey, the GDP per capita is roughly 1/7 that of the US, yet gas prices – because of taxes – are approximately 7 times higher than in the US – a 49-fold disparity. Yes, there are cultural reasons why we value our mobility and resent encroachments on it (there’s certainly a lot more noise about high gas prices than about heating fuel costs), but that doesn’t alter the fact that the greatest measure of that encroachment comes in the form of windfall government tax revenues – not windfall oil company profits.