Sma' Talk Wi' T

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You Are Big Oil!

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Let’s be straight about our economy. Let’s compare United States’s market to the rest of the world:

As of April 10, 2008, the broad U.S. stock market had fallen 7.08 percent. The decline paralleled other developed world equity markets, with the U.K. market falling more than 8 percent, the German market more than 10 percent, the French market about 6 percent and the Japanese market nearly 7 percent. Emerging markets, which had recorded tremendous gains in the past several years, were not immune to the losses. In China the market fell nearly 19 percent, in India 26 percent and the Russian market almost 8 percent. The only region that experienced equity market gains was Latin America, where the Brazilian market was up about 2.5 percent, the Mexican market about 7.5 percent and the Chilean market nearly 12 percent. Indeed the pattern of losses was so widespread that in the developed world every single equity market, save one, recorded a loss year to date. The sole exception was the market in Finland which managed a very slight gain of a 0.25 percent.

But what about the oil prices? In a conversation about oil drilling yesterday, it was suggested that “oil companies should be regulated like utilities.” Make them a non-profit entity. As if we don’t have enough regulation to begin with, and that oil companies are not regulated at all. And who says utilities don’t make profits or aren’t in the business to make money?

Energy companies have had considerable dividends over the last few decades and are considered stable investments compared to other industries.

In this example Utilities, overall, suffer the lowest loss during an economic downturn – less than five percent. Many individual utility stocks do better, and it is those that you should search for. One can cut the sector loss by about 50% by selecting stocks with the strongest fundamentals. In any case, the 4.5% loss for Utilities is less than the overall dividend yield. Thus, one can argue that there has been no loss for Utilities [in recessions].

Oil companies are regulated with oversight by the federal government through FREC. They are not the evil, greedy corporations that Barack Obama, Hillary Clinton, and Harry Reid decry. Investor’s Business Daily has the reasoning behind the liberals hate for oil barons:

With all the commotion in the media and in politics about the high price of gasoline, is there really some terribly complex explanation?

Is there anything complex about the fact that with two countries — India and China — having rapid economic growth, and with combined populations eight times that of the United States, they are creating an increased demand for the world’s oil supply?

The problem is not that supply and demand is such a complex explanation. The problem is that supply and demand is not an emotionally satisfying explanation. For that, you need melodrama, heroes and villains.

It is clear that many people prefer to blame President Bush. Others prefer to blame the oil companies, who have long been the favorite villains of the left. Politicians understand that. Numerous times they have summoned the heads of oil companies before Congressional committees to be denounced on nationwide television for “greed,” with the politicians calling for a federal investigation to “get to the bottom of this!”

Now that is emotionally satisfying. Which is the whole point. By the time yet another federal investigation is completed — and turns up nothing to substantiate the villainy that is supposed to be the reason for high gasoline prices — most people’s attention will have turned to something else.

What about those “obscene” oil company profits we hear so much about? An economist might ask, “Obscene compared to what?” Compared to the investments made? Compared to the new investments required to find, extract and process additional oil supplies?

Asking questions like these are among the many reasons why economists have never been very popular. They frustrate people’s desires for emotionally satisfying explanations.

If corporate “greed” is the explanation for high gasoline prices, why are the government’s taxes not an even bigger sign of “greed” on the part of politicians — since taxes add more to the price of gasoline than oil company profits do?

When oil companies are profitable, middle class investment funds such as College Retirement Equities Fund, and mutual funds, Fidelity, Vanguard, and Capital Research & Management Company, to name a few benefit.

When Exxon makes money, millions of average Joes who work hard to make a living, make money.

“Lets look at the key points on page 4 of the review. I know people feel that big oil is evil because they make huge profits, so the first thing they see is “Record Earnings of $39.5 Billion”, then they stop reading and proceed to jump up and down and cry about the injustice of the world. Since we are calmer and much more evenly balanced individuals, lets actually keep reading down two more lines and what do we find? “32.6 Billion in Distribution to Shareholders”. So let me see, they made $39.5 Billion and gave shareholders, as mentioned before the owners of the company, $32.6 Billion.

So if I still have your attention, Exxon Mobil returned $7.6 Billion in the form of stock dividends (a payment made to all stock holders based on the number of shares they hold) which are basically profit sharing payments to the owners of the corporation. They also bought back $25 Billion in outstanding shares, this is done to maintain the market capitalization based on the number of outstanding shares that would have diluted the stock value when the company issues shares as part of business deals, as well as into the employee’s retirement fund and compensation plans.

So if you have not started jumping about cursing those cigar smoking fat cats in their wood panelled members only clubs counting their windfalls, lets look at who actually owns Exxon and see who benefited from these payout actions.

Who Owns Exxon?

To find this out we can use any of the hundreds of online stock quote services on the Internet. XOM is the ticker symbol on the NYSE. I used Business Week’s stock quotation system as it has an ownership tab. You can look at it here.

The first line we read states “Insiders control 0.05% of XOM through the 4,163,458 shares that they hold.”, these are the fat cat cigar smokers everyone says make all the money. So they made a dividend as they tend to hold their shares unless they need the capital, so since 7.6 Billion was paid in dividends they received $3,800,000 in taxable dividend payments for 2006.

So who owns all the rest of the company’s stock? For that we look at Institutional Investors in the stock quote, these are the Mutual Funds, Retirement Plans and other investment companies, “52.64% of XOM shares held by institutional investors” so these are the funds that help to generate wealth for all the millions of regular people who invest in stocks through funds and other institutional vehicles. These are average people saving for retirement or investing in education plans to pay for college for their children, they received $4,000,640,000 dollars into their accounts.
That leaves 47.31% of the shares held by individual Investors, these are the people who actively and directly invest in the markets from all walks of life, like your barber or your colleague in the office who day trades instead of actually working, and of course those terrible rich people. They got the balance of the dividend payments, or $3,595,560,000.00 against taxed income for them.

Read all of the facts about who actually benefits from capital profits.

Remember YOU, the average hardworking American, you ARE big oil!

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Written by smalltalkwitht

May 13, 2008 at 11:48 pm

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