Blame it on “Big Oil”

The price of gasoline has everyone worried.

Presidential candidates Hillary Clinton and John McCain want to suspend the federal gas tax during the summer. Clinton wants to pay for it by imposing a windfall profits tax on “Big Oil” while her Democratic rival, Barack Obama, says that would exacerbate the problem. He thinks the tax holiday would encourage evil Big Oil to raise prices even more, which would inflict greater pain on consumers when the holiday expires.

While I welcome any kind of tax relief– however brief – the attempt to blame rising gas prices on windfall profit-taking by the big oil companies is misplaced.

If that were the case, the answer to solving your personal energy crisis would be simple. Buy oil company stocks! Then, any rise in gas prices would be offset by the profits in your portfolio.

Looking to put a face on the oil companies? Look in the mirror. Contrary to popular opinion, the oil companies aren’t owned by a few high rollers. Only 1.5 percent of industry shares are owned by company executives. The rest is owned by people like you and me. If you have a mutual fund or IRA, there is a good chance you own a piece of the oil industry you are looking to vilify.

When politicians talk about putting a new tax on the oil companies, hold on to your wallets.

Yes, the oil companies are experiencing record profits, but they are not out of line when compared to other industries, nor is the long-term outlook for independent oil companies a bed of roses, as the costs of exploration and extraction are skyrocketing.

The oil industry is capital intensive, and necessity dictates that the lion’s share of a company’s earnings must be reinvested. These costs remain high in boom periods, like the one the industry is now experiencing, as well as bust periods, like the one that occurred in the 1990s.

Big Oil makes its money by pumping oil out of the ground, not refining and selling it as gasoline. Only a tiny fraction of Exxon’s $36 billion profit last year came from making and selling gas in the U.S.

The price of gasoline is not set by Big Oil. It is set by futures exchanges around the world and is a direct result of supply and demand. As the world’s demand for gasoline has increased, it has all but exhausted the world’s surplus production capacity. No new refineries have been built in the U.S. since 1976.

Governments own three-quarters of the world’s known reserves. Flush with oil revenue, these countries have little incentive to expand their production.

The U.S. is the third-largest oil producer. However, our government has restricted the supply of oil in the ground by putting more and more of our known reserves off limits, specifically parts of Alaska, the Pacific and Atlantic coasts and the Gulf of Mexico. In fact, Exxon – the top U.S. company – is ranked only 14th in the world in terms of oil reserves. In addition, our government has made it more difficult to build and refine oil into gasoline.

Profits reflect the size of an industry, and the oil industry is HUGE! From 2003 to 2007, average earnings for the oil and natural gas industry were approximately 8.1 cents for every dollar of sales, which was only a penny above the average of all U.S. manufacturing industries.

In fact, in 2007, the oil and natural gas industry earned 8.3 cents for every dollar of sales compared to 7.3 cents for all U.S. manufacturing. When you take out the financially challenged auto industry, U.S. manufacturing came out slightly ahead of oil and gas, earning 8.9 cents for every dollar of sales.

Oddly enough, our oil and gas companies pay more in taxes, as a percentage of their income, than our manufacturing companies. In 2006, the oil and gas companies’ income tax expenses averaged 40.7 percent, compared to 22.1 percent for U.S. manufacturing companies.

With gasoline prices on the rise in this silly political season, you will hear more rhetoric about taxing the oil companies’ windfall profits, with little time devoted to the amount of those profits that must be reinvested to meet future needs.

Also, it is important to remember that companies do not pay taxes, individuals do. Taxes must be passed along to consumers as part of the cost of doing business. Real people always will (always have) pay the cost of higher taxes. Let consumers – and voters – beware!

9 thoughts on “Blame it on “Big Oil”

  1. As someone who works in the Industry, the one thing you missed in the article was the fact that it is not in the best interest of oil companies to build new refineries. The notion that they cannot build any new ones is corporate spin. By limiting the number of refineries the price of gas can be controlled.

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  2. When oil prices go up production sharing contracts with host countries abroad require that more production be shared with host countries. This reduces the quoted output of the operating company, as recently reported by ExxonMobil.

    Refiners find it more economical and practical to improve throughput in present refineries than to build new ones because of environmental restrictions, long lead times, etc. However, this increases our vulnerability to storms and terrorism.

    Companies like ExxonMobil spend more on share buy-backs than on E&P or capital improvements because of the lack of prospects. Examples of denial are Point Thompson and ANWR in Alaska as well as the moratoriums on our East and West Coasts.

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  3. Thank you Jane. It is imoportant for people to understand that the “high profits” that oil companies are making are no higher than most other businesses make, and in fact are much lower than those of such as MicroSoft, Intel and other tech companies that are not as important to our lives as things related to oil. The big tragedy of the oil crisis is going to be the food shortage created by the use of food crops to suppliment the alleged shortage of refined gasoline. As far as the government removing the tax for just the summer is concerned, I’m afraid what we would see is gas prices remaining as they are now during that period, and then a jump of at least 18 cents a gallon after they are reinstituted. Until we get rid of the Chuck Schumer mindset in Washington and begin drilling in our own land and offshore where we can, we won’t see any drop in prices.

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  4. Ms Chastain has joined the multitude of conservative apologists for big oil. But what I never see talked about is how so much of this problem of people viewing Big Oil as greedy and uncaring is of their own making.

    Look at what happens when a disaster strikes, such as a hurricane. Almost without fail, waht do you see? Budweiser immediately switching their lines to produce bottled water and sending their trucks to the site. Store such was Walmert and Home Depot kicking in to help. Big companies of every sort donating to Red Cross and other help agencies.

    And who is nearly always missing? Big Oil. I have purposely carefully read newspaper articles and looked through donar lists and found so many companies and individuals going for the good will. But Big Oil acts like the bully in the corner with all the marbles who refuses to let anyone even play with one.

    Then they run crying to conservative bullhorns when officials turn on them and say, “those greedy s.o.bs, if they won’t ever help when asked then I guess we will just have to pry it out of their greedy fingers!”

    And I say go to it. They deserve everything they get. And hopefully, one day, everyone will be driving hybrids and generating with solzr and wind power. And the fat cats and shieks will be left with barrels of oil that no one wants.

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  5. Jane,
    You, I and all conservtives must beat this drum and beat it loud and long!
    If ever there were an indictment of our school system then all one would have to do is point to the fact that the left can demagogue the “profit” with out mentioning the “profit margin”–and no one is the wiser!
    It’s the same way a failing business can conceal it’s sad state of affairs by talking about hving a good “cash flow”–with the problem usually being that the cash is “flowing” out in the form of red ink!
    Keep up the good work!
    Besides, the arguments about surplus and controlled refining are shot down when one looks at the reluctance of our pols to actually do anything about getting more oil–all that has been done for 12-20 years is talk! Drilling is the answer!
    Keep up the good work!
    Luke

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