Oil Companies: Manipulation of Stocks - Essay Example

OIL COMPANIES: MANIPULATION OF STOCKS (Companies do capitalized expenses as to have higher assets) According to Public Citizen Report, the average UScitizen is paying more for gasoline than the normal price in the competitive market, it is believed that the oil companies are using the windfall profits to buy back their stocks rather than make investments in sustainable energy. It is suspected that the oil industry is taking advantage of its monopoly based on huge market control and lax energy trading oversight to gouge the public, squandering the opportunity to invest in cleaner, sustainable sources and curb the nation's dangerous addiction to oil. GAINS FOR THE OIL COMPANIES (Most of the assets of oil and gas companies are intangible in nature there fore are easy to be manipulated) According to the report, titled, Hot Profits and Global Warming: How Oil Companies Hurt Consumers and the Environment, the soaring prices are not dampening demand because most families have little leeway to alter their driving habits. Federal government statistics show this summer's gasoline demand up between 1.6 and 1.9 percent from 2005. The increased prices of gasoline have translated into record oil company profits. In the first six months of 2006, the five largest US oil companies posted $59.4 billion in profits. These companies have spent $112 billion since 2005 to buy back their own stock and pay dividends rather than invest in infrastructure or alternative energy sources, according to analysis done by Public Citizen. (Raymond J. Learsy. The Blog Eat The Press Becoming Fearless. The Huffington Post). In this regard, the American government summoned British Petroleum before the House Committee on Energy and Commerce for clarification. It is alleged that the company allowed its Alaska pipelines to deteriorate despite such large profit margins, causing a partial shutdown of oil production in the US's largest oilfield and temporarily driving up global oil prices. Surprisingly it was reported that the officials of British Petroleum responded that the profits and saving secured were adjusted with the losses the company suffered due to the fluctuation of oil prices. The company was able to convince the panel easily, however the later reports indicated that the company in actual manipulated the accounts, and invested the money for the purchases of physical equipments which were off the record. British Petroleum has claimed itself to be renewable energy leader; it invested only $800 million a year in solar, wind, natural gas and hydrogen energy, less than 2 percent of the total amount the company posted in profits, stock buybacks, dividend payments and cash reserves in 2005. "Under the current market framework, oil companies aren't making investments in ways to break our addiction to oil and apparently have no intention of doing so," said Tyson Slocum, director of Public Citizen's energy program and the report's author. "With $1 trillion in assets tied up in extracting, refining and marketing oil, their business model will squeeze the last cent of profit out of that spent capital for as long as possible." (Johnston, 2005) IMPORTANCE OF RESERVES (Why reserves value are so important) It is understandable that fraction of the profits stem from the international rise in the prices of petroleum, the report has mentioned that, large oil company mergers have squelched competition and has created negative impact on US consumers. Recent mergers between giant oil companies such as Exxon and Mobil, Chevron and Texaco, and Conoco and Phillips have resulted in just a few companies controlling a significant amount of gasoline in the US. Since 2005, the largest five control 55 percent of the refining market, and the largest 10 dominate 81.4 percent. The purpose of these exercises was to increase the amount of reserves produced and refined by the merged company. These exercises are further responsible for giving a strong image to the company, on the basis of their production activity. It is to be mentioned that the company's total production record helps it to secure certain privileges, and also the company is in the standing of those favorites which are to provided with further exploration opportunities, because of their success record and production contribution. It is therefore alleged that Oil company practices have affected the national and international economy, and the environment, because their success record is more fabricated. MANPULATION OF ACCOUNTS (Talk generally why companies do manipulate their accounts) According to the report of Public Citizen, it was recommended to devise a plan for introduction of certain reforms in US energy market. It was stressed that the implementation of a windfall profits tax, repealing all existing oil company tax breaks and loopholes, and dedicating the revenues to financing sustainable energy solutions. It also recommends re-regulating energy trading exchanges to restore transparency and strengthening anti-trust laws to crack down on oil companies' anti-competitive actions. "It is clear that in the next decade we need to transition to cleaner, sustainable energy as a solution to environmental degradation and global warming," said Public Citizen President Joan Clay brook. "But as long as the oil industry is able to manipulate markets to garner record profits and is not required to invest responsibly in our energy future, it will be a key part of the problem." During 2006, Conoco Phillips reported jump of 66% to $13.5 billions, and massive gains were reflected by Exxon Mobil, Shell, and British Petroleum. It is believed that greater the profits of oil companies, the greater the risk to national security of the country and region. The higher oil company profits go hand in hand with higher oil prices. Higher oil prices have so far resulted in the massive transfer of wealth to nations, which has is responsible for the dissemination of hate filled preaching propagating the demise of region and coordination. High oil prices are the enabler of dysfunctional governments, tyrannical to their own and in an era of the proliferation on weapons of mass destruction, increasingly dangerous to the world at large. (Bush, 2006) It is a wrong assumption that profits of the oil company are fair reflection of free markets at work. It is alleged that, Oil commodity is a rigged market and the oil companies are riding the coattails of this manipulation to ever greedier levels by taxing the public, by selling them back the nation's natural resources, gas and oil, at profit levels that have little or nothing to do with the cost of production. Therefore it is considered that the company normally manipulates their account on two pretexts, firstly to reduce the taxation amount, and secondly the manipulation is practiced so that the company's financial standing gives firm impression. (Companies do manipulate in order to attract the attention of share holders) According to a recent New York Times (January 23, 2006) article, the prices reported to Government agencies on transfer values are so rigged or illusionary they have little to do with actual sales prices to legitimate third parties or end consumers. It is alleged that the royalty system is a patchwork of an oil friendly administration and the influence of certain lobbyists, who have allowed the permission for oil and gas extraction on public lands and Coastal waterways at minimal benefit to the public, the presumptive owners of these resources and for maximum benefit to the oil companies and their shareholders (Asheville Global Report, 2006). It is believed that, the rigging of prices is done outside the purview of present laws to the enormous benefit of the oil patch, and is repugnant to the current ethical code for the oil companies. To achieve high prices and profits international oil companies do not need to collude, the OPEC (Organization of Petroleum Exporting Countries) cartel does it for them. OPEC controls some 40% of the Worlds oil production, enough of a corner on the market to have a major influence on prices by restraining production or limiting their capabilities. Oil patch has corrupted the OPEC cartels' machinations while being the OPEC cartels' biggest cheerleader, the OPEC cartel is simply the manifestation of market forces, and a kindly group of nations struggling to meet our energy needs. It was reported that, the rise in the oil prices, brings heavy profits for the companies, whereas the companies reflect carefree attitude and sense of responsibility for expansion and growth in the investment. The manipulation of the accounts is also practiced to secure local and private investment through shares, and the higher borrowing of shares is the reflection of the fact that the company's performance and growth is up to the mark of satisfaction. Therefore, it is reported that the oil companies hire the services of the local brokerages to activate their shares dealings in the market to secure capital and growth. INVOLVEMENT OF OIL COMPANIES AT INTERNATIONAL AND POLITICAL SCALE (Companies do increases their reserves for defense purposes, so their sister companies might have fear of approaching them for take over deal, so difficult to be taken over by the others) The Oil companies do have fears of takeover and mergers, but certain oil companies have avoided those by increasing their reserves and their involvement into the international oil market. The involvement of oil companies into Iraq and other international markets is much because the companies are able to develop their strong quantitative repute in terms of number of projects, finances and oil production. This given paragraph is the explanation of practices of the Oil companies to secure gains, and then this gain protects them from any persistent threat of mergers and takeovers; instead it gives an impression to other companies that the company itself has the financial potential and enough resources to shakeup the oil market and the performance of the oil companies. In the past, it is suspected that oil companies have been involved into different schemes of political nature to achieve their purpose of high returns. The oil companies have been involved in certain practices, where it has deeply influenced and tried to achieve the gains by compromising over the interest and requirement of normal citizen. All this was practiced because the company wanted to reign over other contenders in the field, to dominate and influence. Since the Persian Gulf War in 1991, companies from more than a dozen nations, including France, Russia, China, India, Italy, Vietnam and Algeria, have either reached or sought to reach agreements in principle to develop Iraqi oil fields, refurbish existing facilities or explore undeveloped tracts. Most of the deals are on hold until the lifting of U.N. sanctions. The actual goal of these oil companies it to secure and achieve investment. While the US administration's campaign against Hussein has presented vast possibilities for multinational oil giants, it poses major risks and uncertainties for the global oil market, according to industry analysts. But the oil companies are ready risk, because these companies are certainly optimistic about the financial prospects. Although the volumes have dwindled in recent months, the United States was importing nearly a million barrels of Iraqi oil a day at the start of the year. So the oil companies are into the game, and are dominant contenders. The French company Total Fina Elf has negotiated for rights to develop the huge Majnoon field, near the Iranian border, which may contain up to 30 billion barrels of oil. Companies such as Exxon Mobil and Chevron Texaco would almost assuredly play a role, it is believed that, there's not an oil company out there that wouldn't be interested in Iraq, which is because it will secure their profits, and their revenues likely going to surge tremendously. The oil companies have been successful in creating a plot, to achieve huge gains for themselves. (Fanning, 2001) FINANCIAL SCAMS AND MISUSE OF AUTHORITY: FIGURATIVE ANALYSIS (Directors are been paid based on the level of reserves so the higher the reserves the higher their level of bonus, and other entitlements) There are reports and accusation against the CEOs of the oil companies for their excessive financial earnings, according to the reports the CEOs are accused of running the business not purely on the bases of private and public partnership, and the CEOs are accused of exploiting the financial rights of the employees. It was reported that the former CEO of Halliburton David Lesar earned more than $26.6 million in 2005; although during the same period the company was involved in series of scandalous proceedings. It was believed that the CEO of the company was able to secure the fortune worth $50 million he has made after the launch of war against terror. Surprisingly, the company quoted that the high pay of the CEO was on the account of the company's current oil and gas production; such practices have been highly criticized in the public, because it is only the directors and CEOs who in actual receive the financial perks, the middle and lower working staff received minor proportion of rise. According to the reports, the leading fifteen U.S Oil companies are paid more than 300 percent of the average CEO compensation relative to the comparable sized business. It was reported that more than 15 U.S. Oil CEOs were offered an annual package of more than $32.7, as compare to the CEOs of other corporate where the figure stands at $11.6 million. In 2005, the leading Petroleum profiteers secured more than fifty percent of their previous year salaries. Surprisingly, the middle and lower workers were offered a rise of only four percent in their salaries as compare to their earnings in 2004. The leading profiteers were paid more than 500 times the wages of the normal worker in the oil and gas sector. 'The disparity between U.S. CEOs as a whole and average U.S worker is 411:1', (Sarah, 2006). It is reported that Halliburton CEO David Lesar secured more than $26.6 million last year. Martin Koffel, the top executive at engineering company URS, secured more than $ 14.4 million in 2005, which are twice his earnings in 2004. (Sarah, 2006) REFERENCES 1. Dan Morgan and David B. Ottaway. In Iraqi War Scenario, Oil Is Key Issue: U.S. Drillers Eye Huge Petroleum Pool. Washington Post Staff Writers. September 15, 2002; Page A01. 2. Evelyn Leopold. UN Set to Probe Fraud Allegations in Iraq Program. March 16, 2004. Reuters. 3. Oil companies manipulate markets and gouge consumers. Sept, 2006. Asheville Global Report. 4. Raymond J. Learsy. The Blog Eat The Press Becoming Fearless. The Huffington Post. 5. Louis Turner. Oil Companies in the International System. Royal Institute of International Affairs. G. Allen & Unwin. 1980. pp.11 6. David C Johnston. Introduction to Oil Company Financial Analysis. Penn Well Books. 2005. pp.154 7. Mary E. Williams. The Middle East. 2000. Green haven Pr. pp.56. 8. James Bush, Daniel Johnston. International Oil Company Financial Management in Non-technical Language. Penn Well Books. 2006. pp.145 9. Leonard M. Fanning. Our Oil Resources. McGraw-Hill. 2001. pp.12 10. Sarah Anderson, John Cavanagh. Executive Excess 2006. Defense and Oil Executives Cash in on Conflict.13th Annual CEO Compensation Survey. 2006 Read More