4 Questions: First, Why Are Profit Margins Persistently High?

Why are profit margins persistently high? With decent earnings this quarter, corporate profits as a % of GDP will approach (maybe exceed) 10% again. That is abnormally high compared to the period 1960 to 2000. 

Margins actually started to rise in the mid-80s but really accelerated after 2000 and outside of the 2008 crisis have remained high. Why? What changed in 2000 to elevate corporate profits so much? Is this just money illusion?

That might be part of the explanation but I think there is more going on here. High margins should not persist in a capitalist system; they should be competed away. Have we systematically reduced competition somehow? Is anti-trust enforcement too lax? What about the rise of indexing? There has been a theory floating around for some time that indexing reduces competition. If you own a piece of every company in the S&P 500 theoretically you would be better off if these companies colluded to keep margins and profits high. Is that really reasonable though? Or is it possible that it is happening in a non-coordinated way? How?

Are shale oil fields depleting faster than thought? Is it possible that the shale oil revolution has a short, finite life? We know that production from a shale well has a much different profile than a standard well. It starts off very high but depletes much quicker than a standard well. That’s just a function of how the oil is trapped in the shale rock. Once it is fracked – the rock fractured and the oil released – the oil is recovered fairly quickly. Then you need to fracture more rock to get more oil. The question has always been how much oil is actually in that rock and how much can be recovered. And today we are starting to see signs that the answer to that question is maybe not as much as everyone thought. Gas/oil ratios are rising in all of these fields which might be an indication that the oil is depleting more rapidly than initially thought. So far, companies are touting this as a positive by-product but the higher that ratio rises the harder that will be to sell to their bankers. There is no shortage of gas in this country for sure. Could the current oil glut turn into a shortage?

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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