Opinion: Don't take network polls for how they appear

At least that’s what one would surmise from the recent polls that show that the general perception of the economy is that it is not doing well.

Let’s put some of the influencing factors in perspective. The economy is bad? Shouldn’t that be reflected in a declining, or at least stagnant, GDP, the most-used indicator of the country’s economic health? Whoops, can’t look there. First quarter GDP grew at 4.8 percent, a significant increase over the last quarter of 2005, when it increased a slight 1.7 percent.

Maybe the folks queried by the pollsters were concerned about inflation. Nope, that won’t fly either, as inflation, in spite of a powerfully growing economy, remained low at 2 percent, an improvement over fourth quarter’s 2.4 percent.

Do you recall hearing during the news the positives about the GDP or inflation? Probably not; however I will guarantee you have heard daily about the price of gasoline.

Aha – could this be what is causing the misperceptions about our economic state of affairs? Could it be those evil oil companies, gouging us all and generating obscene profits?

We have to look at some basic facts to make a determination. We have to set aside the emotional and look at the reality. One reality appears to be that average citizens, at least those who participate in those arcane polls, have little, if any, grounding in basic economics. Unfortunately, the same can be said for most of our leaders in Washington, Republicans and Democrats alike.

All the way back in high school we were all exposed to the concept of prices being set by supply and demand. Change either demand or supply and – voila! — prices change. So it is with oil and, therefore, gasoline. It makes no difference how the demand or supply changes; if either changes—ah, you know what happens next.

Have we lowered our fuel demand? Not noticeably so far. Has the supply been changed? Yep, for a number of reasons: traditional spring change-over for 40 reformulated gasolines required by state and federal governments; conversion to higher ethanol blends (at the present not economically justifiable, but Washington is pandering to the Midwest farmers, who have seen ethanol prices rocket upward under the protection of steep tariffs on South American ethanol); the inability to drill offshore on either coast or in ANWR, the Arctic National Wildlife Refuge; and refinery capacity constrained by the NIMBY crowd. (Pardon the acronym. I dislike using them, but this one, for Not In My Back Yard, has always amused me.)

Oil companies don’t set prices. If they had that capability, there is no way that oil would have sold for $10-12 in the 1980s.

OK, so what about speculators in the markets? I’ll grant you that one. The pressure caused by the geopolitical situation, especially as it pertains to Iran’s nuclear power has added a level of speculation.

When the media speak of the billions of dollars of oil company profits, they know exactly what they are doing – and not doing. What they are doing is stirring the viewer to watch, to listen and, generally, to get mad. What they are not doing is explaining that for most energy companies, the profit margins per dollar of sales, at approximately 8.2 cents, are less than those of the following industries: pharmaceuticals, 18.6 cents; banks, 18 cents; semiconductors, 14.1 cents; household and personal products, 11.4 cents; consumer services, 10.1 cents; software and services, 9.9 cents; telecommunications services, 9.1 cents; and food, beverage, and tobacco, 8.5 cents.

Since Exxon Mobil is the media’s favorite target, let’s take a look at their 10.7 cents earnings per dollar of sales and compare that with other companies.

How about Coca-Cola? Please don’t let the politicians know about this, because Coke has 15.6 cents earnings per dollar of sales—one and a half times that of Exxon Mobil! If Washington finds out, any number of things could happen. For instance, they could hold Congressional investigations, perhaps trying to link Bush to syrup production, or they could impose an excess profit per bottle tax and direct the proceeds into the Bridge to Nowhere in Alaska. Or, similarly to the proposed ridiculous $100 rebate they want to send us to “help with fuel costs,” maybe they’ll give us each a $10 check for purchasing an alternative soft drink or a tax credit for buying diet drinks.

America is using more oil and gas each year. India and China have increasing demand for fueling their rapidly growing economies over a long period of time. So how do you rationally take advantage of these facts? Run your financial and technical screens on the oil producers, refiners, and providers of offshore drilling services, and acquire those with the best results. Alternatively, you can get broad diversification in these areas with Exchange Traded Funds. One additional thought: If Exxon Mobil’s profit of 10.7 cents per sales dollar is obscene, how about the taxes on each gallon of gasoline? Federal tax is 18.4 cents, to which Missouri adds 17 cents, for a total tax of 35.4 cents.

Think anybody in Jefferson City really wants you to drive less?

Clark Davis is a 37-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.[[In-content Ad]]