Windfall Profits Tax--Part 2

In my last post, I explained what the Windfall Profits Tax is and how the oil industry is unfairly punished and demonized for being such successful market participants. In this post, I will explain who really reaps a windfall profit at the pump. I apologize for such a long post, but there's a lot that needs to be said, so bear with me.

I've done some internet research on how much profit ExxonMobil makes per gallon of gasoline, and it's somewhere between $0.05 and $0.08 per gallon. The trouble with calculating profit per gallon of gas is that a barrel of oil is used to produce more than just gasoline. The basic premise for this calculation is to convert barrels to gallons and then divide the total after-tax profit by the number of gallons produced. For purposes of this discussion, we'll just assume the higher number--Exxon makes $0.08 profit per gallon of gas. I will give the disclaimer now that Exxon made less than $0.08/gallon over the last 2 quarters when it set 2 new records for quarterly profit because the price of crude oil, which amounts to about 70% of the cost of production, has been MUCH higher over the last 2 quarters than a year ago. With crude coming back down, Exxon's profit margins should go back up a little.

So, moving on...

There are some per gallon numbers that are definitive and not in dispute--TAXES. The federal government takes $0.184 per gallon right off the top. On average, state governments take $0.22 per gallon off the top. The state of Texas charges a $0.20 tax per gallon. So, if you live in Texas, for every gallon of gas you pump into your vehicle, you pay $0.384 to the government. Click on this link if you want to see how much tax other states pay. These taxes don't include other fees such as environmental and underground storage fees.

The math from this point on is pretty simple. As a reward for pulling oil out of the ground, processing and refining it, shipping it to downstream retailers, and creating thousands of jobs for Americans, Exxon makes $0.08 per gallon in profit. As a reward for doing absolutely nothing, the government makes $0.384 per gallon in profit.

However, it doesn't stop there. Not only are liberals ok with the government making $0.30 more per gallon of gasoline than the companies responsible for all the work involved in getting it to the pump, some of them want to sit in their lofty positions and take pot shots at the oil companies. For your reading pleasure, I have posted a few quotes below:

"Arlen Specter says Congress should consider taxing the windfall profits being reaped by the oil companies, which I think is a no-brainer. These guys aren’t entrepreneurs — they are pirates."
— Geraldo Rivera on Fox’s Geraldo at Large.

"The estimates are that the six large U.S. [oil] companies will have a total of $135 billion in profits for the year 2006. Don’t consumers have a right to be angry?"
"The public looks at a total of $135 billion over the year, that’s larger than the gross domestic product of Israel, and says isn’t that an obscene amount?"
— Co-host Charles Gibson to ConocoPhillips Chairman James Mulva on ABC’s Good Morning America.

No, Mr. Gibson, the profit made by state and federal governments for doing absolutely nothing is what is obscene. And, while we're at it, how many people do you know use the gross domestic product of Israel as a benchmark for what is or is not a lot of money? Ridiculous!

But, this one is my favorite. For all the cracks people take a George W. Bush for being a stupid moron, why didn't this clip get more press?



For all the talk about oil companies and executives being so greedy, as explained by Maxine Waters, the federal government isn't happy with ONLY making $0.184/gallon. They want to run the whole show.

Now, I don't want this post to be misleading. Theoretically, state and federal governments use these tax dollars to build and maintain roads and transportation infrastructure. Of course, we all know some of this money gets diverted to pet projects (what we call "pork-barrel spending"). But, it's not like legislators are taking these dollars and sticking them in their collective pockets. However, they would like you to believe that oil company executives are doing that, when in fact, profits are used for a variety of purposes such as reinvesting in oil producing assets, maintaining refining infrastructure, creating new jobs, and rewarding investors who purchase stock in oil companies. If anyone should have a problem with oil company executives getting paid too much, it's the stockholders. So, I'm not sure how Big Oil's reinvestment of profits is any different from the government spending tax dollars on improving transportation infrastructure.

Let's do one more math exercise before I end this post. Let's assume you're paying $2.00 for a gallon of gas right now. If the oil company cuts it's profit per gallon in half, you pay $1.96/gallon. On a 20 gallon fill up, you save a whopping $0.80! Now, if both the state and federal government cut their profits in half, you pay $1.80/gallon and save $3.84.

I hope this all makes sense. In conclusion, oil companies make large profits because they work hard, take risks and go through a lot of trouble to produce a product everyone needs. Government makes large profits because it lies to people about oil companies being greedy. So, who is receiving a windfall profit on gas? I'll let you answer that one.