Saturday, May 3, 2008

Oil Company Profits

A couple of days ago, I posted some Thoughts About Oil Company Profits. Today the On-Line Version of "The Wall Street Journal" published this article - "Windfall Profits for Dummies".
This is one strange debate the candidates are having on energy policy. With gas prices close to $4 a gallon, Hillary Clinton and John McCain say they'll bring relief with a moratorium on the 18.4-cent federal gas tax. Barack Obama opposes that but prefers a 1970s-style windfall profits tax (as does Mrs. Clinton).
Again we have a case of the Democrats pandering for votes. This despite the fact that we have tried to place a Windfall Profits Tax on Oil Companies, and it failed to:
  • reduce prices
  • increase Domestic production
  • reduce our dependence on Foreign Oil
Alas, those who fail to learn from History, are doomed to repeat it.
Mr. Obama is right to oppose the gas-tax gimmick, but his idea is even worse. Neither proposal addresses the problem of energy supply, especially the lack of domestic oil and gas thanks to decades of Congressional restrictions on U.S. production. Mr. Obama supports most of those "no drilling" rules, but that hasn't stopped him from denouncing high gas prices on the campaign trail. He is running TV ads in North Carolina that show him walking through a gas station and declaring that he'll slap a tax on the $40 billion in "excess profits" of Exxon Mobil.
Actually there are no "excess profits" being made by the Oil Companies. The raw numbers only look like like an excess because the Oil Companies are so big. By the way the Government already takes 35% of the Oil Companies Profits. That's the Income Tax Rate the Big Oil Companies pay on Profits.
Exxon's profits are soaring with the recent oil price spike, but the energy industry's earnings aren't as outsized as the politicians seem to think. Thomson Financial calculates that profits from the oil and natural gas industry over the past year were 8.3% of investment, while the all-industry average is 7.8%. And this was a boom year for oil. An analysis by the Cato Institute's Jerry Taylor finds that between 1970 and 2003 (which includes peak and valley years for earnings) the oil and gas business was "less profitable than the rest of the U.S. economy." These are hardly robber barons.
Let's put these figures into perspective. The 5 Largest Oil Companies (Chevron, Exxon Mobil Corp., ConocoPhillips, BP PLC and Royal Dutch Shell PLC) earned $36.9 Billion in 1st quarter profits. Gross Sales were over $400 Billion, and they paid over $140 Billion in Income Taxes.

Now suppose we apply the same percentages to a family making $40,000 per year. The Government takes $14,000, other expenses are $22,310 and we have $3,690 "EXCESS PROFITS. How would you feel about a tax on your "excess profits" of $3,690? Does taxing your "excess profits" make you want to earn more?

I mentioned we tried an excess profits tax on energy previously. Here is what resulted.
You may also be wondering how a higher tax on energy will lower gas prices. Normally, when you tax something, you get less of it, but Mr. Obama seems to think he can repeal the laws of economics. We tried this windfall profits scheme in 1980. It backfired. The Congressional Research Service found in a 1990 analysis that the tax reduced domestic oil production by 3% to 6% and increased oil imports from OPEC by 8% to 16%. Mr. Obama nonetheless pledges to lessen our dependence on foreign oil, which he says "costs America $800 million a day." Someone should tell him that oil imports would soar if his tax plan becomes law. The biggest beneficiaries would be OPEC oil ministers.
Right now Gas Prices hurt, but an excess profits tax would hurt a heck of a lot more in the long run.
This tiff over gas and oil taxes only highlights the intellectual policy confusion – or perhaps we should say cynicism – of our politicians. They want lower prices but don't want more production to increase supply. They want oil "independence" but they've declared off limits most of the big sources of domestic oil that could replace foreign imports. They want Americans to use less oil to reduce greenhouse gases but they protest higher oil prices that reduce demand. They want more oil company investment but they want to confiscate the profits from that investment. And these folks want to be President?
As these figures show, we all need to think beyond the emotional political speak coming out of the current Democratic Presidential Candidates.

No comments: