Quit Scapegoating the Oil Companies!

May 16, 2011

Democrats in Congress love to beat up on the oil companies: those “evil mega-corporations that make obscene profits and gouge us poor consumers.” But while that populist meme might gain them a few polling points with the assistance of a complicit press, any objective analyst of the facts will have to call BS on the entire premise.

Just where would we be, if the government succeeded in seriously putting the hurt on the world’s few companies capable of taking crude oil and delivering useful products to market?

Forget, for a moment, the energy resources coming from petroleum like gasoline, jet fuel, kerosene, home heating oil and the like. We are dependent upon petroleum for plastics, for medicines, for pesticides, for synthetic fibers necessary to clothe us. For asphalt necessary for roads and roofing. Look at what these demonized companies provide to us, on a slim margin of profit, as we’ll see.

The pain at the pump felt by Americans as gas prices hover around $4.00 a gallon is palpable. And as Rahm Emmanuel famously quipped, the left will “never let a good crisis go to waste.”

Politically, the left sees a golden opportunity: They can attack an “enemy of the common man”. They can (they think) raise tax revenues. They can further cripple the petroleum industry – providing impetus toward their “green economy.” They can attack corporate capitalism. So, of course, they go after the oil companies with great zeal.

But even Democrat Senator Mary Landrieu (a hard core leftist) recognizes that the attacks on the oil companies are both unfounded, and ill advised. Acknowledging that punitively terminating tax provisions (which are available to multiple industries and for good reason!) for the oil companies will not reduce (and might increase) gas prices at the pump, and will NOT increase revenues to the government, she spoke out on May 11, 2011 against the attempts to score political points by setting up the straw-man boogie-man of the “Evil Oil Companies” as an enemy to be taken down.

What REALLY is the cause of these high gas prices? Who’s REALLY to blame?

Well, let’s take a look at the factors influencing our pump price today.

First and foremost is the cost these companies must pay for crude. Presently above $100 a barrel, these costs are bolstered by the weakness of the US Dollar – a function of the poor fiscal policy coming out of Obama’s Washington. A weak dollar means a dollar doesn’t go as far in purchasing commodities on the world market. We can only expect to see commodity prices (of EVERYTHING, not just oil) to continue to climb unless drastic action is taken to stabilize the value of our money.

In addition, we are dependent on foreign (and not always friendly) sources of our oil. Leftist policies have hamstrung our domestic production. When the Department of Energy was created (ostensibly to REDUCE our dependence on foreign oil) our imports represented around 30% of our total petroleum consumption. Presently about 2/3 of all our oil is foreign sourced! (Good job, federal bureaucracy)

All that oil we’re obtaining from foreign sources must be transported halfway around the globe (on very environmentally friendly tanker ships). Those Shipping and Delivery Costs contribute to our gas price. Don’t forget, those ships run on diesel. How many gallons do you think a tanker burns to bring a million barrels of oil across the ocean? (And what happens to the shipping costs as the price of Diesel rises?) Then, once offloaded in port, the oil must be transported via pipelines (which charge fees) to the refineries.

Our Refinery Costs are also factored into our gasoline pump prices. We haven’t built a new refinery since the Carter Administration… but we’ve lost a few in that time. Our refining capacity is not increasing to meet demand. Meantime our “helpful” federal government has mandated boutique fuel blends – different formulations engineered for different geographical regions. The refineries must make one blend for Missouri, and another for Illinois! These blends cannot be sold across the regional boundaries, so if there’s a shortage in Illinois for their blend, they can’t sell Missouri’s blend, even if there’s a surplus of that variety! So what happens? The price in IL must go up relative to the price in MO, as a function of its scarcity. And when IL residents note the difference, they cry gouging against IL gas retailers, who are innocent of any wrongdoing!

Speaking of the gasoline retailer, their average Retailer Profits are about 10 cents per gallon… unless you pay by credit card. Then the credit card company, which takes a fee based on the sale price will eat about 6 or 7 cents per gallon, leaving the station operator a mere 3 cents per gallon. This is why gas stations are now mini-markets. They need to sell higher margin items to stay alive. The gas is often a “loss leader” used simply to get motorists to stop and shop their convenience store!

Oil Company Profits must necessarily be figured into the cost equation… but let’s do so with perspective. Oil companies earn approximately 2 cents for every gallon sold. States place taxes on gasoline ranging from 30-something to 60-something cents per gallon, with the national average being 48 cents. So for every penny the oil companies earn, the states make almost a quarter. Who’s reaping the windfall profits? The states invest nothing in exploration, extraction, transportation, formulation, refining, or delivery of gasoline, yet they make nearly a quarter for every penny the oil companies earn in profit!

But we’re not yet done with taxes! Once the states get their share, the feds also get a chunk. About 18 cents per gallon goes to the Federal Government. So about $.66 of every gallon you pump is simply paid to the state and federal government in taxes. Lay that against the lowly 2 cents profit per gallon that the oil companies get! If the profits of the oil companies are obscene, what about the Federal and State Governments appropriating 33 cents (and delivering nothing) for every cent the oil companies make in profit while delivering vital products to market?

But they sell billions of gallons. They earn BILLIONS in profit!

Ok… and so? That profit goes to their shareholders. When they make money, 9.2 million stockholders benefit. Do you have a 401K or IRA or a pension? I’ll just bet you’re one of those evil oil profiteers!

And what of those billions? Oil companies operate on margins that would shut down most other industries. What business could survive with an effective tax rate of 48% and a profit margin under 7%?

According to ABC News (hardly a friend of the oil companies, and certainly not a conservative news outlet) the big oil companies had the following revenues/profits:

Company         Revenues          Profit                Percent Profit

Exxon Mobil     284.7B             19.3B               6.8%

Chevron           163.5B             10.5B               6.4%

Conoco            139.5B             4.9B                 2.8%

Valero Energy  70.0B              2.0B                 2.8%

Marathon Oil    49.4B              1.5B                 3.0%

The total profit for these 5 big oil companies was 38.2 Billion in 2010. (How fast does Government spend 38.2 billion?) Sounds like a lot, doesn’t it?

With approximately 250 million people in the USA, it takes $4 per person to make a billion dollars. So all 5 companies in total earned about $152.80 from each of us in 2010. Now think about what you SPENT on gasoline in 2010. Now realize that over $5000 was collected from each of us in gas TAXES by the states and the feds in that same time period. Who are you mad at now?

Oh, and the Feds want to raise taxes on the oil companies. Where do you think that money will come from?

So WHO should be demonized when you feel that pain at the pump?

Copyright ©2011 Doug Edelman