Oil companies are evil. We all know that. They make billions of dollars a year. How could anyone make billions of dollars a year and not be evil?
However, the actual dollar amount of profits is not as relevant as the ratio of profit to expense, which includes the costs of research and development as well as the ordinary costs of doing business. Overall, oil companies have a slightly higher than average profit margin, but not nearly as high as some other industries, like pharmaceuticals, banks, financial services, telecom, software, and the food and beverage industries. According to U.S. News & World Report, “if you exclude the financially troubled auto industry from that analysis, the oil industry actually appears less profitable than most manufacturers, which were earning 9.2 cents on every dollar of sales.”
Also, if you look at oil profits over the course of several decades, you’ll observe that it’s a cyclical industry, with booms and busts. The chart below, from TaxFoundation.org, tracks oil industry profits from 1977 to 2004, as well as the gasoline taxes levied by the federal and state governments for each of those years. It’s interesting to note the boom-bust cycle for oil industry profits. The profits in the mid -2000’s are comparable to the profits in the early 1980’s. But, in the two decades between, profits were much lower, sometimes only reaching 20% of the profits during the boom years. The boom years need to cover the bust years in order to keep the industry going.
BTW, who do you think makes more money off of gasoline, — the oil companies or the government? If oil companies are evil for pulling in billions of dollars a year in profits from the oil they produce, the government must be evil incarnate, because the federal and state governments make a lot more money off of gasoline taxes each year than the total profits of all the oil companies combined. Over this 28 year period, the government made more than twice as much money off of gasoline as the oil companies did. (And that doesn’t even take into account the corporate taxes the oil companies paid!)
While many think of the oil industry as evil, we’d all be in a fix if it collapsed. So, it’s in our interest for them to make enough money to keep the oil flowing through boom and bust. If the government allowed them to drill for oil here at home, and build new oil refineries, perhaps the boom and bust periods would even out a little more. If there was more local supply to meet the demand, the price wouldn’t be as high. But, since taxes are based on a percentage of the price at the pump, it’s in the government’s interest to constrict the supply, which artificially elevates the price.
Now the Democrats are proposing an additional windfall tax for the “excessive” profits the oil companies are making. But guess where the money to pay those windfall taxes will come from? It will come right out of your pocket at the pump.
The next time you get pissed off at how much you pay for gasoline, bow your head and thank the government for that. Remember, for every penny of profit you’re giving the oil company, you’re giving the government two. And, while you’re at it, thank the government for subsidizing ethanol production and raising your food prices as well.
Ethanol is more expensive to produce and transport than gasoline, as well as being 20%-30% less efficient, so you’ll find your gas prices increasing even further, while your mileage decreases. We have to pay more for the food we eat so we can also pay more for less efficient fuel. You have the environmental lobby to thank for that bright idea, but don’t forget to thank your Uncle Sam and your state legislatures for making their dream (and our nightmare) come true.