Now there is an obvious, snarky, liberal point to be made here. They say that they need the profits to explore for oil so what are they doing playing financial games with them? The point could be made and the point would be true.

But Wonks Anonymous does not want to be your average, low value added, liberal blog. Instead he would like to invite his readers to consider an interesting point in the theory of the firm:

Firms, because they are run by large shareholders, generally invest their profits in a way that brings the greatest possible return for these shareholders. 

A firm like a tobacco company that has high profits but low expectations for growth - due to the decline in smoking and continued public health efforts against the habit - will give its profits back to the shareholders as dividends or even use them to buy out some shareholders while raising the stock value for others.

A firm that sees the prospect for fast and profitable growth - the proverbial dot com firm during the Clinton economic boom - will retain its profits and plow them back into the business.

Exxon is acting like a firm with low expectations for growth. This cannot be because it expects oil demand to falter at any time in the near future. The growth of India, China and other developing nations will assure continued growth of demand for some time to come. It must be because Exxon does not believe that it can make investments that will significantly increase its ability to supply oil.

In their public statements the oil companies may be telling us that there are vast pools of oil that they cannot drill because of regulations or that they will drill just as soon as their earnings are high enough to finance the investments. At least one oil company is acting as if it is operating in a highly profitable market that has little or no growth potential.

One of the basic lessons in economics is this: People can say anything. Their actions will show their true motives and beliefs. Exxon is not betting the farm on higher oil production.

Note that higher oil prices still have an economic purpose. They discourage oil consumption and spur innovations that will further lower consumption. But note well that higher oil prices will do this just as well if they are taxed away by the government through a carbon tax or an excess profits tax. Exxon shareholders and international oil producers do not have to be the only ones who gain from this necessary adjustment.