We're Number One
Dana Investment Advisors
April 4, 2012
Well, here we are again with gas prices at $4.00 a gallon and everyone pointing fingers. The oil companies always seem to be Washington’s favorite whipping boy. They have been hauled before Congress on many occasions over the decades and accused of collusion and other crimes against the public. They never find any wrongdoing. The law of supply and demand has yet to be repealed. Oil companies show huge profits because they are huge companies that employ huge amounts of tax paying workers and pay huge amounts of taxes themselves. A key stat to consider when analyzing a company is its profit margin (cents of net income earned per dollar of revenue). The average profit margin in the oil industry is 6.1%. Drugs and medicines have the highest profit margins at 22.2% followed by computers at 21.8% and beverage and tobacco at 20.1%. All manufacturing businesses have an average profit margin of 9.2% (Investor’s Business Daily 4-4-12). The supply of oil in this country is up slightly and demand is down slightly. However, the supply of oil would be higher if we were to open drilling on government lands. The increase in supply has come from new and more efficient technologies that are being employed on private lands (the Bakken fields in North Dakota). Demand is down as people are driving less, but mainly because the economy is growing at a tepid 2% annual rate. This will not continue forever, and when the economy gains full strength, demand for oil will escalate. Another factor causing high prices at the pump is the closing of three refineries on the east coast. Onerous EPA regulations have made the refining business a losing battle. If you cannot make a profit in any business (except the government) you cannot stay in business. Another factor is our poor relationship with Canada. They are upset that we have cancelled the XL pipeline that would send oil to refineries in Texas and Oklahoma. They may be soon selling their oil to China. Perish the thought. China is our largest competitor in the free market and we are about to hand them a huge advantage. Sometimes you have to think we became the most advanced country in history in spite of ourselves.
Growth and reform should be the main issues in the next election. Grow the economy and reform the tax code along with other debilitating regulations.
Random Thought for April 2012: “There is no such thing as a good tax.”
(C) Dana Investment Advisors