Thursday, March 3, 2011

Oil Executives and Their Encore Problem

People have asked me why I think the oil company executives are acting in a way that seems contrary to America's national interests. If prices of fuel continue to climb, it will have a very negative effect on economic growth, job creation, and consumer purchasing power. I believe the answer is fairly simple and really has little to do with conspiracies or other potentially illegal acts. This is a more fundamental business problem that most CEOs of mega sized companies eventually face. It is called the Encore Problem. All publically owned businesses are measured by Wall Street analysts and investment companies on the growth of their business from quarter to quarter and year to year. Annual comparisons of revenue growth are often considered among the most important and one of the reasons people buy or sell a stock. For businesses, it is grow or die. If you are a company that already vacuums in several hundred billion dollars from the market, those year to year growth comparisons become a real problem. This is especially true in a commodity market like oil in which there is virtual market saturation of your product. There is only so much gasoline that the public can consume and the amount is very consistent from year. The only real growth factor in the consumption numbers is for population growth. The more people we have, the more we consume so that figure is basically tied to the growth of the population. When it comes to investing, people expect to see better growth than just keeping pace with the population growth. How then do these companies grow? They only have a couple of options. One is to raise prices and the other is to buy more market share. These huge oil giants are doing just that. They are certainly not going to compete on price and drive the revenue down. They are going to do everything they can to get the public willing to pay higher prices. Second, they are spending huge sums of money acquiring additional deposits of oil, natural gas, other competitors, and various other sources of energy to help prop up those revenue numbers. Those enormous expenditures also serve another purpose in that they disguise what might otherwise be obvious exaggerated profit earnings that would not be good for their own narrative. They are able to raise revenue, increase asset value, increase market share, marginalize excessive profits, and most favorably they increase stock prices and the value of their own stock options.

The resources available to these companies are staggering. Their budgets are greater than many countries. The money available to influence political opinion is greater than all the other industries. A million dollars to them is not even lunch money. They are not going to change without a considerable fight and unless the public begins to understand what is happening to them, these oil giants will simply buy up what they want and charge as much as they want. I don't ask anyone to accept these things based on my word for it. They should go out and verify it for themselves. Ask questions. Demand answers and if the answers don't quite fit, then you know there is more going on. It isn't usually what they say that is wrong; it is the part they omit.

What these companies know though is that public will do very little about it. Like most national problems, most people are too busy with their own lives to be bothered. They will whine and complain about it at home and among themselves, but they will simply accept it and say, "Well what can one person do? Nothing I can do." Obviously they can, but most won't. Unless you do, then we have no chance of stopping this price gouging at the pump and the further destruction to the economy. Pass this information on to someone. Make a difference. Have them read my other articles on this blog site. If people differ, then share those thoughts. We can all learn.


  1. Most people just want to live their lives in peace. Who will protect them from corrupt systems and/or people.

  2. If citizens are looking for someone else to protect them, they will have a long wait and will just allow themselves to become victims. My strong suggestion is don't be a victim. Do something yourself and do it now. Call your Congressman, your senator, your state representative and demand regulations to reestablish competition in this market.


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