Friday, August 15, 2008

Suing our way out of it

In today's scandal-angle obsessed media, one doesn't often hear the other side of the story. Big numbers are impressive, but they're usually expressed in a vaccuum, out of context. High demand can mean you're selling a lot of product, if you have it to sell. And that's the case with high oil profits in this time of high demand. Volume, volume, volume. Not really so much the price of the barrel. Which the oil companies have to buy. Much of the barrel cost goes to paying oil royalties to the nationalized companies that own the oil fields they buy from. (Here in the U.S. that royalty tax rate -- before the tax on the profit, is 16% of the barrel price. It's much higher in other countries where companies like Shell and Exxon buy most of their oil.) That's right. They buy the oil that they search for, find, and pump. Transport it, refine it, and sell it.

"I saw someone characterize our profits the other day in terms of $1,400 in profit per second," Tillerson [Exxon CEO] told Gibson.

"Well, they also need to understand we paid $4,000 a second in taxes, and we spent $15,000 a second in cost. We spend $1 billion a day just running our business. So this is a business where large numbers are just characteristic of it."

We can't think of anyone who would be willing to pay $4,000 in taxes for every $5,400 they earn in salary or wages. Yet many in our country believe it's OK, even desirable, for oil companies to do just that.
There's a basic rule of thumb in economics. If you tax something, you get less of it. When you get less of it, the comodity becomes more scarce. Supply down. Demand steady or rising. Price up.

$4 billion in tax breaks for oil companies? I did the math. That amounts to about a 3% tax break over a year's time. So they're getting a "break" from 73% to 70%. By anybody's standards, that's still an obscene tax rate. For every $100 worth of net income (that's after costs), the government gets $70. Who is making obscene profits?

Ex-Shell president John Hoffmeister recenty said that oil companies are actually losing a little money right now on gasoline. The price has soared, but not enough to cover the increase in the cost of crude. They are currently making their money off of deisel and jet fuel.

But the ad says that evil McCain is the pocket of "Big Oil" for favoring reducing their obscene tax burden a little bit. Obama, on the other hand, is gonna "stick it to 'em" and Robin Hood each household up $1000 out of their "windfall" profits. Effectively raising the tax rate on oil profits to 75%. Populism in action. Statist confiscation of an obscene portion of earned income. Are we trying to MAKE Atlas Shrug?

We can't sue our way out of this. Those who support suing have no concept of the mechanisms of the economics behind oil. Or in front of it, for that matter.

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