With the United States economy already suffering greatly, the last thing that the economically-concerned public needs to hear is that we are not leading the charge in Clean Energy investments. In an article on CNNMoney.com, Steve Hargreaves notes that China destroyed the US in eco-friendly energy investing by $16 billion in 2009, while in the previous year, the United States led China by $8.9 billion.
Many will argue that clean energy should be one of the United States’ top priorities, such as the director of the Pew Environment Group’s Global Warming Campaign, Phyllis Cuttino, “‘The United States' competitive position is at risk in the emerging clean energy economy.’” I will not argue with this point for several reasons. First, the need for clean energy increases daily as we take every step closer to depleting our current sources of energy (natural gas, fossil fuels, etc). Secondly, new markets create new jobs. The move towards clean energy investments created over 700,000 jobs in 1998, and because such a market is a technologically driven one, it can continue to grow as long as there is a need for energy.
I would never disagree with any of the points stated above, but I am realistic. The concept that so many people fail to understand is the fact that a lack of investment in this field is an undesirable, but highly unavoidable, byproduct of the US economy’s downturn, and I’m not referring solely to the clean energy market. There just is not enough wealth available for companies to continue dumping gratuitous amounts of money in Research & Development because there is no direct line-of-sight between investing money in R&D and returns on profits. Put simply, a company could invest heavily in a new and promising method to refine oil in a way that makes it twice as potent as before (which would technically double the Earth’s remaining supply of oil), but if some calculations were wrong and the new method does not work as planned, all the time and money spent in that investment was more-or-less wasted (not entirely wasted because such developments can be used in other projects).
One of the major worries here is that many people will lose their jobs. While this is probably true, the fact that so many of these companies are cutting back on investments shows that they are working to keep people on board because when they can’t continue to afford both a large workforce and heavy investing, they are cutting the investing first.
What worries me even more is the fact that we are losing to China. With companies like Google and GoDaddy.com cutting many of their operations in China, tensions are beginning to rise. China is one of our largest competitors in many markets, and is also our primary financier of debt. The last thing the United States needs on its plate right now is to allow China to overtake the US in such a lucrative market because when it comes down to it, the country with the cheapest and largest amounts of energy have the ability to work at some of the least costly rates. This is definitely a “bargaining” chip because lowering the cost of production in a country also lowers the cost of the products it sells in foreign markets, allowing that country to undercut everyone else.
The United States’ trailing in the clean energy market to China is discouraging in many aspects, but until the US can stabilize its debt, investing in clean energy is not a solution to the United States’ economic recession (I use this term loosely).
Sunday, March 28, 2010
Thursday, March 18, 2010
No More Gasoline for you, Iran!
It was reported on CNNMoney.com that the Royal Dutch Shell company ceased selling gasoline to the country of Iran sometime in late 2009. The reasons for the halt on sales is unknown, but we can speculate that it has something to do with the possibility of US sanctions on gasoline imports to Iran.
The US senate recently passed a bill allowing Obama to increase sanctions on Iran in response to the country’s developing nuclear program. Iran claims that the reason for its nuclear program is purely for energy, but the threat of Iran developing nuclear weapons is in the back of all our minds for several reasons.
First, the rather undeveloped country of Iran is sitting on one of the largest oil reserves in the world. You can’t honestly tell me that a country that severely limits the amount of technology available to its citizens and has more oil than it can use has a need for nuclear power to survive.
Second, the “elected” president, Mahmoud Ahmadinejad, has repeatedly stated that he wants to blow Israel off of the face of the map. As if that weren’t enough, Iran has purchased technology from North Korea that gives them the ability to accurately hit targets in Europe with missiles, including nuclear missiles if they obtain them. This alone is enough to prove that the first thing Iran will do if/when it obtains nuclear power is to develop nuclear warheads to attack countries it sees as enemies. Although the country of Iran is a republic with an elected president, there is not a lot of confidence in the election because elections are usually landslide victories upwards of 100%, and the votes are counted at unusually (almost impossibly) high speeds. It is more likely than not that the presidential elections are extremely rigged, so the person who wins is simply a puppet president controlled by the Ayatollahs (who truly run the country). It is commonly believed that Iran is one of the largest supporters of terrorism in the world because the country is actually run by extremists with destructive political agendas. Also, the fact that the other powerful party in Iran is the Islamic Revolutionary Guard Corps, the group believed to be responsible for the development and supplying of Iraq with IEDs (Improvised Explosive Device) to fight against the American military, doesn’t exactly give Iran credibility in developing nuclear power for non-lethal purposes.
Lastly, Iran is actually comprised of Shiite Muslims (Persians) who speak Farsi, not Arabic. Historically, there was a large division of power in the Muslim world between the Shiite and Sunni Muslims, and a large power struggle resulted. The Shiites believed that they should be the preeminent power in the Muslim world, and many of those sentiments exist today.
All signs point to danger for the entire world if Iran is able to obtain nuclear technologies. I believe that Shell is making the right decision to stop supplying Iran with gasoline, and the rest of the world should follow suit.
The US senate recently passed a bill allowing Obama to increase sanctions on Iran in response to the country’s developing nuclear program. Iran claims that the reason for its nuclear program is purely for energy, but the threat of Iran developing nuclear weapons is in the back of all our minds for several reasons.
First, the rather undeveloped country of Iran is sitting on one of the largest oil reserves in the world. You can’t honestly tell me that a country that severely limits the amount of technology available to its citizens and has more oil than it can use has a need for nuclear power to survive.
Second, the “elected” president, Mahmoud Ahmadinejad, has repeatedly stated that he wants to blow Israel off of the face of the map. As if that weren’t enough, Iran has purchased technology from North Korea that gives them the ability to accurately hit targets in Europe with missiles, including nuclear missiles if they obtain them. This alone is enough to prove that the first thing Iran will do if/when it obtains nuclear power is to develop nuclear warheads to attack countries it sees as enemies. Although the country of Iran is a republic with an elected president, there is not a lot of confidence in the election because elections are usually landslide victories upwards of 100%, and the votes are counted at unusually (almost impossibly) high speeds. It is more likely than not that the presidential elections are extremely rigged, so the person who wins is simply a puppet president controlled by the Ayatollahs (who truly run the country). It is commonly believed that Iran is one of the largest supporters of terrorism in the world because the country is actually run by extremists with destructive political agendas. Also, the fact that the other powerful party in Iran is the Islamic Revolutionary Guard Corps, the group believed to be responsible for the development and supplying of Iraq with IEDs (Improvised Explosive Device) to fight against the American military, doesn’t exactly give Iran credibility in developing nuclear power for non-lethal purposes.
Lastly, Iran is actually comprised of Shiite Muslims (Persians) who speak Farsi, not Arabic. Historically, there was a large division of power in the Muslim world between the Shiite and Sunni Muslims, and a large power struggle resulted. The Shiites believed that they should be the preeminent power in the Muslim world, and many of those sentiments exist today.
All signs point to danger for the entire world if Iran is able to obtain nuclear technologies. I believe that Shell is making the right decision to stop supplying Iran with gasoline, and the rest of the world should follow suit.
Saturday, March 13, 2010
Unsustainable
The United States government has been presiding over an ever-growing debt since the Bush administration took office and began spending large amounts of money to fund new and expensive entitlement programs, such as "Medicare Modernization Act," "No Child Left Behind," “The President’s Emergency Plan for AIDS Relief” (PEPFAR), and many pet "pork" projects that were slipped into bills passed by many senators and congressional leaders. Also, let’s not forget about the tremendous cost of funding Bush’s “War on Terror” as a result of 9/11. As a result, President Obama began his term during the worst financial crisis that the United States had faced since the Great Depression. To make matters worse, as the Obama administration takes steps to move the United States out of its $11,875,851,000,000 debt at the beginning of 2009 (United States Office of Management and Budget, table 7.1, 2009), it is also attempting an expansion of government obligations via increased involvement in private enterprises, healthcare, etc. As the United States government grows in relation to GDP, the cost of government expenditures forces changes in the lives of the taxpaying citizens because of the government’s need to fund its increasing debt via the collection of taxes.
It goes without saying that all of the programs that the Bush administration enacted listed above are good and meritorious by nature.
For example, the purpose of the No Child Left Behind Act was to improve standardized test scores in an attempt to give more students the opportunity to go to college through a series of changes, including greater teacher accountability, improved quality of education for all students, and heightened awareness and attention to minority populations. The only problem with the NCLB act was its enormous cost to the taxpayers, about $42.2 billion by 2006 (U.S. Department of Education, 2006). Also, the Medicare Modernization Act was supposed to help those less fortunate seniors pay for their prescriptions, and the purpose of PEPFAR was to combat AIDS in Africa and the Caribbean, but these two projects were projected to cost $549.2 billion over five years (Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2009) and $48 billion over five years (Dunham, 2008) respectively. Unfortunately, funding too many projects of this magnitude can be counterintuitive when it causes the American taxpayer to have to pay even more money out-of-pocket to fund them because it forces many Americans to sacrifice their own standard of living.
Consider the lifestyle of the taxpaying citizens living in a country whose government has already enacted the same programs that the United States is attempting to initiate. In 2006, the average size of a home in the United Kingdom was 914.9 square feet. In the United States, it was about 2,200 square feet (Hennigan, 2006). There are several reasons as to why there is such a large difference in the average size of a home between the two countries. One of the major contributors is the cost of energy due to taxes. The price of a gallon of gasoline in the United Kingdom is more than two times the cost of a gallon in the United States, and over 60% of the UK’s cost is tax paid to its government states (Energy Information Administration, 2010). This high inflation in the cost gasoline and all forms of energy has a massive impact on the citizens of Britain. This significantly determines who can afford a car and how much it costs to drive one. Basically, if you are not in a government provided vehicle, and are not very wealthy, chances are you use public transportation for the majority of your traveling needs, and out of the significantly smaller proportion of people in the UK who actually own cars (as compared to the United States), most of them have tiny vehicles that get relatively good mileage. The other immediate impact is on the cost to heat and power a home, because when it can cost up to three times the amount to run the air conditioning or heater in a UK home as compared to the United States, a much smaller percentage of people in the UK can actually afford to live in those comparable homes. The point here is that, because everything is taxed at such high rates in the UK, a large percentage of people must take public transportation because they cannot afford to own and operate their own vehicles, nor can they afford to own similar sized homes in the United States because the cost of energy to heat and cool their homes, as well as the significantly higher property tax rates, force most of the citizens to live in much smaller homes and apartments.
Why is all of this relevant? The tremendous growth rate of government expenditures and accumulation of debt will force the United States government into a tax structure like that which our European cousins are currently enduring. This year, there has already been talk in Washington of considering the institution of a federal “Value Added Tax” or “VAT” tax as it is known in the United Kingdom (Montgomery, 2009). The need to generate revenue for an expanding government debt will impact the lifestyles for citizens in the United States unless our government can manipulate the economy in such a way that it can grow at a rate that keeps pace with the increasing debt and government spending using our current tax structure. As a government expands its entitlement programs and becomes increasingly more involved in the everyday life of its citizens, the citizens come to expect more and more from the government. As a result, these entitlements develop their own synergy. Once this happens, there is a natural progression for that government to continue growing, which eventually leads to its increased consumption, and therefore increased expenditures. If the government begins paying for entitlement programs, such as nationalized health care, there will be increased taxes to cover those costs. Those increased taxes almost always have a negative impact on business growth and GDP. Also, if a government begins down that path, it can be a slippery slope until it hits a tipping point. When a government’s expenditures exceed the government’s actual income for a long enough period of time, the country finds itself in a financial crisis similar to Greece’s current economic situation. This should sound all-too-familiar because I am describing what has already happened in the United Kingdom (and the EU as a whole), and is exactly what is currently happening in the United States.
In my previous blog post, “The Cost of Doing Business,” I explain how, although it is difficult for people to accurately calculate the value of any currency in the midst of so much economic chaos, the one commodity that every person needs to survive, energy, can be used as a reference. One must understand this point conceptually in order to begin brainstorming ways on how to begin working to get the United States out of its large debt. One method the United States has used to remedy past similar (but not nearly as severe) debt situations is to simply print more money. This may have been successful in the past to help alleviate debt crises, but that is the last thing the US government should do today. If the government devalues the dollar, the taxpayers are punished because the cost of energy increases and inflation is created. It does not matter if a taxpayer is making more money than before if the buying power of the dollar has decreased proportionately.
Economic Nobel prize winner, Paul Krugman, believes that we should not be so concerned with paying off the debt as soon as possible, but rather to focus on stabilizing debt altogether.
His reasoning is that if a country is in debt, but that country’s economy is growing and the debt is stable, then the debt to GDP ratio decreases and the country’s economy will stabilize. In Krugman’s New York Times blog post, The Burden of Debt, he discusses how the United States used this tactic in 1950 when debt was 80% of the country’s GDP and reduced the ratio to 46% by 1960, despite the threat of the Cold War with Russia. I agree with Krugman that such tactics are probably the United States’ best option, however it is very difficult for the economy to grow when the government is working to increase entitlement programs.
Although outrageously high taxes are the reason for such different standards of living in the United Kingdom versus living in the United States, discussing the actual percentages themselves is a waste of time. Instead, we should focus on the reasons for those high taxes. As mentioned before, the United States’ ineffective stimulus expenditures are not exactly helping the issue, but there are more problems underneath the surface that are keeping the United States from effectively getting itself out of debt.
One of the government’s largest expenditures is the payment of salaries to all of its federal employees. Consider this: according to an article in USA Today, within the first 18 months of the recession, “Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants…and that's before overtime pay and bonuses are counted” (Cauchon, 2010). I could continue listing other statistics, such as how the number of Transportation Department employees making at least $170,000 a year increased by 1,688 within those 18 months, or the number of Department of Defense Employees making at least $150,00 a year increasing by over 8,000 from December, 2007 to January, 2009, but I think I have made my point.
While the private sector is hurting financially, the public sector is giving its employees raises and hiring more people than ever before. Many of the same people who advocate Obama’s stimulus package, nationalized healthcare, and the hiring and increase of salaries of government employees are the same people who are pointing the finger of shame at corporate CEOs making salaries, bonuses, and stock options equal to several million dollars. There’s only one major difference here – unlike many government departments who are distributing pay raises and hiring more employees while the US government is spending more than it is taking in, many CEOs who are experiencing increased salaries and benefits also have companies that are actually turning a profit. Current McDonald’s CEO, Jim Skinner, received $13.6 million in 2008, an increase of 70% in his compensation from the previous year (Shepherd, 2008). McDonald’s, however, experienced a net profit increase of 80% from $2.3 billion in 2007 to $4.3 billion in 2008 (AFP, 2008). What a novel idea! Give the guy who runs a company more compensation when he helps a company to succeed, rather than increasing his salary when the company is in the red.
The United States is structurally on a path to keep increasing the cost of government and entitlement programs, which, by design, survive by drawing wealth off of the private sector in the form of taxes or by nationalizing industries (similar to what Venezuela has done with their petroleum industry). So, what happens when it is more profitable to work in the public sector, than in the private sector? When this is the norm, the majority of people will begin shifting away from the private sector in an effort to enjoy the guaranteed benefits of being unionized employees working in the public sector. This will result in more people living off collected taxes than those actually paying them.
There is one word that comes to mind when I consider the situation where someone is spending more than they are earning: unsustainable.
It goes without saying that all of the programs that the Bush administration enacted listed above are good and meritorious by nature.
For example, the purpose of the No Child Left Behind Act was to improve standardized test scores in an attempt to give more students the opportunity to go to college through a series of changes, including greater teacher accountability, improved quality of education for all students, and heightened awareness and attention to minority populations. The only problem with the NCLB act was its enormous cost to the taxpayers, about $42.2 billion by 2006 (U.S. Department of Education, 2006). Also, the Medicare Modernization Act was supposed to help those less fortunate seniors pay for their prescriptions, and the purpose of PEPFAR was to combat AIDS in Africa and the Caribbean, but these two projects were projected to cost $549.2 billion over five years (Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2009) and $48 billion over five years (Dunham, 2008) respectively. Unfortunately, funding too many projects of this magnitude can be counterintuitive when it causes the American taxpayer to have to pay even more money out-of-pocket to fund them because it forces many Americans to sacrifice their own standard of living. Consider the lifestyle of the taxpaying citizens living in a country whose government has already enacted the same programs that the United States is attempting to initiate. In 2006, the average size of a home in the United Kingdom was 914.9 square feet. In the United States, it was about 2,200 square feet (Hennigan, 2006). There are several reasons as to why there is such a large difference in the average size of a home between the two countries. One of the major contributors is the cost of energy due to taxes. The price of a gallon of gasoline in the United Kingdom is more than two times the cost of a gallon in the United States, and over 60% of the UK’s cost is tax paid to its government states (Energy Information Administration, 2010). This high inflation in the cost gasoline and all forms of energy has a massive impact on the citizens of Britain. This significantly determines who can afford a car and how much it costs to drive one. Basically, if you are not in a government provided vehicle, and are not very wealthy, chances are you use public transportation for the majority of your traveling needs, and out of the significantly smaller proportion of people in the UK who actually own cars (as compared to the United States), most of them have tiny vehicles that get relatively good mileage. The other immediate impact is on the cost to heat and power a home, because when it can cost up to three times the amount to run the air conditioning or heater in a UK home as compared to the United States, a much smaller percentage of people in the UK can actually afford to live in those comparable homes. The point here is that, because everything is taxed at such high rates in the UK, a large percentage of people must take public transportation because they cannot afford to own and operate their own vehicles, nor can they afford to own similar sized homes in the United States because the cost of energy to heat and cool their homes, as well as the significantly higher property tax rates, force most of the citizens to live in much smaller homes and apartments.
Why is all of this relevant? The tremendous growth rate of government expenditures and accumulation of debt will force the United States government into a tax structure like that which our European cousins are currently enduring. This year, there has already been talk in Washington of considering the institution of a federal “Value Added Tax” or “VAT” tax as it is known in the United Kingdom (Montgomery, 2009). The need to generate revenue for an expanding government debt will impact the lifestyles for citizens in the United States unless our government can manipulate the economy in such a way that it can grow at a rate that keeps pace with the increasing debt and government spending using our current tax structure. As a government expands its entitlement programs and becomes increasingly more involved in the everyday life of its citizens, the citizens come to expect more and more from the government. As a result, these entitlements develop their own synergy. Once this happens, there is a natural progression for that government to continue growing, which eventually leads to its increased consumption, and therefore increased expenditures. If the government begins paying for entitlement programs, such as nationalized health care, there will be increased taxes to cover those costs. Those increased taxes almost always have a negative impact on business growth and GDP. Also, if a government begins down that path, it can be a slippery slope until it hits a tipping point. When a government’s expenditures exceed the government’s actual income for a long enough period of time, the country finds itself in a financial crisis similar to Greece’s current economic situation. This should sound all-too-familiar because I am describing what has already happened in the United Kingdom (and the EU as a whole), and is exactly what is currently happening in the United States.
In my previous blog post, “The Cost of Doing Business,” I explain how, although it is difficult for people to accurately calculate the value of any currency in the midst of so much economic chaos, the one commodity that every person needs to survive, energy, can be used as a reference. One must understand this point conceptually in order to begin brainstorming ways on how to begin working to get the United States out of its large debt. One method the United States has used to remedy past similar (but not nearly as severe) debt situations is to simply print more money. This may have been successful in the past to help alleviate debt crises, but that is the last thing the US government should do today. If the government devalues the dollar, the taxpayers are punished because the cost of energy increases and inflation is created. It does not matter if a taxpayer is making more money than before if the buying power of the dollar has decreased proportionately.
Economic Nobel prize winner, Paul Krugman, believes that we should not be so concerned with paying off the debt as soon as possible, but rather to focus on stabilizing debt altogether.
His reasoning is that if a country is in debt, but that country’s economy is growing and the debt is stable, then the debt to GDP ratio decreases and the country’s economy will stabilize. In Krugman’s New York Times blog post, The Burden of Debt, he discusses how the United States used this tactic in 1950 when debt was 80% of the country’s GDP and reduced the ratio to 46% by 1960, despite the threat of the Cold War with Russia. I agree with Krugman that such tactics are probably the United States’ best option, however it is very difficult for the economy to grow when the government is working to increase entitlement programs. Although outrageously high taxes are the reason for such different standards of living in the United Kingdom versus living in the United States, discussing the actual percentages themselves is a waste of time. Instead, we should focus on the reasons for those high taxes. As mentioned before, the United States’ ineffective stimulus expenditures are not exactly helping the issue, but there are more problems underneath the surface that are keeping the United States from effectively getting itself out of debt.
One of the government’s largest expenditures is the payment of salaries to all of its federal employees. Consider this: according to an article in USA Today, within the first 18 months of the recession, “Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants…and that's before overtime pay and bonuses are counted” (Cauchon, 2010). I could continue listing other statistics, such as how the number of Transportation Department employees making at least $170,000 a year increased by 1,688 within those 18 months, or the number of Department of Defense Employees making at least $150,00 a year increasing by over 8,000 from December, 2007 to January, 2009, but I think I have made my point.
While the private sector is hurting financially, the public sector is giving its employees raises and hiring more people than ever before. Many of the same people who advocate Obama’s stimulus package, nationalized healthcare, and the hiring and increase of salaries of government employees are the same people who are pointing the finger of shame at corporate CEOs making salaries, bonuses, and stock options equal to several million dollars. There’s only one major difference here – unlike many government departments who are distributing pay raises and hiring more employees while the US government is spending more than it is taking in, many CEOs who are experiencing increased salaries and benefits also have companies that are actually turning a profit. Current McDonald’s CEO, Jim Skinner, received $13.6 million in 2008, an increase of 70% in his compensation from the previous year (Shepherd, 2008). McDonald’s, however, experienced a net profit increase of 80% from $2.3 billion in 2007 to $4.3 billion in 2008 (AFP, 2008). What a novel idea! Give the guy who runs a company more compensation when he helps a company to succeed, rather than increasing his salary when the company is in the red. The United States is structurally on a path to keep increasing the cost of government and entitlement programs, which, by design, survive by drawing wealth off of the private sector in the form of taxes or by nationalizing industries (similar to what Venezuela has done with their petroleum industry). So, what happens when it is more profitable to work in the public sector, than in the private sector? When this is the norm, the majority of people will begin shifting away from the private sector in an effort to enjoy the guaranteed benefits of being unionized employees working in the public sector. This will result in more people living off collected taxes than those actually paying them.
There is one word that comes to mind when I consider the situation where someone is spending more than they are earning: unsustainable.
Monday, March 8, 2010
The Cost Of Doing Business
With all of the economic turmoil that’s been happening world-wide, one of the most difficult things for anybody to wrap their heads around is the value of currency and exchange rates. One day, the euro drops drastically and stock prices plummet, then the next day, Greece and the EU publicize their plan for how to fix the problem and the economy temporarily stabilizes. It is obvious that we are in a period of many unknowns, so the market is extremely volatile and is therefore sensitive to any new developments in the economy.
No matter what state the economy is in, there is one commodity that will always represent a universal currency: energy. Although there is fluctuation in the price of oil, it is only due to fluctuation in the value of the dollar. Because oil is not an unlimited resource and the economy is not doing so well, many oil-producing countries are looking to get more money from international companies, such as Exxon Mobile, to do business in their countries. For example, Brazil just discovered a large amount of natural gas (estimated at 50 billion barrels) off one of its coasts. Because of this, Brazil is looking to increase the cost of allowing Exxon to obtain that gas from 50% of Exxon’s total profits (considered to be on the lower end of the spectrum) to about 80%.
Exxon’s profits haven’t been very high lately for several reasons. First, the cost of producing gasoline is extremely expensive. When you factor in the costs of transporting the oil from international soil to the United States (Exxon has to pay to burn fuel too), refining, and distributing the oil, the profit margin on selling oil is already severely limited. Also, because the economy isn’t doing well, the economy is unable to support high priced gasoline. If Exxon started charging $5/gallon of gasoline, it would not equate to higher profits. Instead, it would result in a decrease of gasoline purchases because of the high rate of unemployment.
So, what does all of this mean? When the economy is strong, companies can take measures to increase their profits margins. When the economy is down, however, companies must take opposite measures to give people the opportunity to purchase their products or services. For example, many McDonald’s owner/operators are not thrilled about the new breakfast dollar menu. McDonald’s breakfast is the single-most profitable meal of the day for many franchises, and offering some of those menu items for a dollar (several of which are actually at cost) decreases the profit margins. McDonald’s chose to introduce this dollar menu when sales were being hurt by the economy to give people more of an incentive to eat their food in hopes that they will purchase more than one item (preferably off the dollar menu). In the same way that McDonald’s offers special deals on its food items when the economy is down, Exxon can’t afford to increase the cost of gasoline to the American public, even if the countries from where Exxon obtains the oil increase the cost of doing business.
No matter what state the economy is in, there is one commodity that will always represent a universal currency: energy. Although there is fluctuation in the price of oil, it is only due to fluctuation in the value of the dollar. Because oil is not an unlimited resource and the economy is not doing so well, many oil-producing countries are looking to get more money from international companies, such as Exxon Mobile, to do business in their countries. For example, Brazil just discovered a large amount of natural gas (estimated at 50 billion barrels) off one of its coasts. Because of this, Brazil is looking to increase the cost of allowing Exxon to obtain that gas from 50% of Exxon’s total profits (considered to be on the lower end of the spectrum) to about 80%.
Exxon’s profits haven’t been very high lately for several reasons. First, the cost of producing gasoline is extremely expensive. When you factor in the costs of transporting the oil from international soil to the United States (Exxon has to pay to burn fuel too), refining, and distributing the oil, the profit margin on selling oil is already severely limited. Also, because the economy isn’t doing well, the economy is unable to support high priced gasoline. If Exxon started charging $5/gallon of gasoline, it would not equate to higher profits. Instead, it would result in a decrease of gasoline purchases because of the high rate of unemployment.So, what does all of this mean? When the economy is strong, companies can take measures to increase their profits margins. When the economy is down, however, companies must take opposite measures to give people the opportunity to purchase their products or services. For example, many McDonald’s owner/operators are not thrilled about the new breakfast dollar menu. McDonald’s breakfast is the single-most profitable meal of the day for many franchises, and offering some of those menu items for a dollar (several of which are actually at cost) decreases the profit margins. McDonald’s chose to introduce this dollar menu when sales were being hurt by the economy to give people more of an incentive to eat their food in hopes that they will purchase more than one item (preferably off the dollar menu). In the same way that McDonald’s offers special deals on its food items when the economy is down, Exxon can’t afford to increase the cost of gasoline to the American public, even if the countries from where Exxon obtains the oil increase the cost of doing business.
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