Major oil companies are fast approaching the perfect storm of massive profit gains, rising gasoline prices, and a revenue hungry President who happily vilifies the oil industry. The charges of “greed” during next year’s super-charged political atmosphere may stick, putting at risk the legitimate shareholder value created by today’s oil executives.
Last week, Exxon Mobil, the world’s largest publicly traded oil company, reported a staggering $10.33 billion in third quarter profits, a 41% increase in the face of falling oil production and a 32% increase in revenue. Occidental Petroleum reported a 49% profit gain. And Europe based Royal Dutch Shell reported its third quarter profit more than doubled.
Somewhat stronger economic growth will increase unit volumes. But, it is the fall in the value of the dollar to less than 1/1700 of an ounce of gold that will drive oil prices back above $100 a barrel, sending gasoline prices north of $4.00 a gallon. Rising unit volumes and higher prices point to continued outsized profit gains and growing public anger.
The industry’s best defense against the inevitable political attack: be an early advocate of stabilizing the value of the dollar by moving forward to a 21st century gold standard.
What does a gold standard have to do with the oil industry? Everything.
Ever since President Nixon killed the gold standard in 1971, we have lived through a series of oil price spikes and collapses. Rising oil prices have been blamed on Arab sheiks, profligate American consumers, the rapid growth in China, speculators and at the head of the list, “greedy” oil companies and executives.
Missing from the list is the federal government’s debasement of our dollar.
During the 1950s and 1960s, the dollar’s value was fixed at 1/35th of an ounce of gold and the price of oil was relatively stable, averaging just $2.90 a barrel. Since then, the price of oil has gone up 32 fold to $93 a barrel. But over that same time period, the value of the dollar has fallen more than 45 fold to less than 1/1600 of an ounce of gold.
Think of what this means. If the federal government had maintained its promise that a dollar was worth 1/35th of an ounce of gold, the price of oil today still would be under $3.00 a barrel! That’s right, the entire rise in the nominal price of oil since the 1960s is due to fall in the value of the dollar.
However, politicians being, well, politicians, know instinctively the best defense against the public’s anger is a good offense. When the weak dollar policies of the Obama administration show up in higher gasoline prices, it will not defend the Federal Reserve’s inflationary monetary policies, or reverse its efforts to drive the dollar’s value down relative to the Chinese yuan. No, it will smear the oil industry and call for punitive taxes.
The oil industry will deserve much of this political attack. The reason: oil companies are among the “profiteers” who are enriched by the very inflation that confiscates the wealth and living standard of the average American. As John Maynard Keynes wrote in 1919, from The Economic Consequences of the Peace:
By debauching the currency, governments “not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.”
The way out for the oil industry is to change the terms of debate by calling for the monetary authorities to stabilize immediately the value of the dollar in terms of gold as the way to stop ever higher oil prices.
Warning the American people that today’s weak dollar means tomorrow’s higher oil prices would focus the public’s attention on the Fed’s responsibility for inflicting the pain of higher gasoline prices on the American economy.
Second, supporting a gold standard would align the interests of the oil industry with those of the American people. According to a recent Rasmussen poll of likely voters , 44% have at least a somewhat favorable impression of reinstating a gold standard versus 28% unfavorable. When those surveyed were told that adopting the gold standard would “dramatically reduce the power of central bankers and political leaders to steer the economy,” support soared to 57% in favor vs. only 19% opposed.
Third, restoring the link between the dollar and gold would bring long-term stability to energy prices. Although the industry may miss the profits gained from the dollar’s debasement, it will also avoid the short-term collapses in oil prices that have been endemic to the paper dollar system. The price of oil fell more than 70% from its peak in 1980, to its low in 1986, triggering a massive consolidation of the industry. And, we have just lived through oil prices spiking to over $140 in 2008, only to fall to under $40 a barrel in 2009 before rebounding back above $90 today.
By contrast, between 1986 and 1999, when the dollar’s value relative to gold was kept within a 20% band, oil mostly traded in a 15% band of its $19 per barrel average price.
Stable oil prices would reduce dramatically the monetary risk oil companies take every time they explore for oil. Under the paper dollar system, oil execs have no way to know or estimate what the price of oil will be – and hence their return on capital – in the 5 years or more it takes between the time the company spends hundreds of millions of dollars to explore for oil, and the time it earns a return on a successful oil discovery by actually bringing that oil to market. Reducing the risk of finding new oil will lead to a more diverse oil industry, and more secure oil supplies for the American economy.
By supporting a gold standard, oil company executives can offer the American people a proper diagnosis of the coming rise in oil prices and escape the perfect storm headed their way. Just as important, they can show making the dollar as good as gold can stabilize energy prices and bestow the benefits of general price stability on every American. Who knows, by so doing, they might win the minds, if not the hearts of a majority of the American people as well.