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Ned Cantwell’s recent editorial piece drove home the point that most of America cannot, will not, or does not have the time to understand the reasons for the increase in the price of oil and gasoline. Since I have had the time, I hope I can clear up a few myths.
Myth #1: “Big Oil” is responsible for the price of oil and could choose to lower it.
Oil is a global market; its price is determined by the intersection of world demand (increasing fast) and world supply (stagnating).
Increasing demand and stable supply results in higher prices, the basic law of markets. Any sort of price fixing would take an incomprehensible conspiracy on a global scale. A more detailed discussion of the economics can be find the Congressional Research Service’s (CRS) report at www.fas.org/sgp/crs/misc/RL32530.pdf.
Myth #2: “Big Oil” is making reprehensibly high profits at the expense of consumers.
Yes, American oil companies are making huge profits but it is important to put those numbers in perspective. Oil companies are absolutely massive and so require nominally huge profits to operate.
For example, a profit of $1 million dollars for a small, family-owned coffee shop is astronomical; the same for Starbucks is miniscule; it’s a matter of the scale of the company. A better way to look at profits is profit margin, a measure of profits as a percent of total sales.
The average profit margin for S&P 500 companies is 8.5 percent. Exxon Mobil and Chevron come in at 10.8 percent and 8.6 percent, respectively. Higher? A little. Exorbitant? Not a chance. Apple, Google and Microsoft have respective margins of 15.1 percent, 24.9 percent and 28.3 percent.
Myth #3: “Big Oil” pays almost no tax and that should be rectified.
From 1980-2005, oil companies in the US paid $2.2 trillion dollars (inflation-adjusted) in federal and state taxes.
That’s more than three times the profits they earned in the same period. Imagine making $200,000 a year and having the government take $150,000. They pay taxes. And as for a windfall tax on those “massive profits,” Jimmy Carter did it in the ’80s; the CRS found that the effect was a decrease in domestic production of 3-6 percent and an increase in dependence on foreign oil of 8-16 percent.
Lower gas prices will only come from either an increase in supply (requires drilling) or a decrease in demand (requires you).