Gas/Oil Companies/ Arm-chair economists

[ZoomZoom71]

KEEZYNOTE: Moved this from the gas thread, because there is great discussion and it deserves its own thread. Also, I am a pretty girl.

Originally Posted by Thornes70

Don't worry - it will be.

Somebody remind me again why the oil companies are getting tax subsidies again, when year after year they're getting record profits? I be konfoozed.

What was the average profit margin for oil companies last year? Once you find that out, look up the same stat on cosmetic companies.

Oh, and after that, find out what kinda local/state/federal taxes are built-in to the prices you pay at the pump. Never heard of any subsidies paid to the oil companies, though.

[Causedawg 83]

There's a giant difference between the profit margin for an oil company and the profit margin for a gas station chain. I'm sure I'm speaking to people who already know that, but a lot of people do forget that.

I work for two guys who own a small oil company, and are very successful. They make a very nice profit producing and selling oil and gas. On the other hand, when we looked into building a gas station (and we came very close to it, so I have a ton of research in my office about it), we found that when the price of oil goes up, gas stations take a hit for two reasons.

1) The profit margin doesnt really change and has very very little room for adjustment.
2) People cut back on driving. (obviously)

We ultimately decided it wasn't feasible and moved on to bigger and better deals.

You'd think that the Conoco and other gas station names with big oil production companies behind them would be the exception to that rule, but actually, they are usually just franchises that run into the same problems, and are just required to buy Conoco or whatever branded gas. They get some benefits from being a franchise, but also pay franchise taxes, fees, and percentages just like every other franchise.


About tax subsidies: Our company doesn't get any tax subsidies. The closest thing to any tax subsidies that we get is the occasional tax breaks on certain wells, and they are designed to instigate exploration and production. I really don't know much about the big companies like Conoco, though.

[Thornes70]

hey - it was a nickel in Iraq pre-invasion!

Zoom - I'll look that stuff up. Then I'll get back to ya & put you in your place... ya sarcastic ho.

Cause - yeah it sucks for the little guy owning a station, because they gotta pass along the prices to the consumer, and really don't gain any money when the price is raised... because they're paying the raised price, too! I've seen stations here in the rural areas go belly up in the last year because the cost didn't equal the business they were getting. sad...

[Thornes70]

Okay, sorry - this is long. I just did a quick google, and tried to follow Exxon since trying to find out about all of them would be overkill. I also found something that explains the tax SUBSIDIES as well as the state tax info. Again - sorry for the length but this should hopefully be enough for Zoomy:

According to the International Center for Technology Assessment:

The federal government provides the oil industry with numerous tax breaks designed to ensure that domestic companies can compete with international producers and that gasoline remains cheap for American consumers. Federal tax breaks that directly benefit oil companies include: the Percentage Depletion Allowance (a subsidy of $784 million to $1 billion per year), the Nonconventional Fuel Production Credit ($769 to $900 million), immediate expensing of exploration and development costs ($200 to $255 million), the Enhanced Oil Recovery Credit ($26.3 to $100 million), foreign tax credits ($1.11 to $3.4 billion), foreign income deferrals ($183 to $318 million), and accelerated depreciation allowances ($1.0 to $4.5 billion).
Tax subsidies do not end at the federal level. The fact that most state income taxes are based on oil firms' deflated federal tax bill results in undertaxation of $125 to $323 million per year. Many states also impose fuel taxes that are lower than regular sales taxes, amounting to a subsidy of $4.8 billion per year to gasoline retailers and users. New rules under the Taxpayer Relief Act of 1997 are likely to provide the petroleum industry with additional tax subsidies of $2.07 billion per year. In total, annual tax breaks that support gasoline production and use amount to $9.1 to $17.8 billion.

source: What Gasoline Really Costs Us

As for Exxon's profits, I only went back as far as 2005 (also note that I didn't go out & grab every quarter, so don't let the numbers throw ya off! ) :

In 2005:

ExxonMobil Corp. reported $10 billion in net income in the third quarter, the largest ever by a U.S. energy company.
ExxonMobil's earnings announcement that profits rose 75 percent from last year followed a BP announcement of $6.5 billion in profits, up 34 percent and ConocoPhillips reporting its income grew to $3.8 billion, up 89 percent.

source: Record Oil Profits Prompt Calls for Probe
In 2006:

For the year the company (Exxon) earned net income of $36.1 billion, or $33.9 billion excluding special items. That's up 31 percent from the $25.9 billion it earned on that basis year earlier...
...The oil companies in the S&P are expected to see full-year earnings of $96.5 billion, when combining reported results and forecasts for the companies yet to report. That also would be up 48 percent from a year ago. And the profit growth is not nearing an end, with analysts surveyed by First Call looking for 15 percent growth in earnings at those companies in 2006.

source: Exxon Mobil tops 4Q earnings forecast to cap record year - Jan. 30, 2006
In 2007:

Exxon Mobile, the world's biggest oil company, said profit climbed 10 percent to a first-quarter record after higher gasoline and diesel prices increased refining profit.
Profit rose to $9.28 billion from $8.4 billion in the comparable period a year earlier, the Irving, Tx. company said in a statement yesterday. Revenue fell 2 percent, to $87.2 billion. Refining profit rose 50 percent...

source: Exxon's Profit Surges To First-Quarter Record On Higher Gas Prices - washingtonpost.com
In 2008:

Exxon Mobil made history on Friday by reporting the highest quarterly and annual profits ever for a U.S. company, boosted in large part by soaring crude prices.
Exxon, the world's largest publicly traded oil company, said fourth-quarter net income rose 14% to $11.66 billion, or $2.13 per share. The company earned $10.25 billion, or $1.76 per share, in the year-ago period.
The profit topped Exxon's previous quarterly record of $10.7 billion, set in the fourth quarter of 2005, which also was an all-time high for a U.S. corporation.

source: Exxon posts quarterly, annual profit records - Feb. 1, 2008

[ZoomZoom71]

Originally Posted by Thornes70

...because they gotta pass along the prices to the consumer...

And, when OPEC raises the price of a barrel of oil, do you expect the US Oil Companies to absorb that additional cost of the price of a barrel of oil? Same rules apply. When US oil companies can start tapping our own national resources for crude (ANWR, Florida's Coastlines, etc), and they're allowed to build additional oil refineries to keep up with the increased demand (yes, the use of gasoline by consumers has not really declined in recent years), then you'll see the price of oil and gasoline go down. But, as of now, the US doesn't export any oil, and therefore we do not have much of an impact on supply...that's up to OPEC.

Originally Posted by Thornes70

...and really don't gain any money when the price is raised... because they're paying the raised price, too! ...

And, these "increased profits" you speak of are exactly my point. Most (really all of 'em) companies (not just the oil industry) have a responsibility to their shareholders to earn a certain return on their investment. That's largely related to the profit margin, which is expressed in a percentage. If the cost of goods goes up, the price to sell those goods will go up, in order keep the same profit margin. So, while the dollar amount of profit may be higher, the same percentage of profit margin remains the same.

I'm not an economist by any stretch, so I apologize if I'm not explaining this very well.

Another thing to keep in mind is that shareholders in these companies are sharing in the profit through increased value of their 401k's, IRA's etc. Think about who has investments of this type....a lot of working people, who want their investments to increase in value.

[ZoomZoom71]

Your post came in as I was typing mine. FYI, I didn't see anything in what you posted that mentioned a year-over-year profit margin. It's easy talk about a higher number of dollars, but you can't ignore the profit margin to keep it on a level comparison with other industries.

[KEEZY]

Thanks for that Zoom. Eye-opening for sure. I read an article about Exxon's profit margin for 2005 (10%), and saw that Johnson & Johnson was 18%.

Basically profit margin is Net Income divided by Net Sales Revenue. Wikipedia has a good explanation of it here: Profit margin - Wikipedia, the free encyclopedia

The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning.

For example, a company produces a loaf of bread and sells it for 10 units of currency. It cost the company 6 units of currency to produce the bread and it also had to pay an additional 2 units of currency in tax.

That makes the company's net income 2 units of currency (10 - 6, before tax, then minus 2 for tax). Since its revenue is 10 units of currency, the profit margin would be (2 / 10) or 20%.

Profit margin is an indicator of a company's pricing policies and its ability to control costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies.

The part that sticks out to me, however, is this: It is difficult to accurately compare the net profit ratio for different entities. But I guess comparing the same company to itself over a series of years would be plenty accurate.

I think the thing about this is that, bottom line, the oil companies are making huge amounts of money. Maybe the percentage isn't as high as some, but it just doesn't feel "right". Also, I think there is more to it than profits and margins.

Coolest "fact" I found (I just read the first article I found, so who knows how accurate it is): There have only been 3 years where the profit of oil companies exceeded the amount of money the gov't made on taxes from oil sales (1980-1982).

[ZoomZoom71]

Originally Posted by KEEZY

The part that sticks out to me, however, is this: It is difficult to accurately compare the net profit ratio for different entities.

If their talking about different entities in the supply chain of a given industry, then that statement makes sense.

[KEEZY]

The other big "offender" are banking companies and pharmaceuticals. It's funny how many politicians have ties to any 3 of these. That's where the problem is.

You're a supply chain. I took it as saying that you can't compare the margin of GE to the margin of Walmart. But I'm an IT guy!

[Crippler]

LOL

[ZoomZoom71]

Originally Posted by KEEZY

I took it as saying that you can't compare the margin of GE to the margin of Walmart. But I'm an IT guy!

I think it's completely fair to compare different companies' profit margin when you're talking about ROI. If a company in Industry A averages 15% ROI per year for the last 20 years, and a company in Industry B only average 2% for the same period, where will people want to invest their money???

But, I suppose for people who live to spend what they earn, not thinking about the stability of their own future (and maybe the future of their offspring), all this economic and investment talking is pointless. Those are the same folks probably relying on Social Security to fund their retirement. Shame on you.

[Thornes70]

Originally Posted by ZoomZoom71

And, when OPEC raises the price of a barrel of oil, do you expect the US Oil Companies to absorb that additional cost of the price of a barrel of oil? Same rules apply.

The price of a barrel is actually more inclined by the strength of the US dollar, not the price set by OPEC.

Originally Posted by ZoomZoom71

When US oil companies can start tapping our own national resources for crude (ANWR, Florida's Coastlines, etc), and they're allowed to build additional oil refineries to keep up with the increased demand (yes, the use of gasoline by consumers has not really declined in recent years), then you'll see the price of oil and gasoline go down.

No, you won't. This myth has been pushed by oil R&D so they can get that added profit, imo, but from all reports I've read and seen, ANWR is at least just a six month supply that wouldn't be ready for oh... ten years or so, and added stress on environmental areas like that and the coastline off of Florida isn't going to do DIDDLY when you consider that by the time any of that is even ready (ie collection, dissemination, rifining, etc.), the increase in demand will spike the cost even higher!

You want to make a big difference in the price of oil? Allow competition to be in the form of alternate fuels.

Originally Posted by ZoomZoom71

And, these "increased profits" you speak of are exactly my point. Most (really all of 'em) companies (not just the oil industry) have a responsibility to their shareholders to earn a certain return on their investment. That's largely related to the profit margin, which is expressed in a percentage. If the cost of goods goes up, the price to sell those goods will go up, in order keep the same profit margin. So, while the dollar amount of profit may be higher, the same percentage of profit margin remains the same.

I agree with you 100 percent; I am not against making a profit - but when you see the exact amount of tax subsidies (btw - that's ME & YOU paying that bill), vs. the amount of year-over year profit growth... you can't tell me it's justified.

And I do not hold any responsibility to any shareholder when it comes to my tax dollars being spent.

The oil industry just this last year (when combined with all the companies, not just Exxon) made the biggest amount of profit in the history of the earth. I wish I could find that economic table, but I lost it somewhere (it was like wallstreet journal or something). Just keep that in mind, though... largest profit EVER.

Originally Posted by ZoomZoom71

I'm not an economist by any stretch, so I apologize if I'm not explaining this very well.

Another thing to keep in mind is that shareholders in these companies are sharing in the profit through increased value of their 401k's, IRA's etc. Think about who has investments of this type....a lot of working people, who want their investments to increase in value.

I'm not an economist, either, but it's not rocket science. As for 401ks & the like... tell me, is it better to make 100 bucks in an Exxon 401k while you're spending 400 at the pump? hmmm.

[Thornes70]

One other thing - fuel is a necessity for most people to get to/from work; cosmetics are not. A company can't push insane prices on the consumer if it's an item that can be left behind.