Oil Company Profits
With the run up in oil prices, oil companies have seen their profits also run up. For many this is just wrong. That consumers have to pay more at the pump and oil companies see huge profits…why that is positively un-American! Never mind that there is an obvious and logical connection between profits for a firm and the price of the good said firm sells. Such a correlation is due to something nefarious and underhanded not just the working of a well established market.
Let’s run down why oil companies are experiencing such huge gains in profits. Let’s start simple. We have one oil company that is looking at drilling a well. They do some analysis and find that so long as oil per barrel is over $25 then that well is profitable. The current price is $30/barrel and the expectation is that oil will stay near that price for sometime to come. So you have this mildly profitable well. Then things change. Another country starts to experience an economic boom and they start consuming larger and larger amounts of oil. Turmoil in another part of the world causes market uncertainty as to the steady supply of oil, and people have gotten sloppy and lazy are now driving vehicles that use more gas/mile driven than before. Suddenly the price of oil surges to $50/barrel and you $5/barrel profits on that well have now jumped to $25/barrel. Note that the oil company has done nothing different. They are pumping at the same rate as before, but now for this well, the profits have jumped dramatically.
Keep in mind that the oil market is not simple. ExxonMobil does not go out drill oil, send it to its refineries, and then send the refined product, gasoline, on to its retailers. Instead, what happens is that ExxonMobil drills and pumps the oil. Some of it goes to their refiners, some of it goes to other independent refiners. Some of the oil that goes into ExxonMobil refineries might come from other sources such as Shell, BP, Texaco, etc. Part of the refined product is “branded”—that is, it has an additive added to it such as Chevron’s Techron—however, some of that gasoline is not branded and is sold to anyone who drives tanker truck up to the refinery. The gasoline that is not branded is then trucked over to the retailers and branded. So an Exxon station might have bought its recent shipment of gasoline from Texaco, but is now adding their own additive. All of this is a “good thing”. Why? Suppose you have a retailer who buys solely from the local ExxonMobil refinery, but then that refinery goes down for a planned or unplanned outage. Now what? Does the retailer just sit their with empty tanks making little or no money? No, he gets his oil from the local Chevron refinery, brands it and keeps right on selling.
And most retailers make very little profit off of gasoline. Instead they make a higher profit margin on the items in the Quick-E-Mart that is part of the station. When you are filling up and decide you need a soda and a pack of smokes, they’ve made a higher return on that sale than on the gasoline. The gasoline is what gets you at the station where some customers will buy other more profitable items.
So what would a tax on the oil companies profits accomplish? In regards to the price, I’m not sure it would do a damn thing. Companies exist to earn a profit. Take that away and the company, ideally, will look for something else to make a profit on. Now, the oil companies probably wouldn’t abandon producing oil, but they might look to invest whatever money they do have into something other than producing oil. This is bad because with less money going into producing oil, and with rising demand the supply will be constrained resulting in even higher prices. And who owns these oil companies? Millionaire and billionaires? Sure, I bet some of the shareholders are filthy rich. But I’d be willing to bet that some of the largest shareholders in oil companies are mutual funds…which means IRAs, 401ks, etc. In short, many middle class households have their retirements linked to oil companies. What would happen to those retirement funds if the government were to ride in and like a thief take their profits? My guess here is that those retirement funds will would take a hit. Billions and billions of dollars worth of a hit. A hit that would make Eron look like penny-ante robbery. Keep that in mind next time one of these dimwits running for President blabbers on about oil company profits.
And keep in mind that often times the person who whines about oil company profits is often the same one blubbering on about global warming. Talk about schizophrenic. Hello, McFly! High oil and gasoline prices are good for Global Warming. Higher prices like we are seeing now means people drive less. Less driving means lower carbon emissions. From a global warming view you actually want gasoline prices to be even higher, not lower.
I don’t see why this is so hard to grasp. It isn’t rocket science.