Oil Profits

There has been a lot of back and forth about oil company profits rising about 30% this past quarter. Obama wants a windfall tax; in response conservatives claim that oil company's profits per dollar of revenue are only $.094, while companies like Microsoft make around $.27 of profit per dollar sold.

I don't understand all the complexities of this, but there appears to be a simple error in the argument: We shouldn't measure oil company profits per dollar, but rather per gallon. Using that anlasis:

At about $3.10 for regular this time last year, Exxon made $.28 per gallon.
At $4.10 for the same gallon today, Exxon makes $.37 per gallon.

There is no indication that producing a single gallon costs these companies any more money today than it did before. Even though the prices of a barrel of light sweet crude has gone up, many of these companies drill their own oil, so they don't pay these prices. Even when they do buy from others, their prices are determined by contracts often signed long ago. Need proof? Exxon's profits per dollar didn't change much from last year, indicating that costs didn't change much. The only difference - the number of actual dollars spent on gas went up 25%.


thegameiam said...

you missed a step:

Exxon's profits per dollar didn't change much from last year, indicating that costs didn't change much.

This doesn't take into account the cost of money, the increased transportation costs (yes, oil tankers need diesel fuel, etc), the falling value of the dollar, or the relative revenue per year. You might think that Exxon's costs would be flat, but that's not the case.

Making $.37 on a $4.10 revenue shows that their profit is about 9% Last year, $.28 on a $3.10 revenue is about a 9% profit. This is clearly not an example of gouging - that would be using pricing shifts to hide escalating profits.

Saying that their flat profits are proof that their expenditures are flat is incorrect: you'd need to look at the expense lines of their accounting - profit is revenue - expense, so the only way profit and expense could have stayed the same would be if the revenue was flat, implying that consumption must have dramatically declined - I don't think that this is what's being alleged.

There's lots not to like about oil company policies, but making a consistent profit isn't an unreasonable activity: I think that most companies would be happy to do so.

Maxim said...

Two other things that are missing from your consideration:

1) Compared to the $0.37/gal profits that Big Oil makes, average federal + state taxes are $0.47/gal as of Q1 in 2008 (according to the all-knowing Wikipedia). Let's ask ourselves exactly what is so "unfair" about that situation.

Flipping out about $$Billion oil company profits is a trademark of Jornalists Who Like to Throw Around Big Numbers Because Big Numbers Are So Impressive (especially when said numbers support whatever political axe they have to grind). Less hysterical people understand, for instance, that there are economic benefits to such profits beyond the pockets of Big Oil's executives (e.g. to shareholders of those publicly-traded companies).

2) If an additional tax imposed on "windfall profits" is going to have any effect on prices at the pump, it'll inevitably raise them, and certainly not lower them. Those who support the additional tax as some kind of fix to Big Oil "gouging" consumers are either ignorant or are doing so in bad faith.