Mike the Mad Biologist

Dan Froomkin has a great article about the role that financial speculation plays in driving up gasoline prices*. Keep in mind that even Goldman Sachs, the largest oil trader, admits that speculation drives up oil prices. But what really disgusting is how this speculation-based rise in prices serves as a wealth transfer from, well, just about everybody to oil company executives (italics mine):

By and large, the oil companies’ profits are not finding their way back into the communities from which they came; are not being used to create more jobs; and are not being invested in new equipment and exploration.

Some of that money is going back out the door in the form of larger dividends to stockholders. But in the case of two of the big five in particular — Exxon and ConocoPhillips — more than half of their total profits are being used to buy back their own stock.

Fully $5.7 billion of Exxon’s haul went to buy back its own stock — and the company announced that it expects to buy back yet another $5 billion’s worth in the second quarter of the year. Conoco earned $3 billion in the first three months of 2011 — and spent $1.6 billion of that to buy back 21 million of its own shares.

Buying back stock is not an uncommon tactic among publicly held companies, particularly when they experience a sudden and possibly temporary uptick in revenue. Buybacks are almost guaranteed to send stock prices up, by boosting earnings per outstanding share, increasing the demand for the stock and sending a signal that the company thinks its stock is undervalued.

But from the viewpoint of a company’s CEO, other top brass and its board of directors, stock buybacks have all sorts of particular advantages, as well.

Top executives, after all, often get significant stock options. If stock prices don’t go up, such options are worthless. By contrast, the higher the stock price goes, the more valuable the option. (Exxon’s stock is up 32 percent from six months ago.)

Companies that buy back their stock can either retire it or simply keep it themselves, under the control of the board of directors, to reissue later or award as bonuses.

Dividends, by contrast, are not nearly as good a deal for company executives. For one thing, they are taxed as income. An increase in the stock price is not taxed as income; it’s not taxed at all until the stock is sold — and only then at the capital gains tax rate, which is limited to 15 percent. (Fifteen percent would be a lot for the median American family, which pays less than 5 percent of its income in federal taxes. But it’s a huge break to those paying income tax at the highest marginal rate of 35 percent.)

“Buying back shares benefits existing shareholders, no one else. And more than anyone else, it benefits existing management,” says Henry Banta, an energy industry analyst and partner in the Washington D.C. law firm of Lobel, Novins & Lamont.

“They’re basically enriching themselves,” says Daniel J. Weiss, a senior fellow at the Center for American Progress. “With this windfall, they enrich the board of directors, senior managers, and shareholders.”

They’re not creating jobs with this money, but simply engorging themselves further. The other thing to remember is that, while higher gas prices do lower consumption (a good thing), as Lance Mannion noted a while ago, people’s ability to alter their gasoline use is limited:

Now, again like me, you may think things need to change. But you’re not going to persuade people who are counting the bills in their wallet before deciding how much gas to pump that they should be more like Europeans and be glad to pay more for gas by telling them to stop whining about how much gas is costing them at the moment….

The problem isn’t the price of gas at the moment. That’s a Republican demagogic distraction. The problem is that the price of gas is relative…

Over the last month or so the price of gas has risen almost a dollar a gallon and for a lot of Americans that means that over the last month they’ve paid a hundred dollars or so more to get themselves to and from work, to and from the grocery store, to and from their kids’ concerts and games and lessons.

And over the last month, how many Americans do you think got a hundred dollar raise?

As Mannion notes, “This is a result of our having left it up to the rich to handle everything, and, here’s a shocker. The rich have handled it in ways that benefit them.”

Instead of a gas tax increase, how about a financial transaction tax first?

Comments

  1. #1 Ola
    May 2, 2011

    Thanks for the stock tips, Exxon and ConnocoPhillips. I see my pension fund is heavily invested in big oil. I can’t wait until I retire from the state. Tired of “working”. Bored mostly. Clients complaining and telling me how I’ve got it made helps me feel better though.

  2. #2 Paul Murray
    May 3, 2011

    Similarly, mandatory retirement savings that are invested in stock are a transfer from the workers to the execs. Pst crash, the stock that you were counting on for your retirement will be worthless, and the execs will have pocketfuls of cash.

  3. #3 Wow
    May 4, 2011

    Funny how Ola will, however, still want the state to police his area and protect him from bad people ™ and even ensure that his investment company pay up when they said they would.