Free For All - The Free Liberal Blog: Margins “Don’t Matter”?

August 2008

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I happen to think talk radio is a great thing. Issues of the day are sometimes discussed in something more than a sound bite, and of course we get to hear the callers. No random sample, surely, but the callers give us a glimpse of what “real” Americans think.

Still, talk radio is dangerous. Mostly because I sometimes hear blatant, ridiculous falsehoods uttered by otherwise informed people.

Bill O’Reilly of late has been banging the drum against the oil companies. He picks up on Congress’s concerns about “excess, windfall profits” by the likes of ExxonMobil.

As I pointed out back in November, the reportage on oil company profits completely miss the point. Profit margins have edged down, not up, for Exxon Mobil. This is no surprise. With supply under pressure, ExxonMobil’s costs go up, which they pass onto consumers, and then revenues go up. In the process, because prices tend to be “sticky” – adjust more slowly than costs – profit margins have actually fallen a bit. (Of course, this over-simplifies, as the income statements of oil companies have a number of complexities, but this I think captures the basic facts pretty well.)

O’Reilly, who seems to have invested a lot of his reputation as being “for the folks,” has been confronted with this rather important fact.

Rather than admit he made a mistake, he yesterday made an astounding statement:

“Profit margins don’t matter.”

Hmm, that’s news to me. Having worked for publicly traded companies and dealt quite a bit with Wall Street, I can assure Bill that margins are what Wall Street focuses on. Profitability rates are the key measure for financial performance, yet O’Reilly thinks otherwise. If he doesn’t believe that, he should leave Fox’s Manhattan studios and head to a bar around Wall Street to explain his theory. Or perhaps he should go up to Columbia Business School and teach a class.

I’m confident that the otherwise proud Mr. O’Reilly would be met with scornful laughter about his “theory.” Not one to ridicule, but on this one, O’Reilly’s simply ridiculous.

He then pointed out that sometimes companies allow their profit margins to shrink in order to capture market share. Here, he’s of course correct. But in a near ubiqituous, mature industry like oil, shifts in market share are tiny and inconsequential. That’s why the industry has been consolidating through mergers in recent years, to find economies of scale through cost cutting.

It’s really a shame that such an instructive tool like talk radio is used to confuse rather than enlighten.

-Robert Capozzi