Tuesday, November 01, 2005

Politicians And The Big Bad Price Gouging Oil Companies

Hillary Clinton has a plan on how to deal with oil companies and high gas prices: 20 billion dollars in new taxes on oil and gasoline.

The top Democrat said her goal is to get "oil companies that have experienced these amazing profits either to reinvest them in our energy future to reduce our dependence on oil or to contribute to a strategic energy fund that will provide incentives for companies and consumers who want to be part of an energy solution."

Even Republican U.S. Senate Majority Leader Bill Frist, R-Tenn. has asked to have hearings on why energy prices are so high and said oil executives would be asked to testify.

Riiiight!!! Tax the amazing profits from the evil "price gouging" big oil companies. Make those bastard oil executives testify on why energy prices are so high. I mean how else could their profits jump so high unless they were price gouging us! Well... not so fast.

It is true that oil profits are up, way up. Overall oil companies profits are up 75%. Exxon/Mobile had a record quarterly profit of $9.9 billion and Shell reported a profit of 9 billion for the third quarter. However this is not a result of price gouging it is a result of supply and demand.

Of course since the majority of Americans were educated in a government ran public school system they do not have even a simple basic understanding of economics or how the free market works.

Any politician who cries that there is price gouging going on is one of 2 things. They are either lacking the knowledge of economics or they are taking advantage of your ignorance to increase their power while trying to convince you that they are doing something about it so they will have your vote. (Republicans and Democrats are both guilty.) Instead they should be educating you about the real situation like I am going to do here.

OK. lets go back to supply and demand. Oil Companies like Exxon/Mobile, Shell and others spend money on researching, exploring and extracting oil from the ground. Lets say they spend $15 a barrel doing this. Now the price of oil has gone up to $70 dollars on the world market because of increased demands from China and India which are driving up the prices. So what are the oil companies to do? Sell their oil at a discount? No, they are beholden to their share holders to make as much profit as possible. Besides if they did sell it at a discount the world would buy up every barrel in existence and then we would have a major oil shortage which would drive prices up even higher.

Now another thing that the majority of Americans were never taught in government ran public school systems is the difference between profits and profit margins. Don't take my word for it, ask someone where you work or go to school with, someone at the mall, doesn't matter who, just ask them what is the difference between a profit and a profit margin? See if they can come up with an answer. Simply put, your profits are the money that's left over from gross revenues after you pay the costs of doing business. Profit margins are the percentage of gross revenues that are left over after you pay those costs. Sadly, I am willing to bet that over 80% of Americans do not know the difference, and it will be those people who think they are getting screwed over by the big bad evil price gouging oil companies.

Now lets expand on our explanation of profits and profit margins for those of you who are learning this for the first time. Oh and if you are a college grad and you are learning this for the first time you should demand your money back since you have been robbed of an education. Especially since I know this stuff and I have nothing more than a private high school diploma.
Anyway, let's say that the total gross revenues for a company for one year equal $1,000,000. That's a million bucks. This company spends $930,000 to bring in that million. The difference between the one million and the $930,000 is $70,000. That's your profit. Divide the $70,000 by the one million and you get 0.07, or 7%. That's your profit margin. Now let's say that the very next year the company sells twice as much product the second year and brings in two million bucks. Let's also say that the cost of making those products doubles as well .. to $1,860,000. How much money did you have left over? Those of you who went to government ran public schools get out your calculators .. the rest of you can figure it out in your head. You have $140,000 left over. That's your profit.

Oh my, it seems that your profits doubled! What is going on here? Why you must have been price gouging.

Not so fast. Let's grab those calculators again. Divide the $140,000 in profits by the $2,000,000 in gross receipts and what do we have? Why, it seems the answer is once again 0.07, or 7%! The profits have doubled, but the profit margin remains exactly the same!

Now lets compare oil companies' profit margins to other businesses. The average profit margin for a successful business is anywhere from 7 to 14%. The S&P's average profit margin for the third quarter was 12% the banking industry had a profit margin of 20%. Anyone want to take a guess at what Exxon/Mobile's profit margin was? What do you think 14, 20%, higher??? Noped. It was only 9.8%. In other words it takes a lot more money to make money and keep up with demand in the oil business.

The problem here is that, thanks to the lack of education the vast majority of Americans have received at the hands of the government, few people know the difference between a profit and a profit margin. They read that oil company profits have gone up and they have no educational basis upon which to balance the fact that oil company revenues have also gone up ... thanks to the increase in the price of crude oil. Revenues go up. Profits go up. Since refineries were damaged in the hurricanes it costs money to rebuild them and it creates a shortage of gasoline because less oil is being refined. It's not really that hard to understand.

Look. I'm not trying to put down, or degrade the government ran public schools here that is a whole different rant; but the more I think about it the more I'm convinced that so many of the problems that we face today as a nation are the direct or indirect result of the poor education most Americans get from their state ran public school systems. It's clear that the majority of Americans have little knowledge of the role of prices in the allocation of resources by the marketplace, and the relationship of profits to those prices. Politicians, like Hillary Clinton and Bill Frist, exploit that ignorance to enhance their personal political power at the expense of our economic liberty.

The answer to solve the problem of rising gas prices is for the government to get out of the way of the oil companies. The solution is to drive up the supply, which will lower the price. It is time to allow the drilling in the ANWAR, off the shores of the United States and anywhere else we can drill for crude. There is plenty of oil in the ground....the problem is liberals in congress won't let the oil companies drill for it because they are owned by enviromental extremists.

The next step is to remove all the government red tape to build oil refineries...the places where oil is turned into gasoline. There hasn't been a new one built in over 30 years, thanks to the environmentalists. New refineries could also refine some of the cheaper, rougher crude...which would also bring down prices.

Unfortunately none of this will happen. Instead we will get politicians who will talk about price gouging and the big evil oil companies. We will also here about conservation, electric cars, and other alternative fuel sources. That's all well and good....and advances in technology do need to be pursued to reduce our reliance on fossil fuels. The bottom line is this, for the foreseeable future, cars need gasoline, trucks need diesel fuel, homes need heating oil and airplanes need jet fuel.

In the meantime, if we continue to do nothing, the price of oil will continue to stay high, the oil companies will get richer and politicians will start talking about things like price controls, which never work and result in shortages. Just ask the former communist Soviet Union. Price controls worked out about the same for them as it did for President Jimmy Carter. I am pretty sure no one wants to return to those days.

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