US Economy: Oil Profits Rise as Corporate America Declines

By: CaraTan   Date: 12 September 2008

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Cheyenne, 12 Sep. The increasing cost of oil over the past few years (and especially months), has been hard on consumers at the pump, and elsewhere, resulting in inflation from increased transportation costs, for example. But it has been good for many Big Oil companies.

The obvious industries that benefit are the oil firms. In the US, these big energy companies make up a fifth of S&P 500 profits. This is four times what it was in 2003. Exxon Mobil brought in record earnings of just about $12 billion in profits in Q2 2008. Remember that oil hit $147 a barrel then. And with the S&P 500 (as well as NASDAQ and Dow Jones) at almost-year-long-lows, it is apparent that US industries are worse off than the indicies show: There is $51.6 billion of Big Oil companies skewing these figures.

However, it is expected that this level of profitability will not continue as the price of oil declines. David Rosenberg, a Merrill Lynch economist, calls these falling oil prices a “symptom of demand destruction”. He projects profits in American corporations to be eroded soon due to four drivers: Lower profit margins overall; Companies paying off debt as they become increasingly squeezed financially; Lower energy costs; and Foreign slowdown coupled with a stronger dollar.

Most American businesses have not experienced these troubles yet, but some have. Certainly the sub-prime and credit crises have caused profits to shrink in housing-related industries such as home construction and do-it-yourself-type retailers.

American building suppliers such as Home Depot and Lowe’s have both seen recent declining profits. They are feeling the pressure on both sides: Suppliers are charging more due to transportation costs (shipping lumber isn’t cheap), and consumers are unwilling to pay more. Both these retailers have scrapped plans to open new outlets in the second half of 2008.

The government’s recent $100 billion-plus in stimulus payouts to the public almost certainly helped these struggling businesses, but this was a one-time, short-term blip that cannot be sustained.

It extends beyond builders’ supply shops. Companies such as Toys “R” Us, Clear Channel, Reader’s Digest, and Delta airlines are stuck with considerable debt. Martin Fridson, a corporate debt analyst, notes that there would have been many other bankruptcies, but these distressed firms have borrowed what is called “covenant lite” debt. These are less-restrictive loans that prevent banks from acting upon early signs of financial trouble, so we haven’t seen any collapses – yet.

The fact that Big Oil is getting bigger and that the rest of Corporate America is forecast to slow down is probably no surprise to most of us, although the demand destruction of energy prices may help even things out.

Vladimir Gonzales, EconomyWatch.com

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