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February 02, 2007
The upside of risk taking may be capped by the government
The response to Exxon's record profits is somewhat predictable. There is a movement afoot to cap these profits through increased, targeted taxation to stop this gross profit making.
Of course, what this camp fails to see is the actual risk/reward balance that these companies are managing. I am no expert in oil exploration, but I know enough about their decisions to know that very few companies or people have the courage to take the same kinds of risks that the oil and pharmaceutical companies regularly take.
An article from the Globe and Mail covers the story well:
OTTAWA — The world's largest publicly owned oil company announced yesterday the largest corporate profit ever, but news of its near $40-billion (U.S.) windfall in 2006 sparked an angry backlash, coming on the eve of a major report blaming the use of fossil fuels for wreaking devastation on the planet.
Exxon Mobil Corp. was accused yesterday of using some of those unprecedented profits to fund a campaign to create skepticism about the impact of climate change and opposition to policies that would reduce the use of gasoline and other oil products.
U.S. Democrats, who now control Congress, slammed the record profits as "outlandish," and vowed to raise taxes against Exxon and other oil companies in order to fund alternative fuels and technologies to increase energy efficiency.
Imagine contemplating a $30 billion investement in offshore oil rigs. The investment might not pay off for 5-10 years. Heck, it might not pay off at all! The fluctuation of oil prices is completely out of the control of a company like Exxon.
Or consider a pharma company that has to invest $5 billion in a new molecule that might, in 5 years, fail the extensive testing required by the FDA.
So why take these risks? Because if they do pay off, the will net a large profit. These companies decide to keep looking for oil and new cures for one reason: they might make a lot of money. Now if one diminishes that profit, the decision analysis performed by the strategic leadership will have a lower upside, and will still have this massive downside.
I have seen the decision analysis done be some oil companies and this would radically change the game. This is not a problem if we somehow reduce our need for oil or lifesaving drugs. Or if there is a governmental entity that will routinely lay billions on this roulette table of discovery. But somehow, I doubt that there is such an entity with the courage of the big oil and big pharma companies and I seriously doubt we will decrease our need for oil anytime soon.
It is interesting that no one ever considered this in those points of the cycle when the oil companies were doing very poorly.
Posted by beaumontv at February 2, 2007 09:14 AM
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