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Julian Sanchez | November 9, 2005

Legislators are mulling "windfall profit" taxes on "price gouging" oil companies, and Shikha Dalmia has unearthed a defense of oil company profits too honest and straightforward to make it into congressional hearings.

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Amy R.|11.9.05 @ 3:58PM|#

Darma says in the immediate post-Katrina aftermath, "no one outside the disaster area had to go without oil.". Weren't there reports of gasoline supplies being exhausted in nearby states?

It's a minor point, I know.

|11.9.05 @ 4:12PM|#

�Windfall� Profits Tax on Oil Would Slow Flow
...Despite the industry�s above-average risk exposure, Big Oil is not extraordinarily profitable. According to Business Week and Oil Daily, average industry earnings were 7.7 cents per dollar of sales in the second quarter of 2005, also a time of relatively high gas prices. During that same quarter, by comparison, banks earned 19.6 cents; pharmaceuticals 18.6; software and related services 17; semiconductors 14.6; household and personal products 11.3; insurance 10.7; telecommunications 9.6; food, beverage and tobacco 9.4; and real estate 8.9. The corresponding figure for U.S. industry as a whole was 7.9 cents per dollar of sales.

Oil company revenues may be running at record levels, but so is the cost of the industry�s most important input, crude oil, selling on global commodity markets nowadays for about $60 a barrel. Only a few years ago, during Asia�s economic crisis, it was going for $9.40 a barrel....

The Wine Commonsewer|11.9.05 @ 4:14PM|#

Tax Foundation just released a report on oil company taxes. In inflation adjusted dollars oil companies have paid 2.2 trillion dollars in taxes over the last 25 years, which is three times the profits banked by those nasty old profiteers.

I blogged it at TWC (click below) but if you want to, you can just click through to the entire Tax Foundation analysis and see a couple of snazzy charts.

|11.9.05 @ 4:16PM|#

"Weren't there reports of gasoline supplies being exhausted in nearby states?"

I believe that the influx of refugees (sorry, but I can't remember the pc term)into nearby states, put these states squarely in the "disaster area".

|11.9.05 @ 4:21PM|#

"no one outside the disaster area had to go without oil."
until i shot at a rescue tanker

|11.9.05 @ 4:22PM|#

Another link, similar to TWC's, from Mises.org:

http://blog.mises.org/archives/004299.asp

Bryon|11.9.05 @ 4:23PM|#

I would love to know how many billions of dollars the federal and state governments raked in during the same time period. Nobody's asking about that gouging.

|11.9.05 @ 4:25PM|#

This'll show those oil companies for daring to produce something that consumers want.

|11.9.05 @ 4:27PM|#

Ouch!

Good points all...at least on the surface.

Pardon me Shikha Dalmia, have the oil companies as a whole lost any money over the past 20 or so years?

As a commodity, oil doesn't have the market punishments of say orange juice or pork bellies or even gold.

Because the demand is perpetually high (and appears to be getting higher) and supply is...well, let's just say no one's worried about market saturation, oil companies can raise gas prices with impunity.

On top of that, if there's one virtually recession-proof business out there that is being given every break on the books to keep it that way by the U.S. government, it's the oil business. Laws and government subsidies are tilted way in favor of the oil companies.

If the public opinion weather vane is blowing against the oil companies these days, it's in large part because they got in bed with W, Uncle Dick and the rest of the gang a few years back.

Most folks see the "Oil Companies" as one big bunch of friendly guys splitting up a huge pie...kinda like the NFL owners.

As a result, via Haliburton and KBR, oil companies are interwined in the negative perceptions (fairly or unfairly) most folks are having about the war in Iraq.

Many folks see the recent energy bill as a handout to oil companies that pissed on anything that might eventually compete with it. The bill paid anemic lip service to alternative forms of energy.

And many folks have a negative view of the oil companies in relation to the Middle East...particularly Saudi Arabia.

If oil companies have failed to manage their own public perception, it's their own fault. They reaping what they sow. I, for one, am not crying for them.

|11.9.05 @ 4:35PM|#

Good points madpad. I've got no real love for oil companies per se (their all pretty much in bed with the state as you say). But the sheer hypocrisy of the politicians on this whole "windfall profit tax" just makes my blood boil.

|11.9.05 @ 4:36PM|#

Big Oil is not extraordinarily profitable. According to Business Week and Oil Daily, average industry earnings were 7.7 cents per dollar

paid 2.2 trillion dollars in taxes over the last 25 years, which is three times the profits banked by those nasty old profiteers.

WOW! They must be making gas and selling it at a loss because their nice people.

Oil no only is not very profitable but a darn big money LOSER.

Jesus, some folks can't seem to smell bullshit.

|11.9.05 @ 4:37PM|#

"Because the demand is perpetually high (and appears to be getting higher) and supply is...well, let's just say no one's worried about market saturation, oil companies can raise gas prices with impunity."

Even if that were true, madpad, another market will sneak up on them and take over. Oh, wait. That might already be happening because prices are so high.

http://enn.com/aff.html?id=981

"Biodiesel Production Soars; 2005 Production Expected to Triple Last Year�s Figures

The National Biodiesel Board (NBB) anticipates 75 million gallons of biodiesel production in 2005. That�s three times the 25 million gallons produced just one year earlier."

There are 45 biodiesel plants in the United States, with 54 planned or under construction. Many current facilities are expanding. Together, all those facilities would have the capacity for 800 million gallons per year.

We produced 500 thousand gallons in 1998.

This is what happens when the Big Guys look ther other way. This is how the market is supposed to work.

|11.9.05 @ 4:37PM|#

Bryon,

Check the mises.org link.

|11.9.05 @ 4:38PM|#

make no mistake...I am absolutely opposed to the windfall tax. It's bad economics, bad law and bad policy.

I'm just not crying for the bastards either.

|11.9.05 @ 4:41PM|#

I'm just not crying for the bastards either.

First they came for the oil companies...

Ed|11.9.05 @ 4:43PM|#

Brava!

Bryon|11.9.05 @ 4:45PM|#

Gracias. I've been looking for those numbers since this hysteria started.

|11.9.05 @ 4:45PM|#

Instead of being called before Inquisitions, why don't executives pull a Judith Miller and go to jail instead? No balls?

Ed|11.9.05 @ 4:45PM|#

"Bastards"?
I do indeed smell bullshit.

|11.9.05 @ 4:46PM|#

JonBuck,

Yes, biodeisel is an exciting development. And you're right, it's doing exactly what the markets are supposed to do which is also a wonderful thing.

But in the short run, most cars in the U.S. and the rest of the world run on a gasoline product other than deisel. Add China's increasing need and the developing worlds growth aand the need for something to make cars run will continue to go up.

In that same short run, oil demand is high and will probably remain that way.

|11.9.05 @ 4:47PM|#

"I'm just not crying for the bastards either."

We'll I guess I'm not either, but at the same time I'd rather see the profits go the (quasi) private sector firm that actually produces a valuable commodity than to the government which produces little in the way of real value.

Ed|11.9.05 @ 4:51PM|#

I would have added the questions:
When the market works and prices fall, why does no one complain? But when the market works and prices rise, why does everyone complain? Don't folks realize they cannot have their cake and eat it too?

|11.9.05 @ 4:53PM|#

WOW! They must be making gas and selling it at a loss because their nice people.

Oil no only is not very profitable but a darn big money LOSER.

madpad, huh? The passage you were responding to simply says that the oil industry doesn't have as large a margin as many other businesses and that they have paid far more in taxes than they have made in profits. Who said anything about selling below cost or losing money and what do those have to do with the discussion?

|11.9.05 @ 4:55PM|#

Because the demand is perpetually high (and appears to be getting higher) and supply is...well, let's just say no one's worried about market saturation, oil companies can raise gas prices with impunity.

Really? Then why did they stop going up? Why did they go back down?

Guess it must be the kind-hearted oilmen.

R C Dean|11.9.05 @ 4:56PM|#

Christ, madpad, just because the taxes paid by the oil companies exceed their profits doesn't mean they have to be losing money. I can smell bullshit, too, and it from here it smells like you are so eager to bash big oil that your brain has shut off.

I think oil companies are probably in the same situation as tobacco companies. Their product is brutally taxed at various levels that it is now wonder their business puts more money in the government's pocket than it does in the owners'.

I would bet, actually, that a lot of businesses pay more in taxes than they take home as net net earnings. That would be an interesting analysis.

|11.9.05 @ 5:00PM|#

well, let's just say no one's worried about market saturation, oil companies can raise gas prices with impunity.

Then why as recently as the late 90's was I paying record low prices of $0.90 a gallon? And why, as the author states, do the oil companies wait for a disaster to ratchet up prices? If they can indeed raise prices with impunity, they should always be high, but historically speaking they're not even as bad as the late 70's. Why have gas prices fallen the last couple months? I just paid $2.30 a gallon while a few short months ago I was paying close to $3 a gallon.

|11.9.05 @ 5:08PM|#

Instead of taxing their "Windfall Profits" my not just change the energy bill to not give them any of the money they did not need in the first place? Wouldn't that have the same net result?

|11.9.05 @ 5:09PM|#

Why have gas prices fallen the last couple months?

Clearly the windfall profits tax will go through, and it will be retroactive to now. Oil company executives -- bastards that they are and not willing to give up a dime -- will travel back in time to lower the prices and thus their taxable profits. Duh.

|11.9.05 @ 5:16PM|#

Instead of taxing their "Windfall Profits" my not just change the energy bill to not give them any of the money they did not need in the first place? Wouldn't that have the same net result?

Perhaps monetarily it would bring the same net result.

But it would preclude the other important results of (1) the government's mucking with the energy industry and (2) Congresspeople's buying the support of constituents and corporations.

Larry A|11.9.05 @ 5:20PM|#

paid 2.2 trillion dollars in taxes over the last 25 years, which is three times the profits banked by those nasty old profiteers.
WOW! They must be making gas and selling it at a loss because their nice people.

Well, no. First the oil companies paid 2.2 billion in taxes, then they had .7 billion left in profit.

Or if a gallon is <round> $2.50 and the oil company profit is 7.7 cents per dollar then the company makes about 19 cents a gallon. Around here they pay direct federal and state highway taxes of 39 cents per gallon, plus 21 cents sales tax, plus corporate income taxes, etc.

|11.9.05 @ 5:32PM|#

Wow. I never thought I'd see the oil industry in a different light, but I have to say I was educated today.

|11.9.05 @ 5:37PM|#

madpad,
"Pardon me Shikha Dalmia, have the oil companies as a whole lost any money over the past 20 or so years?"

Starbucks has never lost money either. Rather than see that as a bad thing, I'm kinda fond of it. I own a ton of stock, you see, and....

|11.9.05 @ 5:39PM|#

Their product is brutally taxed at various levels that it is now wonder their business puts more money in the government's pocket than it does in the owners'.

I suggest we enact similar legislation regarding federal taxes. When the price of oil goes over some threshold, we slash federal taxes accordingly.

...or don't the fat cats in Congress care about Americans that need gasoline and heating oil?

|11.9.05 @ 5:39PM|#

Ken Shultz,

Brilliant! :)

|11.9.05 @ 5:43PM|#

Ken Shultz,

Nice to see you back. :)

Gene Berkman|11.9.05 @ 5:46PM|#

It should be clear that government policies have contributed to high oil prices. In particular, the Iraq War has caused disruption of oil supplies from Iraq, which before the war was a major supplier to the U.S. under the Oil for Food program.

Republican Senators are attacking the oil companies to distract people from the effect of their war on oil supplies.

Many people supported the Iraq War on the assumption that Iraqi oil would be cheaply available, and the price of gasoline would come down from its exorbitant $1.50 a gallon price. Now it is time to show who is responsible.

|11.9.05 @ 5:50PM|#

not to get all conspiratorial, if that is even a word, but maybe that energy bill was a payoff to the industry to keep them from honestly defending themselves during this obvious act of political grandstanding going on in these hearings.

i can't remember which senator it was that was needling one of the industry reps today to finally answer the simple question "who sets these prices on fuel"

i mean come on, that is just embarrasing

like my spelling

|11.9.05 @ 6:47PM|#

Instead of a "windfall" profits tax, why not eliminate all subsidies and special tax breaks to the oil companies. It is clear they don't need them.

|11.9.05 @ 7:06PM|#

Try telling Houston that the oil industry is recession proof.

Companies that refine gas are normally long on oil. That means that when oil is $60, those companies are making a lot of money. But when oil is $8.50, those companies are forming pressure groups to get the government to stop OPEC from "dumping" oil.

BTW, gasoline is now $1.99 here, down from $3.19 in September.

|11.9.05 @ 7:32PM|#

Brian Courts,

Thanks for your comment below

"Then why as recently as the late 90's was I paying record low prices of $0.90 a gallon?"

I work in the drilling end of the oil business and it is always amusing watching people like madpad go beserk when the price of gasoline goes up for a year. They completely forget the fact the gasoline has been pretty cheap for decades before that.

|11.9.05 @ 7:47PM|#

Madpad,

Take a look at the link The Wine Commonsewer found. I do find it a funny that the politicians who are complaining bitterly about oil company profits have made more money from oil then the oil companies have. link

|11.9.05 @ 7:57PM|#

Madpad,

You said "Many folks see the recent energy bill as a handout to oil companies that pissed on anything that might eventually compete with it."

You must have missed the renewables mandates in the bill and the trainloads of money the bill gave to ethanol producers.

The energy bill was a pork laden (a porkapoolaza) disaster that should have never been passed. It will do little if anything to increase US energy security. The easy solution, don't pass any more energy bills. Might not help but at least it won't make things worse.

|11.9.05 @ 8:02PM|#

Jesus Ammonium, where are you? I'm paying 2.75 in Western Washington, and that's stalled from 3.10 two months ago.

|11.9.05 @ 8:30PM|#

Lets not kid ourselves, the only reason that politicians are holding these hearings is so that they keep their jobs in 2006. The media really hyped this story when the figures (sales and profit numbers) came out. I truly think (at least hope) that politicians know that the high price of oil is not because of price gouging.

|11.9.05 @ 9:09PM|#

I truly think (at least hope) that politicians know that the high price of oil is not because of price gouging.

At least some seem to. From the WaPo transcript, we can look at, e.g., Dominici's questions:

So my first question is, since most of my people and I believe most Americans that we hear from want to know how is the price of oil set? Who sets it? Why does it go up? How does it come down?

Actually, my constituents -- and I believe most Americans -- think that somebody rigs these prices, that in the process somebody is getting ripped off. And they think it's them, the constituents who ask me and the constituents of America who ask this question.

At first glance these sound like the ravings of an economically inept loon. But if you read more closely, you see that he's representing his constituents as economically inept loons while championing their pathetic whining before evil oil company executives. What great politics!

|11.9.05 @ 9:12PM|#

I would just like to say that it bums me out when I see the argument that so and so industry needs to manage its public image better to avoid legislative beat downs. I'm generally in the consequentialist camp, but the very idea pisses me off on first principles.

|11.9.05 @ 9:13PM|#

"BTW, gasoline is now $1.99 here, down from $3.19 in September."

�I�m paying 2.75 in Western Washington, and that's stalled from 3.10 two months ago."

Last time I paid for gas was about year [(+) and (-) a few months]. I'm lucky enough to live in a town that I can walk anywhere I need to go, I don't even need to use public transportation. I totaled buy car and never really got around to buying a new one

|11.9.05 @ 9:14PM|#

"BTW, gasoline is now $1.99 here, down from $3.19 in September."

�I�m paying 2.75 in Western Washington, and that's stalled from 3.10 two months ago."

Last time I paid for gas was about year ago [(+) and (-) a few months]. I'm lucky enough to live in a town that I can walk anywhere I need to go, I don't even need to use public transportation. I totaled buy car and never really got around to buying a new one

|11.9.05 @ 9:15PM|#

"BTW, gasoline is now $1.99 here, down from $3.19 in September."

�I�m paying 2.75 in Western Washington, and that's stalled from 3.10 two months ago."

Last time I paid for gas was about year ago [(+) or (-) a few months]. I'm lucky enough to live in a town that I can walk anywhere I need to go, I don't even need to use public transportation. I totaled buy car and never really got around to buying a new one. It seems that being lazy actually helped this time.

|11.9.05 @ 9:17PM|#

Sorry about the the posts ;)

The Wine Commonsewer|11.9.05 @ 9:38PM|#

Bryon, sorry I wasn't clear in the post.

The 2.2 trillion taxes paid by oil companies was a grand total of all government taxes at every level, but do not include local property taxes, state sales, severance taxes, or on-shore royalty payments.

|11.9.05 @ 9:47PM|#

"The 2.2 trillion taxes paid by oil companies was a grand total of all government taxes at every level, but do not include local property taxes, state sales, severance taxes, or on-shore royalty payments."

Damn!

|11.9.05 @ 10:31PM|#

>Yes, biodeisel is an exciting development.

Not really. Recent EPA emissions regulations basically outlaw deisel for passenger cars, as well as lean-burn high-efficiency gasoline engines.

|11.9.05 @ 10:55PM|#

What I hate is how people mention price gouging without mentioning collusion. The only way price gouging works in a competitive market is if collusion is occuring. Yet, where are the facts and basis for a collusion charge? Yeah, I don't see it there either.

|11.9.05 @ 10:57PM|#

I feel the need to clarify my position a little.

First on TJIT's post saying...

You must have missed the renewables mandates in the bill and the trainloads of money the bill gave to ethanol producers.

I didn't miss it at all. Let's break the Renewables mandate into 2 groups. Ethanol subsidies and everything else.

Ethanol subsidies are crap. It costs more to make the shit than they can sell it for by some 30 percent. They have to subsidize it. That means I'm going to pay for it at the pump and out of my taxes. Thanks guys.

As for everything else, I addressed that with the statement about the funding for them being "anemic lip service"

As for my statements on oil companies, a lot of what I've said has been taken out of context.

My ultimate point is that saying the oil companies aren't making that much money is flat disingenuous.

Most of what's driving the criticism of my point is the notion that Oil companies are generating outstanding revenue but not much in the way of profit as Illustrated in this line from the article...

Our aggregate profits are so large because we have huge sales. But our profit margins�the more relevant measure�are below the overall Standards and Poor industry average.

Fair enough. So oil company profits are on par - if a little below - profits from other industries.

Oil companies also pay heavy taxes - actually you and I pay those taxes since they come right off of the price at the pump. So assert that "oil companies are being taxed to the hilt" all you want but that's not exactly accurate.

Oil companies by and large also benefit from billions each year in subsidies from the U.S. government. They pay little to nothing in corporate taxes and they just got handed a windfall of their own in the form of the Energy Bill.

My principle gripe has been the pity party visited on an industry with notoriously close ties to the administration and the majorities in both houses.

My point was that they were simply reaping what they've sown and if they wan't to change perceptions, it's on them.

|11.9.05 @ 11:32PM|#

A couple of months ago the Economist ran a headline artical titled "The Oiloholics" in which they suggested that the US government levy a heavy tax on gas to curb consumption. This struck me as odd from the Economist. While they're hardly purist libertarians, they are generally free market. Why advocate artificialy inflating the price of gas? They made no mention of governmebt subsidies, tax breaks, etc. Let alone alone any suggestion to eliminate these first.

thoreau, your a big fan of the Economist(as am I) what was your take on this artical (mabey late august)?

|11.9.05 @ 11:34PM|#

Oil companies by and large also benefit from billions each year in subsidies from the U.S. government. They pay little to nothing in corporate taxes and they just got handed a windfall of their own in the form of the Energy Bill.

I was not aware of this. If you can point me to a source of this, its something to think about. I feel that any industry benefiting from subsities is more accountable because they're already competing unfairly with the market.

|11.9.05 @ 11:37PM|#

Madpad,

You said "My principle gripe has been the pity party visited on an industry with notoriously close ties to the administration and the majorities in both houses."

I see you are also flinging the Halliburton/ KBR stuff around. As I've said before I'm sure Halliburton regrets having Cheney as a CEO. Before Cheney joined them they were just the second largest oilfiled service company in the world. After Cheney became CEO they became evil incarnate:-)

It seems like you don't mind outrageous behavior to the oil companies simply because they are close to a political party you don't like.

|11.9.05 @ 11:44PM|#

Oil companies also pay heavy taxes - actually you and I pay those taxes since they come right off of the price at the pump. So assert that "oil companies are being taxed to the hilt" all you want but that's not exactly accurate.

Very true, but then much of the blame for high gas prices goes to the government? Can we put the government on trial for price gouging?

Oil companies by and large also benefit from billions each year in subsidies from the U.S. government. They pay little to nothing in corporate taxes and they just got handed a windfall of their own in the form of the Energy Bill.

They're also severely limited through regulation. If they were allowed to drill more in the US, gas prices would drop. And those corporate taxes that they don't pay? Well, even if they did, that would only raise the price of gasoline further since, as you mentioned, corporations don't pay taxes...we do.

I have no pity for oil companies, overall they've got a pretty sweet deal. I don't any real pity here for them either, only honest attempts at assessing their relative profits and a general distaste for government sticking it's nose where it doesn't belong. The fact remains that the government plays a much more substantial role in keeping prices high than "greedy, price-gouging oil executives". This whole thing is a sham, and it's only going to make my gasoline more expensive.

|11.10.05 @ 2:49AM|#

My point was that they were simply reaping what they've sown and if they wan't to change perceptions, it's on them.

But they aren't reaping what they have sown. Their obnoxious lobbying behaviors and political friendships are completely orthogonal to the windfall profits issue. They are being harassed simply because they are the suppliers in a price spike where the demand comes from large numbers of politicians' consituents.

The answers to all the idiotic questions the senators have about "Who sets the price of oil?" are well known economic laws. It is beyond rude to publicly chastise oil companies -- much less penalize them -- for being beholden to these economic laws. Remember, to a first-order approximation, it is physically impossible for oil companies to lower the price of gasoline below market rates. There simply isn't enough of the stuff around.

Such demagogic grandstanding not only miseducates a public into thinking something can be done about the purported problem; it's also exactly the sort of behavior that makes oil companies need to lobby for political cover in the first place.

And it results in even more interference and misallocation in a market that can ill afford it, making us all poorer in the long run.

Ron Hardin|11.10.05 @ 3:38AM|#

When there's a sudden supply bottleneck, consumers set the price. The oil companies have nothing to do with it at all.

Consumers bid against each other for the surviving supply. Since the demand for gasoline is ``inelastic,'' the price has to go up _a whole lot_ to choke off demand (elasticizing the inelastic demand). Choke off the demand it does. The alternative method is closed gas stations and alternate-day daylong gasoline lines.

A side effect is that whoever owns cheap oil has a windfall profit. The profit is not a problem, and has short and long term side effects that serve to solve the shortage quickly.

However : a side effect of ``inelastic'' demand is that demand throttles itself down accompanied with outrage, shouts and screams, and a search for a scapegoat.

So there you have the congressional hearings. It's scapegoat theater.

R C Dean|11.10.05 @ 11:09AM|#

You folks who are still paying high dollar for gas should look to your state EPAs. On the West Coast, the states require all kinds of goody formulations for gas, which means you are buying a specialty product that will always be slow to decrease in price.