A Gusher or a gouger? Exxon Mobil should should be made to give some back.
It’s nearly impossible for the average citizen to grasp the scale of ExxonMobil Corp.’s huge profits. In the quarter ended Dec. 31, the giant company made $10.7 billion, the equivalent of more than $115 million for every one of its 92 days, nearly $5 million each hour, more than $80,000 every minute, nearly $1,350 each second. ExxonMobil’s overall 2005 revenues of $371 billion amounted to more than $1 billion a day! The total was larger than the entire economies of all but 16 of the 184 countries ranked by the World Bank. It was 40 percent greater than the gross national product of Indonesia, a member of the Organization of Petroleum Exporting Countries with a population of 242 million.
A few months ago, when I was paying $2.95 per gallon, I was trying to fugure out how (and more importantly, why) oil companies could be making record profits. Of course, I was a history major, not an economics major, so to my economically untrained mind, this seems like…oh, I don’t know…what’s the word I’m looking for?…ah, yes- price gouging. Yes, that seems an adequate description, and I would imagine that I’m not the only American wondering why it is that oil companies can continue to squeeze us so that they can continue to make record profits.
Part of the problem here is that gasoline is not an elective commodity. We all need gasoline to fuel our increasingly mobile existence. We all have to get to work, go to the grocery store, or pick up the kids from soccer proctice. With most other products, if the price reaches an uncomfortable level, we can simply cut back, find an alternative, or do without altogether. That’s not an option with gasoline. Frankly, if I can be allowed to use a crude analogy, oil companies have us by the short hairs. They can charge whatever they choose, and we are stuck- but it’s not just us as individuals that are impacted by unreasonable increases in gasoline prices. The effects ripple throughout all corners of the national economy, because virtually every commercial enterprise is dependent, whether directly or indirectly, on the price of energy.
Given this reality, shouldn’t oil companies be held to a different standard? I’m not certain that a windfall tax is necessarily the answer, but you have to wonder when these companies are making their record profits on the backs of Americans struggling to pay the going price for a gallon of gasoline. How much profit is fair? How much is simple greed and extortion? And can (or should) windfall profits be taxed to prevent oil companies from fleecing the American public?
First, the Iraq war helped add billions to ExxonMobil’s windfall gains by raising the price of crude oil, gasoline and natural gas. Then Hurricanes Katrina and Rita disrupted domestic production and refining, pushing prices even higher.
All of us pay for the huge profits, but poor Americans living in colder regions and working people who must commute long distances are the ones whose contribution to ExxonMobil’s profits are the most painful.
I drive 40 miles one way to work five days a week. That’s 400 miles a week just to get to work and back; d’ya think I’m not fixated on the price of gas? It could be worse, though, I could be living in Minnesota and having to pay what must feel like extortion-level prices for heating oil. And when the weather is below freezing, you can only turn the thermostat down so far before you put your own health and safety at risk.
The U.S. Energy Information Administration estimates that home heating oil prices this year will be 23 percent higher than last year; throughout the northern states, this means not only discomfort but real hardship, even death for some of the elderly.
How many people are going to have to freeze to death before government pulls it’s anterior out of it’s posterior? Or is this federal government so strongly “free market” that it would rather rely on Hugo Chavez to supply low-cost heating oil to the needy?
As to people who must drive to work: A 2005 CNN poll found 58 percent of drivers experiencing severe or moderate hardship when gasoline was at $2.22 a gallon. Now the government is predicting $2.41 a gallon for this year.
Of course, I realize that in terms of real dollars, gasoline is, relatively speaking, not all that much more expensive than it was in the 80s and 90s. Nonetheless, the emotional impact of paying prices approaching $3/gallon cannot and should not be under-estimated.
Some experts believe the gigantic profits result not from chance but from limited refining capacity ‚Äî possibly deliberate ‚Äî reducing supply and boosting prices. Although demand has grown dramatically in recent decades, Jamie McCourt, president of the Foundation for Taxpayer and Consumer Rights, observes: “We haven’t had a refinery built since 1976.”
In the best of all possible worlds, ExxonMobil might recognize the sources of its good fortune and give something of reasonable scale back to the American people (beyond the relatively modest amount it donates to the arts, education and other causes).
It might, for instance, help make heating oil available to low-income citizens, as Venezuela is doing in Massachusetts, New York and Maine.
Or it could simply contribute money to help offset the pain: Appropriations for the Low Income Housing Energy Assistance Program for this fiscal year are $2.1 billion, nearly $3 billion short of what Congress authorized.
Beyond this, ExxonMobil could make a major contribution to helping rebuild New Orleans, where it has an important refinery. Private citizens have donated about $3.2 billion so far to the rebuilding effort. The $13 million contribution ExxonMobil touts on its Web site is a mere one-eighth of 1 percent of the increase in its 2005 profits.
Actually, given its New Orleans refinery, ExxonMobil might do very well by doing good: It could protect its investment by getting serious about helping the city build strong Category 5 levees and restoring hurricane-slowing wetlands. The estimated total cost is $31 billion ‚Äî $5 billion less than ExxonMobil’s 2005 huge profit flows.
Yeah, right; and this will happen about the time I am elected Queen of England. A business doesn’t become successful by giving money away, right? Even money that it obtained by holding the American public economic hostage? No CEO wants to explain to his or her shareholders why he’s giving money away.
Unfortunately, we do not live in a world where significant, voluntary “give-backs” to American society are common.
The obvious alternative is some form of taxation, something we have done many times in the past when chance and misfortune have combined to produce unwarranted gains.
Last fall, the Republican-controlled Senate approved a one-year tax increase of $5 billion for the nation’s largest oil companies.
Another Senate-approved measure would effectively remove the foreign tax credit that the nation’s three largest oil companies receive for taxes paid in other countries. At the moment, however, even these tiny steps are unlikely to pass the House of Representatives.
It will take an aroused citizenry to demand what should be given freely. Sen. Byron L. Dorgan, D-N.D., and six other senators have introduced windfall-profits tax legislation. This direction would inevitably have to be at the center of a serious agenda for change as the pain continues to increase.
While a windfall profits tax would be a politically popular and profitable solution, this is something that needs to be examined carefully and not simply enacted in a knee-jerk fashion. Americans who rely on gasoline, and that would be ALL of us, deserve to know that they are not going to be continually squeezed by oil companies who recognize that we have no alternative but to pay whatever price it is they’re asking.
When you consider how dependent that the American (and the world) economy is upon affordable and reliable energy supplies, this is something that cannot and should not be left to the whims of “market forces”. Though this subjects gets little press attention, the price of gasoline is inextricably woven into the fabric of life. Is it time to protect Americans from the greed and avarice of oil companies? From where I sit, the answer is a resounding “yes”. I’m not going to sit here and say that I have the answer to this dilemma; I’ll have to leave that to intellects more nimble than my own. Nonetheless. oil companies cannot and should not be allowed to sacrifice the economic well-being of Americans on the altar of flat-out greed.
Be careful what you wish for... You just might get it.
I'm no history major, but I do seem to recall that the last time energy "windfall" profits were taxed, the end results were higher consumer prices and an increased dependence on foriegn sources. In effect, consumers ended up footing the bill and the chief beneficiary was our greedy and
inefficient government.
The Chronicle's editorial is misleading, going to great lengths to express oil company profits and gross revenues in forms that are intended to garner support for additional taxation, while making absolutely no mention of the equally incomprehensible sums already being paid by consumers and corporations in the form of taxes.
Consider the source:
Gee, there's little wonder why a "political economist" (whatever that is) who wrote a book titled "America Beyond Capitalism: Reclaiming Our Wealth, Our Liberty, and Our Democracy" would purposely present profits (and not expenses) in raw dollars instead of percentages of pre-tax income, and completely leave out important facts such as:
Yes, folks, that’s 1.3 TRILLION bucks in taxes, roughly twice as much as oil company profits. Yet, Mr. Alperovitz would rather not tell you that. Instead, he offer's this solution:
Mr. Alperovitz is a socialist disguised as a economist, and I find his blatent efforts to influence democracy through propaganda and misinformation quite distasteful.
Not that there's anything fundamentally wrong with socialism. After all, it seems to work very well for fire ants, killer bees and lemmings...
Don't be a lemming folks. When a wolf in sheep's clothing trys to force feed you his kool-aid, do your homework and write your representatives!
From an economics standpoint, gasoline has a price elasticity of demand that is inelastic. Translation: Because of the lack of substitutes for this commodity, a small change in price - either up or down - has a negligible effect on demand. So, dropping the price will not enhance revenue while increasing the price will not reduce revenue. It's not like consumers can start electrifying their vehicles or running them on coal if the price of gasoline goes up.
Thus, the oil companies do, indeed, have us by the short hairs. And neither they nor their government support system has an incentive to push for alternatives/substitutes. Consequently, the price per gallon could go up to $6 and the results would be quarterly profits of $20-30 billion for the top companies. It's an industry that absolutely should be regulated until reasonable and price competitive substitutes are available.
http://drewlbucket.blogspot.com
The economic and practical reason behind Exxon enjoying such huge profits is their vertical monopoly. They take the oil from the ground, refine it, and sell the end results. They own each link in the chain.
The cost of pulling oil from the ground is unchanged, the cost to refine it is unchanged, and the cost to offer it for sale is unchanged. The only change has been to the value of product itself. This means that veritcal monopolists and suppliers will reap huge profits during market fluctuations since
Profit = (Sales)(Value) - Cost
If the negative number stays the same while the value number goes up, you're getting more profits.
Also, a solution better than a windfall tax would be to offer incentives for the companies in question to spend the extra profits on developing renewable energy technologies or on pollution controls. These solutions unquestionably benefit the public good, unlike taxes which have an overhead caused by bureaucracy and are often poorly distributed. Moreover, the only difficulty in developing renewable energy technologies or controlling pollution is that both are extremely capital-intensive. These short-term fluctuations offer excellent opportunities for investment in these industries.
PS - it's not Exxon's fault they make so much goddamn money. If they refused to sell gasoline at the market price, they would make the proper decision to sell the oil or gasoline to other suppliers instead. This would still make Exxon a boatload of money, and likely make no impact on the price of gasoline in the US.
Excellent comment Adam. I must admit that I'm not an economist, so I don't completely follow the Sales * Value portion of that equation. I assume you're referring to unit volume and price, respectively. I've always subscribed to the more fundamental Profit = Revenue - Expenses equation. Considering the diverse income sources of today's "oil" mega-corporations, I think this form may be more appropriate.
As far as increased regulation and government controlled "incentives" go I must disagree. Forced capitol investments of such magnitude generally do not produce financially feasible results within a reasonable amount of time.
For example, much of the battery technology that enables the currently available hybrids to (at least) appear attractive was not achieved through corporate tax credits, incentives, or regulation. It is the result of good ole supply and demand capitalism. People demanded more performance from their laptop batteries, and the IT & battery industries supplied the capitol that funded development of the technology. As laptop battery technology improved, the price (value?) of the battery compared to the rest of the laptop increased substantially. Consumers were more than happy to shell out more for better batteries (or perhaps didn't notice the increased battery cost because processor and memory costs decreased concurrently.) Whatever the case may be, technology was developed, deployed, and subsequently made available to a variety of industries, capital risk takers were rewarded with profits, and it was all accomplished with (or maybe because of) minimal government interference.
Hydrogen powered vehicles (or laptops) could be another story, but then, that stuff isn't nearly ready for prime time yet, despite substantial government "incentives."
Sorry... I forgot two things. It's hard to have a vertical monopoly when you are forced to purchase so much raw material from external sources. (And I say that with full knowledge that Exxon owns the rights to all minerals under my property.)
Drew also has a point. Oil mega-corporations buy elected officials in a politically agnostic manner, and as a result, the EPA is actyally big oil's biggest buddy (but that's another topic!)