Of course, the way these profits work is what has created the false impression of price gouging, which these opportunistic politicians have been playing up. Net profits are set as a percentage of gross profits. So if oil products are selling at a higher price, that same percentage of profit will end up being more money as a result. Most of us should be familiar with this phenomenon even if we aren't involved in business. We can see it just by looking at the sales tax we pay on things we buy. If you buy something for a dollar with 8% sales tax, you pay 8 cents. If the price of the item goes up to $1.50, you pay 12 cents in tax. So if the price is higher the state makes more money without ever changing the tax rate. Oil company profits work in pretty much the same way. If oil is at $2 per gallon they make 16 cents. If it goes to $3 per gallon they make 24 cents.
The goal which these Senators are pushing towards with their efforts to paint the oil companies as piratical profiteers, is the institution of a Windfall Profits Tax similar to the one which we had in the 1980s, where the government just declares that certain companies are making too much money, and takes it away from them through a special arbitrary tax aimed just at them. This idea is being pushed particularly hard by Senator Hillary Clinton and some of her Democratic allies in the Senate. Putting aside the fact that such a tax is inherently unfair - with many companies in other industries making far higher profits and not being punished for it - it also doesn't work.
The problem with a Windfall Profits Tax is that these oil companies are international operations. If the tax rate they are charged in the US goes too high or is seen as unfair, they can just move more and more of their operations overseas and outside of US jurisdiction. This is exactly what happened under the previous Windfall Profits Tax, with the result that domestic oil production fell, overseas oil production increased, and a tax which was supposed to raise $320 billion ended up bringing in only $40 billion.
Article comments
— go to most recent comments1 - Lumpy
Nice to see u in full rabid rant mode. Love that dino too.
2 - Baritone
I imagine the oil CEO's wives all get together now and have coupon clipping parties just to keep up their spirits and help get their kids off of those mac & cheese diets.
3 - jamminsue
Dave,
Two things come to mind. First, it would be much better if ALL our Senate and Congress members, Democrats and Republicans alike, grew a backbone and set up an all-out program like the Hanford Project in the 40's and Star Wars in the 80's to find alternate energy sources for all our energy needs. Nuclear is not a good answer as the by products are unacceptable.
Second, there are specific things that oil is critical to that we should save our oil fields for - like medicine, and a few other important things like that.
I usually do not agree with you, and in this case do not from the point of view of using our oil fields as a temporary stopgap, that will only delay the time when we have to pull up the bootstraps and get the job done. Kudos that you seem to be getting the idea we need to find new ways to create energy.
I agree the Windfall Profits Tax is not a good thing for the reasons you enumerated, and we cannot afford to loose any more manufacturing industries in this country, our manufactuing level now is so far below what we should have, it scares me whenever I think about it.
I agree that the Senate's hearings were little more than a circus. We as citizens should write our Senators and tell them how embarrassed we are that they participated in such an expensive, useless spectacle.
Dave, keep on writing, you give us all lots to think about, even if, in my mind, your answers are wrong.
4 - Dave Nalle
>>I imagine the oil CEO's wives all get together now and have coupon clipping parties just to keep up their spirits and help get their kids off of those mac & cheese diets.<<
Baritone, your sarcastic comment gets to the heart of the inability of so many people - especially on the left - to understand that there is no relationship between what a CEO is paid and what a company charges for its products or what it pays its workers. Until the left starts to understand how business works and sheds the mindless hostility towards anyone successful, they pose a genuine threat to the overall welfare of the country.
Dave
5 - Clavos
Until the left starts to understand how business works and sheds the mindless hostility towards anyone successful, they pose a genuine threat to the overall welfare of the country.
Not gonna happen, Dave.
Not until everything is either owned by, or at least tightly controlled by the government.
I am reminded of Atlas Shrugged.
6 - troll
'price' and 'cost' are not synonyms
7 - Baritone
sory davey i don git whut yur sayin r u sayin i aint gotno mind cud be il go see ifn ican fine it n git back wich u ina wipstich i gess we gotta lurn how bidnes wurks so weuns can grabonto r peec o pi i lik pi im lef handid
8 - Dave Nalle
Sounds like Baritone is a Clinton voter.
Dave
9 - Baritone
rong. im votin fur that barrics alabama fella i decidid i don go fur them pantsoots
10 - Arch Conservative
"Until the left starts to understand how business works and sheds the mindless hostility towards anyone successful"
Never gonna happen Nalle.
11 - Lee Richards
Dave,
You make some good points about our lack of comprehensive energy policy. In large part, though, you do what the oil companies want us to do:start with the conclusion they like and then reason backwards, assembling facts to fit and support it. Low profit margin still adds up to record billions for them.
Supply and demand IS at work; you accept the oil companies(and Saudis)stated explanations/excuses for low supply;in the face of those record billions "limited supply" is making for them, I doubt and question their every statement.
12 - Clavos
in the face of those record billions "limited supply" is making for them, I doubt and question their every statement.
Me too. I think they are taking a leaf from the DeBeers Diamond Market Playbook and holding back oil to create an artificial shortage.
In fact, I'm convinced of it.
I'm talking about the Saudis and other towel heads, not the oil companies.
13 - Dave Nalle
Lee, I don't have to take the oil companies' word for the limitations on supply or refinery capacity. The facts are easy to verify Because we're buying most of our oil from outside the US, we're at the whim of the oil market. That market sets prices based on supply, and supply has increased only slightly over the last decade while demand has increased enormously.
Clavos blames the Arabs, and they are certainly partly to blame, but on the other hand who can blame them for intelligently controlling what is essentially their only economic asset so that they don't run out? IMO the real blame rests on the Chinese whose consumption of oil has increased so much that it's the primary factor in the increase in prices, and that problem is only going to get enormously worse in coming years.
Dave
14 - bliffle
It's all part of the Vast Left Wing conspiracy to undermine American Freedom and cede USA sovereignty to a vast One World Oil Community.
Venal congressmen, who've failed to make their fortunes in the Private Economy are susceptible to the bribes (masquerading as 'campaign contributions' of course) freely offered by the Vast Oil Producers Cooperative that owes no allegiance to any nation, least of all the USA, and is free to export capital gains to Foreign Agents in Dubai or wherever. They live everywhere, have residences and offices everywhere. Their allegiances are to no one.
The Vast One World Commune of oil providers resembles nothing so much as a Russian Commune from the Soviet Era. They would love to loot our natural resources in ANWR, for example, to pour the oil into their international oil market for their own benefit at the expense of the USA.
And when US citizens are bled dry from excess prices and can no longer afford oil, the Vast Leftist Oil Commune will sell it to China, Burma, Asia, wherever, where they are even now stimulating demand with advertising propaganda.
Back in 1973 when we had a wakeup call with the OPEC boycott it was the OneWorlder Socialist oil providers who beat back the independent entrepeneurship of redblooded american businessmen who were seeking to provide alternate energy for alternative energy users and vehicles.
As makers of electric cars, hydrogen powered cars, propane ppowered cars, started to find customers the Vast Oil Socialists realized their grip on commisar-like power was threatened by these weenie little upstarts was threatened and they took steps to crush the upstarts and increase their own subsidies. They increased their own unneeded subsidies more to exhaust the Federal budget of energy funds than because they needed the money.
The oil situation is just one phase of Socialization of One World under the control of people in remote places: foreign countries. Socialism from the top down.
Our soft-on-crime Liberal Justice Department simply refuses to enforce laws against bribery and corruption, reserving their enforcement for the poor occasional weenie who defies their authority and becomes a whistleblower. It's a page right out of the Moscow Trials! Accuse the non-conforming one of the very crimes he accused others of!
The Vast Oil Communal Movement even recruits their own politicians from the ranks of failed businessmen, who they know are susceptible to their bribes and blandishments because of their low esteem and known inability to earn an Honest Income in the Private Sector.
Leftist Big Government Mid-level manifestations of the Vast Fabianist Oil Conspiracy, such as the famous Carlson Group laid the groundwork and practiced their chops back in the 30s by coppering the play of Hitlers Germany by guaranteeing currency thru the Bank Of International Settlements (betraying their One World Socialist intention by boldly using 'International' in their own name! Defying one and all! Could anything be more communistic and anti-individual than that!)
What they say about the Fabians was right: They are wolves in sheeps clothing. Appearing to be busineessmen in Blue Brooks Brothers Suits, they are really the cadre of the Vast International Communist Corporate Conspiracy.
Even the 'corporation' itself was established as a communist organization. Can anything be more socialist than an outfit that has extraordinary privileges and no responsibility?
Communisn! Socialism! Fabianism! All sneaking into our culture by sly tricksters pretending to do good things for USA citizens but really owing allegiance only to the Vast Conspiracy they are part of and submerge their own character and pesonality into.
15 - Brad Schader
Kind of a difficult subject for me, but money always is. I find it hard to understand how the oil companies are paying more for oil than they ever did, yet still are making more profits than they ever did. One would assume that, if the base product raises in price, then the profits should either go down or remain constant. On the other hand, I do know we pay less per gallon than most European countries do per gallon because our government helps the industry, but the government gets its money from us, so we are really paying just as much as Europe, only the difference is hidden in taxes.
Right now, this is a pure political move with no power or reason. The parties know the public is pissed at gas prices and this, being an election year, is one of the few times the government actually tries to appear to pander to us.
Basically, there are questions that need to be asked and no one wants to ask them or answer them.
16 - bliffle
"I find it hard to understand how the oil companies are paying more for oil than they ever did, yet still are making more profits than they ever did."
Not difficult at all. OilCos are middlemen, brokers, so they levy a surcharge as oil goes thru their hands and increasing cost works in their favor. rather like a real estate salesman who has a vested interest in higher prices.
They use their oligopoly power to exclude competitors and keep the commissions sweet. Just as in real estate.
A more advanced analysis deals with 'Inelastic Demand' a seemingly simple concept that increases complexity a lot.
17 - Baronius
Very good article, Dave. I wonder, in how many Senate debates has the stupidest thing been said by Arlen Specter? The man is to stupid statements what Tiger Woods is to golf.
18 - Baritone
I can't say that I know that much about it, but isn't it at least possible that the oil companies do work to one degree or another with the suppliers of crude oil?
Are we really to believe that there exists no collusion between various entities in the industry? That seems at least as naive as what Dave claims regarding Senate Democrats.
Dave goes out of his way to lift the oil companies and oil producers above any culpability in all this. He met my bit of sarcasm with a rebuke above, but I feel that his position has as I suggested an element of naivete' in it as well.
I don't know what to say about bliffle's diatribe. It'd be interesting to see some actual proof of those left wing commie oil cartel claims.
I do think it might be connected to some of the more recent UFO sitings out in the southwest U.S. and Mexico. It's a forgone conclusion that all extra-terrestrials are "fellow travelers." To resist is futile.
B-tone
19 - Lumpy
I think bliffle is off his meds. someone give the man some flouride and quaaludes quick.
20 - troll
That market sets prices based on supply...
...the market sets prices based on speculation about future supply - something of a different matter
real world economic phenomena are never quite as straight forward as they appear to be in the Republic of Dave
21 - Baritone
So true!
Over the past couple of months, speculators have been elevating prices without any concrete connection to actual supply and demand. And it is important to reiterate that it is the OPEC countries that are controling the supply. What the world is paying for gas and other oil products now has little to do with actual costs of production, delivery, refinement, transport and retail operations.
Dave also "blames" China. Should China get out of our way? Are they to be considered no more than young upstarts, interlopers, who should have more respect for their capitalistic elders?
B-tone
22 - Dave Nalle
>>That market sets prices based on supply...
...the market sets prices based on speculation about future supply - something of a different matter
real world economic phenomena are never quite as straight forward as they appear to be in the Republic of Dave<<
What is the functional difference, troll? There is none. To be entirely accurate, the pricing is based on the relationship between expected supply and expected demand. But as 'speculation' goes, trends in supply and demand are pretty easy to predict. Plus since they average prices over extended periods of time any unexpected changes in the real price are levelled out.
Dave
23 - Dave Nalle
Dave also "blames" China. Should China get out of our way? Are they to be considered no more than young upstarts, interlopers, who should have more respect for their capitalistic elders?
While I agree that China does have as much right as anyone to use oil, it remains a fact that their increase in use has a major impact on the market, so we can still blame them even if we acknowledge that they aren't doing anything that is wrong - just something that's inconvenient for us.
Dave
24 - troll
What is the functional difference, troll? There is none.
well actually:
the one model allows for and explains rising prices without a corresponding decrease in supply and the disconnect between cost and price that Baritone points out
the other doesn't
'pricing is based on the relationship between expected supply and expected demand' (why didn't you say so in the first place) doesn't reduce to 'That market sets prices based on supply'
...I have yet to figure out your undoubtedly propagandistic motive for presenting the oversimplification except that it is representative of the simple minded analysis that we are going to have to listen to from McCain...it must be your desensitization conspiracy
25 - Zedd
Arch sed:
""Until the left starts to understand how business works and sheds the mindless hostility towards anyone successful"
Never gonna happen Nalle."
Oh ARCHIE why don't you try!! Help the left understand business. Will YOU help? Share your wisdom PLEASE. Save America will ya will ya?
I'm sure Clav will chime in. One for the Gipper (I know its from a movie but... whatever that means... I know its suppose to make Reps feel all swelled up). Do it, do it do it!!!