Tuesday, May 16, 2006

Is the Economic “Cure”worse than the Disease?

Stephen Schwarzman is chairman and CEO of the Blackstone Group, one of the largest factors in the private equity industry. His company buys public companies and takes them private again. In a recent interview, he was asked about the Sarbanes-Oxley corporate governance law. He replied that it was very good for his business but it was the worst thing that could happen to the U.S. economy. It has vastly increased the number of public companies desiring to go private in order to escape the costly documentation of accounting and policy procedures the law requires. Even some very large companies are going private. Last November the giant Georgia Pacific company went private in a $21 billion sale to Koch. So the American public is deprived of the opportunity of investing in this Fortune 500 company, thanks to a law that is supposed to protect American investors. The law has also hindered start-up companies from going public and led to many new companies listing their shares overseas, on exchanges in Europe or Hong Kong instead of the New York stock exchange or other U.S. markets. Last year, 23 of the largest 25 initial public offerings by U.S. companies were made in overseas markets.

Wednesday, May 03, 2006

Oil Prices and Taxes

Exxon’s first quarter profits of $8.4 billion received a lot of publicity. Not surprisingly, the media seized the opportunity to portray the oil industry, and Exxon in particular, as Public Enemy No. 1, for the high price of gasoline. What most media omitted in their reporting was that Exxon for this same quarter paid $7 billion in taxes and spent $4.8 billion on exploration and capital investment in order to increase future production. From the $7 billion the government got in taxes, what do the consumers get that would increase the supply of gasoline?

The media reports were intended to make it seem Exxon had suddenly gotten huge profits from the recent high prices at the gas pumps. What the media didn’t want to tell the public was that Exxon’s profits had actually dropped and were 10 cents per share lower than industry analysts’ estimates. In the fourth quarter of last year, profits were $10.71 billion. Although Exxon’s profits were down in the 2006 first quarter, its taxes actually increased, as its tax rate jumped to 47 percent.

While it is popular for the media and various politicians to blame Exxon and other oil companies for the high prices of gasoline, the real causes are largely ignored, such as our government’s failure to allow drilling in 85 percent of our coastal waters on both coasts and also in much of the Gulf of Mexico and Alaska. Also, China’s demand for oil grew 41 percent over the past four years, while total world demand grew 8 percent. Hurricane Katrina contributed to the higher prices by knocking down refineries. And refiners have started mixing more ethanol in gasoline instead of MTBE. Ethanol is more expensive than MTBE.

Since 2003, the price of gasoline at the pump has risen 25 percent less than the global price of crude. And if all of the oil companies were forced to cut the pay of their CEOs to $500,000—and if all the savings were passed on to consumers—the price of gasoline would fall by less than a tenth of a cent.