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How I Stopped Demagoguing and Learned To Love The Oil Companies

I am on the road this week, and still do not have time to write the post I want to write about Obama demagoguing against oil companies.  Fortunately, I do not have to, because Q&O has this post.

Here is the short answer:  companies like ExxonMobil, even in the best of times (or most rapacious, as your perspective might be), makes 9-10% pre-tax profit on sales.  They make something like 5-6% when things are not so good.  This means that if gas prices are $3, when you take out the 45 cents or so of tax, Exxon is making between 13 and 25 cents a gallon profit.  Call it 20 cents on average.  So, wiping out profits completely with various ill-advised taxes or regulations would achieve the substantial goal of ... cutting about twenty cents off the price of gas, or about $2.50 off the price of a fill-up.  Of course, that is at the cost of eliminating all investment incentives in the world's most capital intensive resource extraction business.  Which in turn will mean that that price cut will last for about 2 years, and then be swamped by price increases from disappearing gas supplies  (exactly what happened in the late 1970s). 

Part of the problem is that most people do not understand the supply chain in crude oil.  It would seem logical that if the price of oil rises form $30 to $100, then all that $70 price increase is pure profit to Exxon.  That would have been true in 1905, but is not true today.  Exxon, even when it does the exploration and drilling, gets its oil via complicated agreements with state-owned corporations which in the main are structured so that the country in question, and not Exxon, gets windfall.  This means that if Obama wants to tax windfall profits, he needs to seek out Venezuela and China and Saudi Arabia.

The article covers all this and more.

Posted on March 27, 2008 at 08:33 PM | Permalink

Comments

Correction, when things are not so good they may have margins of 5%. There's no guarantees they'll do that though. Didn't one of the major refiners recently post a loss even though this is about as good as things get for the market for them?

I'd be interested to see if these margins can hold as they push production into more expensive areas looking for oil.

Posted by: Allen | Mar 30, 2008 9:58:08 AM

Two related cartoons for ya, Coyote!

http://www.redplanetcartoons.com/index.php/2008/03/31/rocket-scientists-they-are-not/

http://www.redplanetcartoons.com/index.php/2008/03/19/dissecting-gas-prices/

Posted by: Scott | Mar 31, 2008 1:45:02 AM

Don't forget Canada and Mexico.

If we are to become truly "energy independent", we also have to divorce ourselves from these monsters.

Posted by: MJ | Apr 1, 2008 4:05:26 PM

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