Some Common Sense on Gas Prices reported this AM on GMA

[ERD50]

I was shocked this AM; GMA was doing their usual gas price 'news' (geez, you'd think we breathed this stuff), I was ready for the usual blab, and then...

Dan Harris comes on and covers two topics:

1) The Gas Tax Holiday - So Dan says he talked with a number of top economists and they ALL said this was the WRONG thing to do. First, fed tax is only (IIRC) 15 cents or so a gallon, so it isn't that big of a deal. But still, to the extent that you lower prices, you increase demand - so we will use more gas, just increasing the whole problem. He didn't even get into the fact that since we run a deficit, we just need to pay those taxes somewhere else, so...

2) Windfall Tax on 'Big Oil' - Again, he said the economists all pointed out that if you limit profits, this will reduce incentives to explore for more oil, to invest in refineries, etc - all leading to HIGHER gas prices.

Wow - some common sense on gas prices - shocking. Of course, Charlie Gibson really didn't have much to say - I guess this just doesn't make for 'good' TV. And now, the weather...

I can't find a link on their web site, sorry.

-ERD50

 

[Khan]

I was shocked this AM; GMA was doing their usual gas price 'news' (geez, you'd think we breathed this stuff), I was ready for the usual blab, and then...

Dan Harris comes on and covers two topics:

1) The Gas Tax Holiday - So Dan says he talked with a number of top economists and they ALL said this was the WRONG thing to do. First, fed tax is only (IIRC) 15 cents or so a gallon, so it isn't that big of a deal. But still, to the extent that you lower prices, you increase demand - so we will use more gas, just increasing the whole problem. He didn't even get into the fact that since we run a deficit, we just need to pay those taxes somewhere else, so...

2) Windfall Tax on 'Big Oil' - Again, he said the economists all pointed out that if you limit profits, this will reduce incentives to explore for more oil, to invest in refineries, etc - all leading to HIGHER gas prices.

Wow - some common sense on gas prices - shocking. Of course, Charlie Gibson really didn't have much to say - I guess this just doesn't make for 'good' TV. And now, the weather...

I can't find a link on their web site, sorry.

-ERD50

No windfall tax; but can we do away with the tax breaks?

With crude at $100 a barrel, Big Oil needs no tax breaks - Yahoo! News

It's difficult — make that impossible — to justify taxpayer subsidies for an industry whose top five companies made $123 billion in profits last year. Oil at $100 a barrel ought to be plenty of incentive to drill without extra encouragement from taxpayers.

 

[ERD50]

Agree 100%. Tax subsidies/breaks for these established companies makes no sense.

Just another example of how far off the mark our politicos are.

-ERD50

 

[eridanus]

2) Windfall Tax on 'Big Oil' - Again, he said the economists all pointed out that if you limit profits, this will reduce incentives to explore for more oil, to invest in refineries, etc - all leading to HIGHER gas prices.

I'm against a windfall tax but I also don't think taking 10% of $40 billion will deter Exxon's activities much.

 

[ERD50]

I'm against a windfall tax but I also don't think taking 10% of $40 billion will deter Exxon's activities much.

OK, are you offering to have your personal taxes raised 10%? It shouldn't affect you much.

And why single out the oil companies? There are plenty of other businesses making a higher profit margin.

-ERD50

 

[whitestick]

2) Windfall Tax on 'Big Oil' - Again, he said the economists all pointed out that if you limit profits, this will reduce incentives to explore for more oil, to invest in refineries, etc - all leading to HIGHER gas prices.

-ERD50

If that were true, then why was the last refinery built about 30 years ago, domestically.
Don't remember the exact citation, but I believe I heard that a large part of our rising gas prices is due to limited refinery capacity, not the 20% of oil that we import. IF that is true, and I have no way to disprove it, then it would seem the oil companies are keeping their windfall profits, not building refineries, and expecting the next fire/service interruption/shut down to reformulate/ to generate even more profits and higher prices.
The free market actions only work when you have a free market, not one monopolized due to constraints - be it start-up costs for refineries, or limited licensing to procure and ship oil in this country. Seems a candidate for regulation, just done better then the usual government fiasco.
Gawd, now I'm sounding like a democrat......
Woe is me - Maybe I should vote for Ralph Nadar

 

[RetiredGypsy]

Vote Democrat, vote Republican, vote for Ralph Nader...you're still electing a politician.

The sad thing is I wouldn't mind seeing gas at $7-8, comparable with England. Less SUV soccer moms glued to their cell phones trying to run me over. Fewer idiots with trucks running around trying to run me over. Generally, just less people trying to run me over in general. And if they were still running around, it'd be putting a terrible dent in their wallet, and at least I'd have that going for me if I got ran over.

 

[Notmuchlonger]

Vote Democrat, vote Republican, vote for Ralph Nader...you're still electing a politician.

The sad thing is I wouldn't mind seeing gas at $7-8, comparable with England. Less SUV soccer moms glued to their cell phones trying to run me over. Fewer idiots with trucks running around trying to run me over. Generally, just less people trying to run me over in general. And if they were still running around, it'd be putting a terrible dent in their wallet, and at least I'd have that going for me if I got ran over.

I think you been ran over. To think a country of this size is comparable to Europe. Honk Honk.

Wait excuse me. You said tiny old England. Honk honk hooooonkkkk

 

[RetiredGypsy]

Gas isn't $7-8 a gallon in England?

 

[mb]

If that were true, then why was the last refinery built about 30 years ago, domestically.
Don't remember the exact citation, but I believe I heard that a large part of our rising gas prices is due to limited refinery capacity, not the 20% of oil that we import. IF that is true, and I have no way to disprove it, then it would seem the oil companies are keeping their windfall profits, not building refineries, and expecting the next fire/service interruption/shut down to reformulate/ to generate even more profits and higher prices.
The free market actions only work when you have a free market, not one monopolized due to constraints - be it start-up costs for refineries, or limited licensing to procure and ship oil in this country. Seems a candidate for regulation, just done better then the usual government fiasco.
Gawd, now I'm sounding like a democrat......
Woe is me - Maybe I should vote for Ralph Nadar

(1) We import ~60% or our oil not 20%. Import 12.2 of 20.6 Mbarrel/day consumption. Source: Infoplease

(2) The cost of crude is responsible for $2.82 of a $3.90/gallon assuming $118/barrel. Refining is only 32 cents/gallon. Source: April 30, 2008 San Jose Mercury News

(3) Although new refineries have not been built, existing refineries have been expanded and I suspect that is probably the most economical way to increase refining capacity.

(4) The price of oil was in the toilet from 1982 until a few years ago giving less incentive to expand production during that time.

I'm not a fan of big oil, in fact I favor a big, big increase in the gas tax(currently only 35 cents/gallon according to the same Mecury News article cited above) and abolishing the tax breaks for exploration but I don't think that we should selectively punish businesses for acting like businesses and trying to maximize profits especially when many of the factors leading to those profits (e.g. the price of oil) are not under their control.

MB

 

[clifp]

(1) We import ~60% or our oil not 20%. Import 12.2 of 20.6 Mbarrel/day consumption. Source: Infoplease

(2) The cost of crude is responsible for $2.82 of a $3.90/gallon assuming $118/barrel. Refining is only 32 cents/gallon. Source: April 30, 2008 San Jose Mercury News

(3) Although new refineries have not been built, existing refineries have been expanded and I suspect that is probably the most economical way to increase refining capacity.

(4) The price of oil was in the toilet from 1982 until a few years ago giving less incentive to expand production during that time.

I'm not a fan of big oil, in fact I favor a big, big increase in the gas tax(currently only 35 cents/gallon according to the same Mecury News article cited above) and abolishing the tax breaks for exploration but I don't think that we should selectively punish businesses for acting like businesses and trying to maximize profits especially when many of the factors leading to those profits (e.g. the price of oil) are not under their control.

MB

Nice post and I agree. I keep hearing all the big tax breaks for big oil. Now I don't doubt there are many/some but I am waiting for one of the [-]wind turbines[/-] politician and/or the media to start listing the exact tax breaks big oil gets.

We provide an R&D tax credit for big pharma, big tech, and any other industry, I am not sure that providing an incentive for oil companies to look for oil in the US is such a bad thing. In fact it seem pretty comparable to the R&D tax credit.

 

[Texas Proud]

I bet the farm subsidies are a lot more than the big oil tax breaks....

And we do not need them as they drive up prices....

A tax break is used to get them off the dime... they can just sit around soaking up their profits and paying dividends... and NOT do exploration...

The tax break is for something specific that might not get done..

However, I kind of agree that it is not needed at this time... but maybe was when passed (don't know... but possible)..

 

[StJohnsWood]

Well played ERD50 Well Played!

What are the oil companies profit margins. Would they make more by putting their cash in a savings account and bagging the oil bizness

OK, are you offering to have your personal taxes raised 10%? It shouldn't affect you much.

And why single out the oil companies? There are plenty of other businesses making a higher profit margin.

-ERD50

 

[ERD50]

2) Windfall Tax on 'Big Oil' - Again, he said the economists all pointed out that if you limit profits, this will reduce incentives to explore for more oil, to invest in refineries, etc - all leading to HIGHER gas prices.

-ERD50

If that were true, then why was the last refinery built about 30 years ago, domestically.

Mostly because they can't get permits to build a new refinery. NIMBY. Maybe that is a good thing, but it is the reason, nonetheless. It is easier to expand an existing plant, as mb points out.

The free market actions only work when you have a free market, not one monopolized due to constraints

If the oil companies are big bad monopolies, they sure are lousy at it.

I just looked up the top 10 companies in the S&P 500. Of those ten, two are oil companies (CVX XOM). Their profit margins are rank # 7 and 10 - out of 10. 11.2% and 9.0%, versus 21%-28% for the top three. So why 'pick' on oil companies - I do not get it?

Your other 'facts' have already been corrected by others.


-ERD50

 

[TromboneAl]

These high gas prices are too good to last. People should be celebrating. The best part is the rapid rise in prices. You couldn't design a better way to promote alternative fuel sources.

And this is from someone who spent $2,000 on gas last year, and paid over $4 per gallon yesterday.

 

[DallasGuy]

Gas isn't $7-8 a gallon in England?

Gas averages about $8 per gallon across much of Europe according to the following article:

Why gas in the U.S. is so cheap: Financial News - Yahoo! Finance

It says that on a per capita basis, people in the US use 3 times more oil than Europeans....perhaps it's time we start weaning ourselve off oil a little. I really get tired of the argument that SUV drivers here in the US use to explain their use of those types of vehicles...that they're safer on the road. Perhaps thats true, but then don't turn around and complain about the high price of gasoline making it unaffordable (or painful) to drive your SUV. As the article says "We dug our own hole". Just as I'm pointing my finger towards SUV drivers, I need to look in the mirror to see what I can do to reduce my usage since there are many more ways that we in the US waste energy.

 

[FinanceDude]

So why 'pick' on oil companies - I do not get it?
-ERD50

A)It's easy......
B)They provide a product EVERY ONE uses.
c)Even at "low margins", there's a lot of money to be made.........

 

[ERD50]

I really get tired of the argument that SUV drivers here in the US use to explain their use of those types of vehicles...that they're safer on the road. Perhaps thats true,

Even that is not a reason...

The New York Times > Business > Safety Gap Grows Wider Between S.U.V.'s and Cars

The gap in safety between sport utility vehicles and passenger cars last year was the widest yet recorded, according to new federal traffic data. People driving or riding in a sport utility vehicle in 2003 were nearly 11 percent more likely to die in an accident than people in cars, the figures show. The government began keeping detailed statistics on the safety of vehicle categories in 1994.

-ERD50

 

[ERD50]

A)It's easy......
B)They provide a product EVERY ONE uses.
c)Even at "low margins", there's a lot of money to be made.........

And people can't see past the end of their nose...


-ERD50

 

[maddythebeagle]

These high gas prices are too good to last. People should be celebrating. The best part is the rapid rise in prices. You couldn't design a better way to promote alternative fuel sources.

And this is from someone who spent $2,000 on gas last year, and paid over $4 per gallon yesterday.

I agree...maybe we should tax gas more

 

[RetiredGypsy]

I've heard in South Africa gas is ~$0.43/gallon. Who cares about great white sharks, manhood-shrinking sorcerers, or British tourists, that sounds like a good place to retire to me!

 

[eridanus]

OK, are you offering to have your personal taxes raised 10%? It shouldn't affect you much.

And why single out the oil companies? There are plenty of other businesses making a higher profit margin.

-ERD50

The point is that the initial argument is stupid. There are good reasons to be against a windfall tax but the "it'll make them re-consider their business model" argument doesn't hold. Exxon just isn't going to pull out of oil exploration if their profits drop from $40B to $36B due to a windfall tax.

 

[eridanus]

Mostly because they can't get permits to build a new refinery. NIMBY. Maybe that is a good thing, but it is the reason, nonetheless. It is easier to expand an existing plant, as mb points out.

There has always been a lot more money in upstream operations (mainly exploration) compared to downstream operations (refining and retail). In fact, downstream often loses money for the majors. Look at Valero's (a pure-play downstream) lack of profits this quarter.

"Independent refiners like Valero, which don't own or operate oilfields, have been hit hard by the run-up in oil prices to $120 per barrel, while retail gasoline prices have hit $3.61 per gallon."

 

[mb]

Nice post and I agree. I keep hearing all the big tax breaks for big oil. Now I don't doubt there are many/some but I am waiting for one of the [-]wind turbines[/-] politician and/or the media to start listing the exact tax breaks big oil gets.

We provide an R&D tax credit for big pharma, big tech, and any other industry, I am not sure that providing an incentive for oil companies to look for oil in the US is such a bad thing. In fact it seem pretty comparable to the R&D tax credit.

Good points.

I'll contradict myself a bit and say that I have conflicting opinions on tax incentives for exploration. I would like to discourage gasoline consumption but I would like to encourage discovery of new oil reserves in this country. But I kind of view oil reserves like ER investments. It's good to have more but it isn't necessarily good to use it up as fast as you can. But oil companies and their share holders want to maximize profits and that usually means pumping it out of the ground as quickly as possible and as profit making entities that is what they should do. We can't criticize them for that. That is what they are supposed to do - make money. But I think this is one area where perhaps government should try to push things just a bit in what I think is the right direction towards more conservation and preserving resources for future needs. (Sometimes I surprise myself when I sound so much like a good democrat )

I don't know how much of a break oil companies get for exploration. All I know is what the spin-masters on each side say and that is probably the equivalent of knowing nothing.

One poster asked about oil company profit margin. Again I don't know actual numbers but my recollection is that historically it is pretty modest.

MB

 

[ERD50]

The point is that the initial argument is stupid. There are good reasons to be against a windfall tax but the "it'll make them re-consider their business model" argument doesn't hold. Exxon just isn't going to pull out of oil exploration if their profits drop from $40B to $36B due to a windfall tax.

Of course it would not have such extreme effects as having Exxon 'pull out of oil exploration' over a 10% tax. Just like lowering gas prices by by 18 cents (the fed tax) won't make everybody go out and buy a Hummer.

But price and profit changes *do* have reactions. The supply/demand and risk/reward fundamentals have not been changed.

My basic problem with a 'windfall' tax is - where's the 'windfall'? From my above post:

I just looked up the top 10 companies in the S&P 500. Of those ten, two are oil companies (CVX XOM). Their profit margins are rank # 7 and 10 - out of 10. 11.2% and 9.0%, versus 21%-28% for the top three.

Here, in easier to read form:

S&P Rank Symbol Profit %
1 .......MSFT.. 28%
2 .........MO.. 25%
3 ........BAC.. 21%
....
7 ........XOM.. 11%
....
10 .......CVX... 9%

So why is this a 'windfall tax'? Now, if the country decides it wants to tax fossil fuel, because we want to discourage its use and promote alternative sources, I'm OK with that concept. But focusing on businesses that make moderate profit margins, and making it seem that making money is a punishable offense bothers me.

How would you like the govt to decide that *you* made 'too much' money, and that you (or your business) should be singled out and taxed at a higher rate than others?

Let me be clear - if the oil companies are found guilty of collusion, price fixing, or other illegal acts, the people involved should serve time, and the companies should be fined heavily. But I dread the day when making a profit by selling a legal product that is in demand is retroactively determined to be a punishable (or fine-able) offense. That's what a 'windfall' tax sounds like to me. We have tax laws on the books - way too many of them already.

Heck, as long as I'm on my soapbox, lets talk some *real* common sense. I'll go back to my fundamentals and state again that we should eliminate *all* corporate tax. After all, these taxes are just paid by the consumer. The overhead of compliance with these taxes is paid by the consumer. So, all corporate taxes do is raise prices for consumers and help drive jobs overseas. It a shell game, but no one wins - not even Uncle Sam. So a 'windfall' tax is just a smoke/mirrors tax policy stacked on top of a smoke/mirrors tax policy.

-ERD50