Come on Exxon, Be a Leader!

Procter and Gamble is a great American company.  In 1837 two immigrant brother-in-laws combined their soap and candle business to start what would eventually become the largest consumer products company in the world.  Their early beginnings are a testament to American capitalism, and just as important, patriotism.  In 1860 on the brink of Civil War, William Procter and James Gamble were concerned about their supply of red oil critical for making soap and candles shipped from the South.  In a strategic move they sent their two sons to buy as many barrels of oil as they could and ship the supply back to Cincinnati.  Their sons bought hundreds of barrels even to the point that P&G became a laughing stock by the dock hands that were tasked with unloading supply from the Ohio River.

When the Civil War broke out the following year, the Southern oil supply was cut short for all competition and the initial $1 a barrel oil price skyrocketed to $16.  Due to the supply constraints P&G won the contract to supply the Union Army and did not raise prices a single penny.  The widespread use of their products by soldiers continued even after the war ended and was the foundation for the next 150 years of sustained company growth.  P&G continued this pricing behavior during WWI and WWII.  P&G held pricing power over competition, and remained faithful to the American consumer.

Fast forward to 2012 where we are facing a different kind of oil shortage.  With sanctions placed on Iran, OPEC is leveraging the gap in supply to drive prices up.  What most Americans fail to understand is only 10% of US consumed oil comes from OPEC and the Middle East.  Almost 50% of consumed oil is produced in the US and another 20-30% comes from Canada and Mexico.  OPEC is the largest producer in the world which allows for price control given the elasticity of oil.  Instead of Exxon and Chevron holding their prices steady and putting pressure on OPEC, they choose to follow the oil cartel   They understand that rising prices has minimal impact on demand so any increase positively impacts profit.  Just to add to shareholder’s delight, US tax payers are subsidizing Exxon’s fair share to Uncle Sam.

Here is my plea to American oil companies:

Show some respect to the country that provides you with a capitalistic market and protection to enable healthy long term business.  Do not look at Iran as your meal ticket for greater profits at the expense of American citizens.  Be a pricing leader, not a follower. Demonstrate to the American consumer that the conflict in the Middle East is not just a business strategy.  And finally, stop begging for tax handouts with one hand while gauging the US consumer with the other.  Doing so might help with the argument to increase domestic drilling, and would  follow the example of companies like P&G who take pride in making an honest profit and paying their fair share of tax.

[caption id="attachment_331" align="aligncenter" width="525"] Historical Oil Barrel Prices - Global[/caption]

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