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.
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!