The fallacy of Exxon Profits and the "Windfall Tax"

In the earlier post that purports to show how the price of a gallon of gas is arrived at ( http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp ) I don't see where the company's profit is factored in?? (How much would the price be decreased if they only took a "fair" profit I wonder?.....Whatever the reduction would be......I'll take it!)

beemerboy wrote:I think what a lot of people don't realize is, when EXXON (BP, Conoco etc.) claim that they only make 10 cents on a gallon of gas that is only part of where their billions of dollars come from.

beemerboy wrote:At each stage of the process, the oil companies create profit.

Very informative beemer............& at each stage of the process................the price of a gallon of gas goes up! (sounds like a giant "Pyramid Scheme" to me)

Devil5052 wrote:

Steve.N wrote:I don't normally respond to "tense" threads but had to respond to this one. My dad just dumped all his Exxon stock because of poor performance (he had a lot, a whole lot). Attached is a stock dividend analysis that I find interesting. Everything Exxon does is up over the last three years except dividends to stock holders. ROI, cash flow, Return on equity etc etc. I understand the economics of cost vrs profit but can't help but wonder where all the money is going. I own a business, I wish my ROI figures were as good as Exxon's

http://seekingalpha.com/article/54993-d ... orporation

I missed the importance of your above post Steve. If I'm reading it correctly, it would appear that Exxon-Mobil has figured out a way to even cheat their own stockholders! Where is all the money going??? I wonder if Ken Lay is really dead!?

Any other Exxon stockholders around?

SteveN's dad may have had a bad go with the Exxon investment, but I know a couple of people who made investments in oil companies back three or four years ago and are doing very well on that investment. I don't know if they're looking for dividends or rather are planning to sell the stock high and make their money that way. They are definitely not complaining though, so throw that on the anecdotal evidence board too.

Devil, what do you think would be a fair profit for Exxon to be making. $40 billion is too much, okay. What is reasonable in your mind? And why do you think your number is reasonable but their actual profit isn't? Remember, you have $40 billion to play with, or 15 cents/gal.

pvolcko wrote:Devil, what do you think would be a fair profit for Exxon to be making.

Fair Question.........I'll say take the net profits of Harman Stoves, Alaska & Keystoker............ & divide by three. That should be the profit margin, by percentage.......and not a damned dime more!
(Let's limit them, by law to what some real, patriotic American companies that aren't "in bed" with the Saudis, are actually earning)
How about that for a change?

Here are a few of the investigations or calls for investigations of oil company profits that I alluded to before. This represents a 5 minute Google search:

AAA wants gas-price inquiry
Auto club asks Senate to investigate why oil profits are soaring despite glitches
Full Story:http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/05/16/BUGVAPRFRQ1.DTL

Congress to Investigate Big Oil
story: http://officialpumpsonline.com/2008/03/ ... e-big-oil/

The Senate Finance Committee provided additional evidence of the lawmakers' scramble to respond. In an unusual move, the panel requested tax returns from the country's major oil and gas companies, CBS News correspondent Bianca Solorzano reports, as part of an investigation into industry profits and soaring gasoline costs.


Full story:http://www.cbsnews.com/stories/2006/04/27/politics/main1550059.shtml

Public Citizen Urges Congress to Restore Accountability in Oil and Gas Markets
Tyson Slocum, Acting Director of Public Citizen’s Critical Mass Energy Program, Testifies Today Before Senate Committee

WASHINGTON, D.C. – Record oil company profits are partially the result of uncompetitive markets created by too many recent mergers combined with lax government regulations, leading consumers to be gouged at the pumps, Public Citizen told lawmakers

story: http://www.citizen.org/pressroom/release.cfm?ID=2124

Well, you happened to pick three privately owned companies whose profits aren't openly known. I'd venture to guess that the profit margins you suggest taking would be about the same or a little higher profit margin than Exxon's 10%. Harman certainly is higher than 10% (at least once you take out their new factory expense). Alaska and Keystoker are much smaller companies, but I'd guess they both operate at around 10% net profit margins, maybe a little bit less. I have no insider information to support this, just my independent understanding of the business and what it takes to stay afloat for as long as they've been running.

What's this money get used for? If publicly owned: buy back of stock, payout of dividends, etc. Privately owned: finance stock hold back for an IPO, payout of profit sharing to equity holders, etc. In any company: If an especially good year, bonuses and employee profit sharing. Buffer for next year's salary increases and next year's insurance, tax, and employment overhead increases. Safety net for fire and flood recuperation, emergency hiring of additional employees, covering downturns in the market or missed sales goals, paying off principle debt, etc. 10% is definitely in the range of average, responsible profit margins and any company would gladly make it if they are lucky enough to be able to make that much. Certainly the past few years have been difficult for a number of businesses, but just because that's the case doesn't mean oil companies like Exxon should be expected and certainly not forced (through a poorly, misleadingly named "windfall profits tax") to operate at lower profit margins.


rant time...

I sometimes wonder if people have the slightest clue how expensive and risky it is to own and run a company like Exxon. They're engaged in some of the most costly and risky work in the world. Their product is priced on the global market, open to market manipulation (OPEC, Chavez, the Ruskies, Chinese currency fixing, the Iranians, speculators, major players like Soros, etc.) and the pricing volatility that is inherent in a commodity businesses, to say nothing of the political whims of the major producer and consumer nations' governments. Even small companies are highly risky, relatively expensive ventures that are often all consuming to those that take on the challenge. The level of personal responsibility, liability, time, investment, and ego that is embodied in such a venture is staggering.

Consider the whims of governments for a second here. Major oil companies have had to literally eat the expense of building up the oil infrastructure of entire nations when those nations reneged on drilling and production deals by nationalizing the industry, after the exploration, test drilling, training, and capital investment was already made. Now these companies are faced with some pissant congresscritters trying to get their hyper liberal constituents' rocks off by threatening to nationalize the industry here in the US!? I don't know how those CEOs held it together when that was floated before them at that hearing last week. I would have stroked out then and there if I were them.

Imagine this, "The anthracite coal and coal stove industry is making too much money. People are suffering, having to choose between heat, food, and medicine. We can wait no longer for these greedy companies that are financially raping our people with their windfall 10%, 12% and even 15% profits, people desperate for relief from high energy and heating prices. We can wait no longer for these companies to do the right thing. We must act now. I, Governor Rendell, hereby sign into law the '2008 Energy Relief Act' tasking the state taxation bureau with taxing all anthracite coal related business at the rate of 100% for all profits above 2% of revenue. We respect our in state energy producers and appliance manufacturers and appliance dealers/installers, but they have not respected us. None the less, I did not take this step lightly, but ultimately I've decided it is for the greater good of our people and our state. This financial windfall being sapped from the pocketbooks of our people will no longer be countenanced by this government. The legislature has spoke, I have spoken, the people have spoken. ... I'll take some questions now."

Amazingly, what was suggested in that congressional hearing last week, or the week before, was even more draconian than that. It was something that could have been straight out of Chavez's, Castro's, or Lenin's lips. To hear it uttered by a couple of elected congresspersons was deeply unsettling.

rant off...

Devil5052 wrote: I don't see where the company's profit is factored in??

It doesn't specifically state but the profits would be spread across all those costs except the taxes. It would depend on how it was broken down and the costs were calculated. For example when I delivered coal I gave a flat rate with incremental cost increases depending on the distance. I never broke it down for the customer, easier for both them and me because I could tell them on the phone it's going to be X amount of dollars per ton and thats what they would pay when they got it. Now I could of broken it down to base price for the coal, tacked on retail charge and tacked on delivery fee but in the end its still the same cost. In a way it all boils down to smantics, there was no "delivery fee" for the closest customers as I calculated it.

As a 20 plus year oil company employee, I must say Paul is 100% correct in his "rant". If you don't like Exxon/Mobil's profits go to another gas station! Like Citgo!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Paul

Paul wrote:As a 20 plus year oil company employee, I must say Paul is 100% correct in his "rant". If you don't like Exxon/Mobil's profits go to another gas station! Like Citgo!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Paul

Keep in mind Paul that I am firmly convinced that there is illegal price fixing & restraint of trade (both felonies under U.S. law) going on amongst the major oil companies. (with the assistance of Dick Cheney's secret Energy Task Force).........Therefore, switching from Exxon to Citgo would be like saying If you don't like Al Capones's moonshine...........Go across town & buy Bugsy Siega'ls!(sp)

pvolcko wrote:I sometimes wonder if people have the slightest clue how expensive and risky it is to own and run a company like Exxon. They're engaged in some of the most costly and risky work in the world.

You know Paul......I never looked at it like that! (I'm sitting here practically in tears as I type this )
I'm taking out my checkbook right now & mailing off donations to all the major oil companies..........I assume they are charitable donations for IRS purposes.....aren't they?

Devil if you were ever in business then you would know exactly what Paul is talking about. Let's take his company for example. There is lot of R&D cost which add up quickly, and if the product fails? It's the investors in Coal-Trol left holding the bag, if it succeeds then they make some money. If its really successful then they make "obscene" profits so lets tax the hell out of them to punish them for that... If you're going to take an enormous risk on something the rewards for success should be just as big.

First Quarter
. ----------------------
. 2008
. ---------- ----------- ------
Net Income
----------------------------------------
. 10,890
.
.
Capital and Exploration
. 5,491

Numbers are in millions.

http://www.marketwatch.com/news/story/e ... EA9C361%7D

..........

The legislation in Congress is out of step with this new order. It doesn’t reduce demand or boost domestic supply.

Mostly it is a rehashing of old ideas, including proposals for resurrection of the windfall profit tax, an ill-advised gasoline tax holiday, an extended tariff on imported ethanol, more tax breaks for renewables, a meaningless antitrust bill aimed at OPEC, and possible gasoline price controls.

We need to avoid taxes that make it more costly to develop domestic petroleum supplies or penalize investments in expanded refining capacity. Public grilling of U.S. oil executives does nothing to change the world price of crude.

We need to reduce barriers to increased domestic supplies, while participating in global energy markets. Complete isolation from global markets is not a realistic goal, but U.S. energy reserves can help alleviate the pressure on prices.

......................

JON P. NELSON

PROFESSOR EMERITUS, ECONOMICS

PENN STATE UNIVERSITY

http://www.thetimes-tribune.com/site/ne ... 8216&rfi=6

Thought it was an interesting "letter to the editor".

Can also be read at:
http://www.pennlive.com/columns/patriot ... xml&coll=1

What is interesting is that the average daily trading of oil futures exceeds a days supply of delivered oil by 20 times its volume. Someone is stealing it or the money.