Ungodly Oil Profits?

There have been two recent items about oil profits which have provoked my interest enough to write about them.

The first, by the Emirates Economist, says

Short-run demand for petroleum is inelastic, meaning that a fall in supply translates into percentage increase in price that is greater than the decrease in quantity consumed. As a result, negative supply shocks drive up revenues and can drive profit as well. What does this prove? That despite its size Exxon and its fellow producers were not exploiting market power – otherwise they would have done on their own what a string of hurricances did instead.

He very wisely points out that

It is only because government has been able to maintain a reputation not to grab profits that oil producers invest in exploration and production.

This long-run view is crucial for economic development.
The second item, by Kip Esquire, says,

[ExxonMobil] announced profits of $9.9 billion on sales of $101 billion. For those who cannot divide, that is a profit margin of 9.9% of sales. Since when is a profit margin at a cyclical peak of 9.9% considered “staggering”?

Microsoft makes 30%, in good times and bad, with a fraction of the investment or risk [ExxonMobil] takes. … Procter [&] Gamble makes a margin of nearly 13% of sales selling toothpaste and detergent but we are going to begrudge oil companies 7.6% on average and 10% in their best quarters?

While I agree with the tone of his posting, I think a better comparison would be the rates of return on equity, not the rate of return on sales. Rate of return on equity better captures the opportunity costs of the shareholders’ financial investments; and rates of return on sales can vary dramatically across industries for reasons that have nothing to do with market power. Furthermore, there seems to be some evidence that oil profits have fallen, now that oil prices have declined.

Back in the late 1970s, I used to tell people who were affronted by the large profits of the oil companies that they had a chance to get in on the profits themselves by buying the stocks of those companies. That they chose not to do so should not be taken as grounds for punishing or taxing those who did.

Some Muslim Reactions to Ahmadinejad Call to Wipe Out Israel

The reaction of the Muslim press has been mixed:

The Iranian president’s call for Israel to be “wiped off the map” has received a sympathetic ear in some Arabic papers, which say it was a justified device to focus attention on the Palestinians’ plight.

Others however believe the remarks were ill-advised and counter-productive.

Some of the editorials are frightening in their misrepresentations and dogmatism in blatant support of Ahmadinejad. Others are more balanced. [thanks to Jack for the pointer]

Signs of Rank and Status

With some frequency, we receive e-mails of the following nature at The University of Western Ontario:

The flag will be at half staff on [insert date] from 8:00 am to [insert time] in memory of [insert name], [insert position and rank] with [insert number] years of service.

It appears that the longer one worked here, and the higher the rank, the longer the flag is left at half-mast. The process of assigning different castes to different deceased employees is grotesquely insulting to the memories and survivors of those who have died.

My friend, BenS, says he knows his former colleagues will celebrate when he dies, and so he would like the university to lower the flag in his memory now, while he is still alive, so that he can participate in the celebrations.

BF has wondered whether a new hire who dies suddenly would have the flag dipped in his/her honour for ten seconds or so. Maybe I should hire a work-study student to collect data and estimate the decision rule that is used.

When I retire, I want my employer to dedicate a urinal in the Socionomology Department to my memory (but, like Ben, I’d rather hold a dedication ceremony now, while I am alive, so I can enjoy it, too). It turns out that the concept of “The John Palmer Memorial Urinal” is neither unique nor original.

This is all in sharp contrast to how Phil’s Dad was memorialized.

Still More Sudoku

We are slowly weaning ourselves off our addiction to Sudoku (see here, here, and here). But not completely.

Meanwhile, Brian Ferguson recently sent me this comprehensive set of links to Sudoku from The Times.

Spider Stalemate

I realize I don’t appear to manage my time as efficiently as others. But given my preferences and abilities, who is to say what is efficient and what isn’t?

Anyway, before I became addicted to blogging, I played a lot of Spider solitaire. I played at the medium difficulty level. One question keeps bugging me:

In order to get the game to deal out a new set of cards, each of the columns must have at least one card in it. What happens if you’ve managed to peel off a whole bunch of runs, and there aren’t enough cards left to fill each column? I’ve never done this, but it looks as if it should be possible.

I wonder if blogging and playing Spider fit the advice cited in the Marginal Revolution, “If you want to improve your well-being, make sure that you allocate your time wisely.”

Great pick-up line?

From Overheard at Western. The incident occurred outside a club with a wild reputation:

A guy is standing on a street corner. He has one boot on, one socked foot out in the gutter, and is yelling at girls across the street…

Guy: Hey baby! You have diabetic ketoacidosis! I can save you!

Mystery Dinner Theatre

This weekend, I am performing in another Mystery Weekend at the Forest Golf and Country Club. The show begins after dinner this evening (Friday) and continues through the entire weekend until mid-morning on Sunday.

We actors must stay in character the entire time, which is both challenging and fun. The show is “Circus Murder”, and I play Swami, a fortune-teller. As one might readily imagine, there will be considerable forecasting about oil prices and housing prices and anything else I can make up on the spot.

Last spring, when I was in one of these shows, I was able to use the hotel’s internet service to keep blogging. I expect to be able to do so this weekend as well.

I have been traveling quite a bit lately. I have been able to keep up with posting to the blog, but just barely, and doing so has meant that I have not had the opportunity to reply to all the comments. Please accept my apologies. I appreciate the comments and next week my life might return to normal.

How Useful Is Game Theory?

from Steven Levitt:

Unfortunately for game theory, the simple ideas that are so alluring were quickly mined. What followed was less interesting. Modern game theory has become extremely mathematical, notation heavy, and removed from everyday life. Many of my colleagues would not agree with me, but I think game theory has failed to deliver on its enormous initial promise. I’m not the only one who feels this way. I was recently speaking with a prominent game theorist. He told me that if he knew what he knew and he were just getting started in the profession today, no way would he be a game theorist.

from John Lott:

If economics isn’t testible, you don’t have a science. Having a certain richness is nice, but there are simply too many game theory models that end up making similar predictions. When you can’t even differentiate monopoly behavior from perfect competition in predation what good is it? Indeed the goal frequently seems to be how many different models can be generated. I also agree that Game theory creates a bias towards thinking about everything in terms of monopoly. What is interesting in Game Theory disappears when you assume that firms are behaving competitively. For whatever it is worth, I wrote a book on all this entitled: “Are Predatory Commitments Credible?” Take a simple example in Predation to show how sensitive the results are. All the models basically look at the information held by the predatory firm. But what if the victim firm can sell short the stock of the predator? Given that the costs to the predator from actually engaging in predation are so large, indeed much greater than the losses imposed on the victim, victim firms that sell short the stock of the predatory might not only hope that the predator enters the industry but the victim firm might now want to stay in the industry just so that they can benefit from the predator’s losses. Of course, the very possibility of short selling can make it unnecessary. The whole thing is a mess.

from William Polley (where there is a wonderful summary of the recent discussion by others not cited above):

Game theory, like any model building apparatus, is a way of keeping track of what’s going on so that you don’t contradict yourself. I certainly understand the frustration of Mandel and others over the non-falsifiability of models with multiple equilibria. (See also the story Roberts relates in his post.) However, I think a number of important real-world situations may be characterized by coordination failures and multiple equilibria. It is worth having a framework that can accommodate that, as long as you don’t start seeing multiple equilibria behind every tree. It’s not a theory of everything… at least not yet, and it may never be. It’s one more tool in the toolbox, useful for identifying the effect of changes in the rules or institutions and making sure you don’t violate your own assumptions.

I’m sure Polley is correct, but I really prefer the the overstatements of Levitt and Lott. For a brilliant and very readable introduction to game theory and the prisoners’ dilemma, read this.

Another Important Reason to Stop Iran from Developing Nukes

From Yahoo and the Associated Press [h/t to Jack]:

President Mahmoud Ahmadinejad declared Wednesday that Israel is a “disgraceful blot” that should be “wiped off the map” — fiery words that Washington said underscores its concern over Iran’s nuclear program.

… Referring to Palestinian suicide bomb attacks in Israel, Ahmadinejad said: “there is no doubt that the new wave in Palestine will soon wipe off this disgraceful blot from the face of the Islamic world.”

Ahmadinejad’s speech came hours before a Palestinian suicide bomber blew himself up in the Israeli town of Hadera, killing five people. Iran aids several militant Palestinian groups, including Hamas and Islamic Jihad, with support and training through proxies among Lebanese Hezbollah guerrillas.

Does the world really want a guy like this to have his finger on the button? His anti-Semitism is appalling (though expected), but his confirmation that many Muslims want Israel anhilated should serve as a warning to everyone else.

Update: Melanie Phillips has considerable detail in her insightful response.

With its customary hypocrisy, the alleged civilised world has recoiled in horror at the declaration by Iran’s President Mahmoud Ahmadinejad that Israel should be ‘wiped off the map’. So he’s a genocidal, Jew-hating maniac. So what’s new? Iran has never made any secret of its intention to annihilate Israel. It exports demented anti-Jewish and anti-Israel hatred to the Muslim world, it funds terrorists to murder as many Jews as possible (see the most recent victims this week in Hadera) and it is racing to build a nuclear weapon so that it can expeditiously carry out its professed aim to eradicate the Jewish nation state.

All this the world has known; and yet it has sat on its hands, occasionally extricating them to be wrung over Iran’s accelerating nuclear programme before resorting to the tried and tested strategy of maximum uselessness, diplomacy through the United Nations — fresh from that organisation’s triumph in disarming (not) that other threat to the world, Saddam Hussein; for which failure the head of its nuclear watchdog, Mohamed al Baradei, was doubtless awarded the Nobel Prize by a grateful Swedish establishment and wider world for whom America, not Iran, appears to be the greatest enemy of civilisation.

So Iran continues merrily on its diabolical way, murdering Israelis here, murdering Iraqis there, serenely building its apparatus of mass destruction while the alleged civilised world looks at Iraq and looks at President Bush and sucks its teeth and settles down to wait for the new Jewish holocaust wrapped in the mantle of sanctimonious opposition to pre-emptive action.

Maybe NOW Posner Will Become a Supreme

With the withdrawal of Harriet “I’m a crony” Miers from the nomination to become a Supreme, perhaps now President Bush will nominate Richard Posner.