Part of the reason for giant oil profits is that the industry itself is huge. But viewed in relative terms, oil and gas earnings are less impressive. The industrys net profit per dollar of revenue was just under 9 cents, compared to 13 cents for the S&P 500, meaning the markup for the oil and gas industry is below average . Remember...the numbers sound big, but its all relative to their revenues...and their revenues are higher because the price of oil is higher
Granted, total profits reported by these companies will be large, because the industry volume is enormous. But why did the integrated oil majors do so well in 2007? The answer is record oil prices, which are set by supply and demand on the world market. I said this in an earlier posts...the oil companies are not setting the price of oil...the free market is based on supply and demand. The average price of crude was $72.30 per barrel in 2007, compared to a historical average of $25.95 during the period 1986 2006. This explains why not only Exxon Mobil, but most of its competitors, had strong years: Royal Dutch Shell earned $31.3 billion, Chevron earned $18.7 billion, and ConocoPhillips came in with a respectable $11.9 billion annual profit.
So now weve pushed back the problem one step, and we have to ask, Why were oil prices so high last year? Perhaps the greedy oil companies colluded to restrict supply, and stick it to the helpless consumers!
The problem with this theory is that the supply of oil is also at an all-time high. The worldwide average number of barrels produced per day was an estimated 84.8 million in 2007, compared to 72.4 million during the period 1986 2006. The oil industry responds to high prices just as any other industry does. When the price of a product goes up, companies have the incentive to sell more of it.
High oil prices in recent years are caused not by supply restrictions, but by huge increases in demand. As the economies of places such as China and India boom, they draw oil and other commodities to them. Higher market prices signal the increased scarcity of these resources, causing businesses and consumers around the world to economize more carefully in their usage, whether that means finding alternate production techniques or carpooling to work. At the same time, the high prices give incentives to locate and develop more oil reserves. Given the economic realities, these outcomes are exactly what we want to happen.
Whether or not one views these market forces as benign, jacking up taxes on oil companies will only make things worse. When you raise taxes on an activity, people engage in less of it; thats the whole point of sin taxes on liquor and cigarettes. But in this case, were taxing the companies who produce oil meaning less production and higher consumer prices.
Raising taxes on the production of oil will reduce its supply, causing oil and gasoline prices to rise even further. They sometimes call it a windfall tax, but in truth crude oil doesnt grow on trees. It can take over a decade and hundreds of millions of dollars of investment to find and prepare an oil field for large-scale production. And this is why Big Oil's profits shouldn't be dismissed as greed.
Oil companies are already paying exorbitant tax bills. In 2006, the industry paid $81 billion in income taxes, and almost certainly paid more in 2007 as profits were higher. (The industry data for 2007 have not yet been compiled.) Also remember that government forecasts of new tax revenues are usually grossly optimistic, because they ignore the reaction of the target industry. President Reagan ended a Carter-era windfall tax on oil companies that had generated only $80 billion during its lifetime, even though proponents of the tax had anticipated a take of $390 billion.
If politicians are concerned about gas prices, they shouldnt erect extra hurdles for those companies in the business of finding new supplies of oil. If the government really wants to do something, it can roll back restrictions on offshore and Alaskan drilling. Beyond that, it should just let market prices and the profit motive do their jobs.
upsidedow sarcastically)
) I see the new cars bragging about 28MPG highway and I'm thinking "What the crap???" Thats HORRIBLE!!! I saw one the other day in Costco, it was a 4 cylinder, and it was small, and got 28MPG hwy. My old 1992 Mitsubishi truck got 28 MPG, and it was geared very low. Thats nothing special. My Maxima is a 6, not a 4, and it gets much better. We've owned 5-6 of the older Maximas, and we've tested 3 of them in the lower to mid 30s on MPG. I don't think the new ones are that efficient.
