Supply, demand, oil and profit

by Rocket Finance

Just a few comments about the major economic story of the summer:

Many pundits and politicians have blamed high gas prices on the lack of competition between the oil companies. I think that theory can be laid to rest. Competition is alive and well in big oil. The fact that we could purchase gasoline at less than $1.50 a gallon as recently as 2002 is Exhibit A and the price drop over the past two weeks is Exhibit B. The laws of supply and demand are hard at work in the oil industry. Consumers are using less gasoline, supply is increasing and prices are plummeting.

The greatest portion of the price of gasoline is the cost of the raw product, about 58% of the final price. The next highest component is federal, state, and local taxes, which vary slightly, but taxes make up an average of 15% of the final cost of a gallon of gasoline. Refining costs average about 12% of the final price, and marketing costs are about 10%. All of the percentages vary slightly, so the actual profit for “big oil” is usually around 5 to 9 percent. Obviously, when the price of oil increases, so do their profits, but remember that when the price decreases – so do profits.

If oil companies were in collusion, why does the price vary from state to state? Why don’t they keep the price the same everywhere – they would make a killing in states where gas taxes are low. Wouldn’t they?

Barack Obama wants to tax “windfall profits” and give it back to citizens in the form of a second stimulus check of $1,000. The idea of taxing windfall oil profits was tried before – by President Carter and did not work very well.

The entity that is making out like a bandit on oil is the federal government. When you fill up at the pump, you are paying 18.5 cents a gallon to the federal government, but that is not the end of the tax bill on oil. Remember that 5 to 9 percent profit? The oil companies are paying an average of 45% of that profit in various taxes to the federal government. Check out the figures here, and a portion of the article:

ExxonMobil’s recent announcement of first quarter profits of $10.9 billion has prompted the predictable political demagoguery about “obscene” profits and the need for a new windfall profits tax. Exxon does not need our help to defend itself against such charges but I remain amazed that none of the major news outlets have highlighted the fact that these are net profits, meaning profits after taxes.

If reporters were to dig just a bit deeper into the company’s earnings statement they would find that Exxon—like all the major domestic oil companies—directly pays or remits a staggering amount of taxes to governments both here and abroad. Before taxes, Exxon had income of $20 billion on total world-wide revenue of $116 billion. Its earnings statement shows that the company paid $9.3 billion in income taxes to governments here and abroad. This amounts to an effective tax rate of more than 46 percent, 10 percentage points higher than the U.S. statutory rate of 35 percent.

In addition to income taxes, the table below shows that Exxon paid or remitted $20 billion in various sales taxes, excise taxes, severance taxes, and property taxes. This brings the total amount of taxes the company paid or remitted to $29.3 billion, nearly three times the net profits it earned for shareholders.

The cost of the “windfall profit” tax would just be passed along to the consumer (you and me) anyway. I am confident that a tax cut for big oil would also be passed along just as readily. States with low taxes already have lower gasoline prices. . .

What is the definition of a “windfall profit” anyway? Who decides whether or not a profit margin is large enough to be a windfall?

Relatively small changes in supply have dramatically affected the price of oil over the last two weeks. Why wouldn’t a little more drilling also affect those prices?

I think that tax cuts for the oil companies are a good idea. I understand that many will not with me on that point, however it is clear that we need all the options on the table: conservation, fuel efficiency, alternative energy, nuclear power, natural gas, coal and increased oil exploration and drilling. One who opposes the pursuit of any of these options is not being honest and has an agenda detrimental to United States energy policy.

  1. 7 Responses to “Supply, demand, oil and profit”

  2. By Deamiter on Aug 11, 2008 | Reply

    … Of course, only around 6.5% of their taxes are paid to the federal government (in 2007) where they get billions in subsidies. They actually pay MUCH less than the 35% corporate tax rate in the US.

    If I complained that I was only taxed 8% on my income, I’d be laughed at!

  3. By rocketc on Aug 11, 2008 | Reply

    I believe thos subsidies are passed along to us . . . if you were only taxed at 8%, you could do some real economic stimulatin’!

  4. By Deamiter on Aug 11, 2008 | Reply

    I’d sure have a hard time stimulating the economy with roads that were falling apart and without emergency services! Some things are just more efficient and cheaper when everybody pays into the same big pot (like health insurance).

    Those billions in subsidies along with an incredibly leaky tax-code, deferred tax payments and taxes on only the money they can’t classify away as expenses means they pay a tiny portion of their revenue in taxes.

    In contrast, if I could deduct food, clothing, vacations, the purchase of my home etc… as “living expenses” I might pay 8% taxes too!

    In reality, the 35% sounds like a lot because we relate it to our income taxes, but it’s quite low and, more importantly, ExxonMobile doesn’t pay NEARLY 35% taxes even on their profits in the US due to subsidies and loopholes. Most of that 46% taxes they pay is in other countries where they can’t play such extravagant games in reclassifying profits to avoid taxes.

    I’m not saying they should pay more, but claiming without evidence that 8% taxes on revenue and a flat 18.5 cent tax is having an increasing and significant effect on gas prices is rather silly. Quite frankly, I’d rather see an increase in the flat gas tax to help cover the soaring cost of road repairs, but of course if the gas tax were a percentage rather than a flat number we wouldn’t have funding problems when the price of asphalt and running heavy machinery went up.

  5. By Amanda on Aug 13, 2008 | Reply

    Part of the reason gas prices vary from state to state is due to different standards required within the state. Some require more processing to reduce emissions, thus the gasoline is more expensive. Different states have different tax rates. For instance Missouri has very low taxes on gas, and gas is usually lower than neighboring states.
    While I don’t blame oil companies for the price of gas. It is hard to swallow an excuse of “We are suffering too” when they make 11 billion in one quarter(3 months) time. It’s hard to understand why more and more companies are raising prices due to the price of oil(which is use to make 1,000 of products not just gasoline) but are posting record profits.

  6. By rocketc on Aug 13, 2008 | Reply

    Yes, you are correct about the different formulas for different areas of the country. My larger point was that if oil companies can lower prices – they will and do.

    That 11 billion dollar profit is a good thing and benefits all of us.

  7. By Neil Collier III on Nov 1, 2008 | Reply


    My comment for you is that would it be possible that the oil companys sponser the stimulus checks (2008) under Bush organization just to raise oil prices to make a profit for the oil companys and his Texas oil buddies.

  8. By rocketc on Nov 1, 2008 | Reply

    your precious Dem’s voted for the stimulus also. Are their intentions pure as the wind driven snow?

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