Profits
ExxonMobil just declared record quarterly profits. For the record, I’m a fan of capitalism.

This isn’t capitalism.

Any econ 101 student can tell you that when a company has unilateral control over a key component of the supply chain, that company holds monopoly power and will exert that power to maximize profits at the expense of its customers… who are powerless to stop it. (When a small group of companies share monopoly power together, it’s called an oligarchy. Monopolies and oligarchies are anathemas to capitalism. OPEC is an oligarchy. DeBeers is a monopoly.) ExxonMobil—no matter what they say about not extorting profits—looks like, smells like, and acts like a monopoly.

I don’t blame the company for leveraging monopoly power; doing so would be like blaming a shark for eating. But not blaming the shark doesn’t mean that you don’t deal with the shark.

Speculation
What exactly does ExxonMobil have monopoly control over? Oil, yes, but these days, oil is not merely something you use to power an engine. With the falling dollar and weakening global economies, speculators were moving money out of currencies, gold, and other “natural hedges” and into the one resource that they knew the world would continue to need, even if it went to hell in a hand basket: oil.

So the value of oil is no longer tied only to its intrinsic value as a natural resource; like gold or platinum or a dollar bill, it now seems to have value as a form of quasi-currency.

And while this is not inherently a bad thing, speculation in oil for it’s “currency value”—by people moving money in and out of the commodity not b/c they want the oil, but b/c they want to the relative safety of owning oil vs. owning a different asset class, like currencies or precious metals—will cause price swings more wildly than they otherwise would because there are more people trading.

Well, with the world apparently going to hell in a hand basket lately, this means that ExxonMobil finds itself in the enviable position of controlling an asset that not only is dearly needed, but that is now dearly coveted relative to other investment options generally.

Dividends & Intentions
So what? ExxonMobil will pay out a $1.60 dividend on every share of common stock this year. Profits were $8.08 over the past 12 months; that’s a dividend of just under 20% of earnings.

ExxonMobil doesn’t know what to do with 20% of the money it makes.

Now, money is to a company what food is to a person. You need it coming in if you’re going to grow; if you’re not growing, you don’t need as much, but if you’re in a competitive environment, you probably need more (think Phelp’s 10,000 cal/day Olympic diet). Since companies generally exist in a competitive environments, their appetites are ravenous. Paying a dividend is—giving cash back to shareholders—is the equivalent of saying, “I’m full, can you wrap that half sandwich for me to take home?” Companies pay out dividends only when they’re full, or in economic terms, when they don’t think they can make use of the funds.

With all our environmental challenges (sorry, naysayers, the scientific jury is in: the world is not flat, the earth is not the center of the solar system, and global warming is not a fairy tale), ExxonMobil is saying, “We’re full, we really wouldn’t know what to do with another bite of food. Someone else who is hungrier than us should eat that.”

ExxonMobil is passing on the opportunity to take a leadership position in the field of alternative fuels.

ExxonMobil is not an energy company, it is an oil monopoly.

And as long as it insists on taking actions that, de facto, define itself that way, then it should be regulated as such.

Society has an economic (and in this case environmental) imperative to break monopolies. If ExxonMobil is not willing to cannibalize its own business for the sake of the greater good (and why would it?!), then society will have to create artificial competitive forces.

Posted under Current Trends