Gas prices, oil company profits, et al. May 5, 2008
Posted by JP in Discussion, Politics, Venting.trackback
May 5 (Bloomberg) — Crude oil rose more than $2 a barrel on concern that production disruptions in Nigeria, Africa’s biggest producer, will limit supplies.
Militant attacks on an oil-transfer facility in the country forced Royal Dutch Shell Plc to reduce output, the Associated Press reported May 3, citing the company. The Nigerian Movement for the Emancipation of the Niger Delta, or MEND, claimed responsibility for the weekend assault.
The attacks “could take more oil off the market,” said James Ritterbusch, president of Ritterbusch & Associates, in Galena, Illinois. “There is not much margin for error as far as losing barrels.”
Crude oil for June delivery rose $2.07, or 1.8 percent, to $118.39 a barrel at 9:35 a.m. on the New York Mercantile Exchange. The price has risen 91 percent in the past year.
Feb. 1, WashingtonPost.com - Buoyed by soaring crude oil prices, Exxon Mobil announced yesterday that it set new records for U.S. quarterly and annual corporate profits in 2007, and Chevron, the nation’s second-largest oil company, also reported big gains in earnings.
Exxon broke the record it previously had set for profits by a U.S. corporation, earning $40.6 billion last year. It earned $11.7 billion in the fourth quarter, or $2.13 a share, up 14 percent from the fourth quarter of 2006. Revenue for the quarter rose 30 percent, to $116.64 billion. Exxon’s profit for the year came to $4.6 million an hour.
Chevron said its profit rose 29 percent, to $4.9 billion, or $2.32 a share. Chevron’s quarterly revenue grew 29 percent, to $61.41 billion. Profits of the five biggest international oil companies have tripled since 2002.
Seems to me that there is a disparity here. Certainly we are a capitalist society, supply and demand, etc. However, it boggles my mind that a product that is so vital to the entirety of our economy can be left on a capitalist island unlike any other.
The government regulates drugs (prescription drugs) to some extent, it absolutely subsidies crop production - all in an effort to maintain costs to the consumer so we don’t derail the economy completely. Gasoline though appears to be a ‘hands-off’ issue. Although the price of a gallon of gas effects absolutely everything else in this country. Our farming costs more because of it, subsequently either the price of agricultural products goes up, and either the government has to increase subsidies to offset those costs or the costs are passed on to the consumers. Not only does the cost of grain go up, but the cost of getting that product to markets goes up as well. The cost of going to the store goes up, so a family can afford to spend less money on groceries. The cost of going to work, shipping and receiving goods goes up, so the business owner either passes the costs on to the consumers, or absorbs them - either way the business makes less money, pays less taxes, employs less people, pays lower wages, or moves out of the country completely.
Consider this scenario: An owner of a small boutique employing 5 people, must spend more to receive the goods he sells, thus he either passes that cost to his customers, who then begin shopping elsewhere, or not at all, he makes less money and has to either lay off some employees, cut their hours drastically, or close the business. He makes no money, which is his wage, so he cannot spend money on things for his family (like food, housing, utilities). So now we have this: One business owner making and spending less money, one or more people (the employees) either out of work or making less money, who in turn spend less money (and receive unemployment payments. However, since the business sells less, they buy fewer goods to sell which in turn creates the same cycle with the business producing the goods, and the business shipping the goods.
What we have is a continuing cycle, it does not end at the boutique, the producer, the shipper because their employees pass on the same deleterious cycle to the businesses they frequent. It doesn’t end until either the whole economy bottoms out and we all face the times of the Great Depression, or until that keystone is fixed and the money supply is balanced.
What does not work? Here are a few things that won’t fix the problem:
Economic stimulus packages - giving the citizens $300 - $1200 to spend one time will not fix the problem. It may cause a short term boost, but it is not a true correction.
Suspending fuel taxes for a season and making the oil companies pay for it. I’m sorry, but Clinton’s idea is absolutely asinine. The issue is not the tax on fuel, it is the overall cost of fuel.
Here’s the thing: If I supply a product and the cost of my raw materials goes up, I can either absorb those costs and keep my prices the same in order to continue selling my product, or I can pass those increases, or a portion of those increases on to my customer.
In most cases, I would absorb those costs as much as possible for as long as possible until the difference between my cost of goods sold and my gross profit narrowed to a point where I was forced to raise my prices. In some cases I would gently raise my prices over a period of time to maintain an acceptable margin of profit. Being a smart business owner I would never pass on the full increases to my customers as soon as the increased costs came to me - I would lose my customers and my business if I did that.
But wait! Here’s the thing; if I was truly a smart business owner I would supply a product that no one else could supply and that everyone in the world needed and then I could do whatever I wanted to the prices and make as much money as I possibly could with no regard to the welfare of my fellow man. I don’t know the economic term for this evil practice, but I’m certain I would not see such people in heaven anytime soon.
What to do? I have to say that it goes against my normal way of thinking, but if I were the government, I would mandate some sort of price control on the cost of fuel. Certainly Exxon and Chevron would not post record profits if that happened, but heck, I’m just a little guy trying to feed my family and pay my rent. I couldn’t tell you the difference between 18.7 billion dollars and say… 13 billion dollars. I can’t see where that would end up destroying the economy if a multi trillion dollar oil company made 20-25 percent less profit but the rest of the country could save 20-25 percent in what they have to spend to survive.
What do you think?
Mostly very astute. However, it lacks one of the fundamental economic variables, supply. It is most important that we produce more of the raw material in question, crude oil. It is also important to drill domestically to insure that our need for oil doesn’t depend on foreign conflicts or a conflict we may have with a foreign nation that would normally sell oil to us. I highly agree that raising taxes on gas companies would only drive up the price of oil, but I’m not sure that’s what you were getting at. I’m also a recent convert to hybrid energy.
I know this post is older, but if you look at oil company profits over the past 25 years, they’ve been roughly the same when adjusted for inflation except a period between 1985 and 1998 or so where their profits were very low. Secondly, if you look at their profits in terms of percentage of overall revenue, that’s been pretty steady at around 10% profit for the past 25 years or so as well.
So the reason they’re making record profits isn’t that they’re profiteering, it’s that we’re using more oil than ever before. It isn’t the oil companies that we need to blame for that, it’s ourselves. In the 1980’s and early 1990’s it wasn’t very common that people drove trucks and SUVs, most people drove cars and station wagons until the late 80’s when it started to become more minivans and then transitioned to trucks and SUVs when consumers found them to be emasculating and manufacturers responded by giving us the SUV.
Another interesting fact that the news never brings up is that the oil companies already pay substantially more in taxes than they’ve ever made in profits. in the past 25 years they’ve made about $630 billion in profits (when adjusted for inflation to 2004 dollars) and in that same time period they have paid approximately $2.2 TRILLION in taxes. And what does the government spend their money on? Invading countries with oil, and with the profits THEY make from oil, is it any wonder?
Another interesting fact, the oil industry is not the most profitable, not in terms of total profit, in terms of profit per employee, in terms of profit as a percentage of total revenue. Banking is almost always the most profitable industry in the country but the media aren’t giving screen/headline time to increasing bank fees. The second most profitable industry is pharmaceuticals which rank just behind banking. Where banking’s profits are usually around 25% or so, pharmaceutical profits are usually around 22%. Yes, people do complain about drug prices, but not nearly as much as they do about gas prices.
Why do people complain about gas prices? Probably because there’s a great big sign with a number right out in front of every gas station they drive by.
Do you know how many people will drive a few miles out of their way to save a couple cents per gallon of gas? Do you realize that other consumables often vary in price by far more than does a gallon of gas, sometimes even more than a dollar?
Nobody shops around for a gallon of milk, they just go to whatever store is close and pay whatever price they charge, but you can save far more by driving out of your way and price shopping a single gallon of milk than you’ll save by driving a few miles out of the way to save a couple cents a gallon for gas.
Did you notice that the price for a gallon of milk has nearly tripled in the same period of time that the price of a gallon of milk has tripled? What about a loaf of bread? It’s the same story and yet people don’t pay any attention to those prices, or if they do it’s just to note how much they’ve risen rather than to think about driving a few extra miles and getting it cheaper somewhere else.
Our outrage at gas prices and oil company profits, when looked at rationally and in a manner consistent to how we look at everything else in our lives, is just insanity. I’m starting to think that the politicians and media making a pariah out of the oil companies is a ruse designed to keep our attention away from the reality right in front of our eyes.
Corrections:
You can save far more by driving a few miles out of your way to buy a single gallon of milk than you can by driving a few miles out of your way to save a few cents a gallon on gas when filling your whole tank.
The price of a gallon of milk has tripled in the same period as the price of gas has tripled.
I think that was all.