Oil profits
May 9th, 2006 by MaxJerry Taylor of the Cato Institute lays out the facts about oil company profits in this TV interview and goes into more detail in this paper with Peter Van Doren.
Turns out, oil company profit margins–what they make on each dollar sold–were just about average at 8.8% in 2005 as compared to 8.5% for the economy as a whole. BP came in at about a 6.8% profit margin while ExxonMobile managed 10.7%. For comparison, Yahoo earned a 45% profit in the last quarter of last year. Taylor cites a Goldman Sachs study that finds the return on investment in the oil industry between 1970-2003 was less than the industrial average.
“Price gouging” is address and it predictably turns out supply and demand are determining gas prices, which are determined in spot markets with thousands of actors where individual actors have little say on price. Even the left-wing blog the Daily Kos acknowledges this saying, “it really is as simple as: price is determined by the market.â€Â
Taylor also talks about the “windfall profits tax” and mentions that it was tried before, from 1980-1988. Again, the left-leaning Daily Kos acknowledges the facts of the matter saying, “the windfall profit tax of the 1980’s drained $79 billion in industry revenues that could have been used to invest in new oil production, leading to 1.6 billion fewer barrels of oil being produced in the United States from 1980 - 1988.”
Taxes change incentives, and this one was no exception. It discouraged investment in the oil industry and, predictably, domestic production down, imports up, and gas prices up. What else would anyone expect a tax on an industry to do? Who would want to invest in an industry where you’re exposed to all the potential downside loss, but your upside gain is limited?
