The President’s War Over Oil Profits

In his State of the Union speech last week, President Obama made the statement, “We need to get behind this [electric vehicle] innovation. And to help pay for it, I’m asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies. I don’t know if you’ve noticed, but they’re doing just fine on their own. So instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s.” When he made that statement, in my hyper-critical mind, I asked, can oil companies really afford to pay more in taxes?

Can oil companies afford higher taxes?
So, I decided to investigate.  Today, I read a story entitled, “Exxon profit tops Street on taxes and output,” and read that Exxon Mobil Corp, the world’s largest publicly-traded oil company, made $9.25 BILLION dollars in profit.  Score one for the president!  Make those oil companies pay!

Then I read a little bit further, and saw that the larger-than-expected profit came because they had expected their effective tax rate to be 46%, but it ended up being 38%.  What?  Mr. President, you wouldn’t give them a break on their taxes, would you?  Then the brakes started locking up on the wheels of my brain… wait a second… they paid 38% taxes?  What the heck is that?  Mr. President, you want them to pay MORE in taxes, more than the 38% that they already make.

But, wait, you say.  They made 9.25 BILLION DOLLARS.  Yes, yes they did.  They made $9.25 billion on $105.2 billion of revenue.  That’s an 8.8% profit.  In 2009, they made a 6.4% profit.  These are not huge profit margins.  These are small profit margins compared to other industries.  Most businesses would not be in business if they generated such small profits.

Why pick on oil companies?
Yet President Obama wants to increase taxes on oil companies.  Why did he pick on oil companies?  Because they’re big.  Because when someone sees the number $9.25 billion, they can easily think, “Yeah, these people can afford to pay more.”

This is the same logic that people use to demonize any large company.  Think WalMart.  Think Archer Daniels Midland.  Think BP.  They’re big; therefore they must be bad.  There’s big numbers there; therefore, they can pay more.

What will really happen if the president increases taxes on oil companies?  Sure, those companies may absorb the increase in taxes for the first couple of quarters.  But then, they have an obligation to their shareholders, and they’ll increase their prices to their customers in order to bring their profits back to a level that’s acceptable to their shareholders and their business.

This means that, in essence, President Obama was advocating for higher prices on gasoline.  This is fine, considering that President Obama actually believes that gasoline should be more expensive (because he believes that higher prices will force the move from fossil fuels to alternative fuels).  But he should come out and make that argument, instead of demonizing oil companies, saying they should pay higher taxes.
You can argue that gas prices ought to be higher.  But you can’t argue that oil companies can afford to pay higher taxes, because that’s just wrong.

A more direct approach
Since President Obama has said that he wants to have the most open administration ever, he should advocate for a higher gasoline tax.  If he wants to extract more money from oil, to encourage the transition from fossil fuels to alternative fuels, he should advocate an increase in the gas tax, instead of an increase in taxes on oil companies, because increasing taxes on oil companies would probably also affect other companies that also cannot afford higher taxes.

  • Broc

    Ya those poor little billion dollar oil companies…my head might explode.

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  • Andrew Smith

    To be clear for a second, the tax reduction was a Bush administration policy passed by a bunch of Democrats in the House and Senate trying to get votes from the small business community. If that doesn’t make your head explode…

    Spiking the gas tax will hurt main street, and won’t push normal people away from fossil fuels because the cars we drive are built to run on the stuff they feed us. Are we off the absurdity deep end yet?

    The goal of taxing the big companies is to try to get them to develop alternative business strategies. Realistically, when your profit is around $9 Billion (that is $9,000,000,000), you have no incentive to change your business strategy, especially when you have politically split houses of Congress, no such legislation will end up on the President’s desk in the Oval Office.

    We can only hope that the guys in England designing Hydrogen infused fuels that will replace hydrocarbon fuels get their invention on the fast track to commercial production…

    • Bob

      The president stated his goal of taxing the oil companies more was to “invest” that money in other things.

      Also, you don’t incentivize companies to innovate by taxing them. The only thing that incentivizes is a higher price for their product. Yes, raising the gas tax will hurt main street; but so will raising the corporate tax on oil companies. Companies don’t respond to higher taxes by finding another business strategy; they respond by raising their prices so they can still make a profit.

      Yes, we need alternative fuels. But why does government need to do ANYTHING to create incentive to innovate in that direction? Here’s the scenario I envision: as oil runs out (if it ever does), the price of oil rises, which is a market pressure that causes companies to innovate (without government incentive). Each company chooses the alternative that it believes will garner it the most money in the future, and runs in that direction. Those companies that choose the best alternative thrive, while the others wane.

      The alternative to this scenario is that government dictates which alternatives are the “best” (based upon which Congressman is in power), and creates a boondoggle that doesn’t work very well, but is politically expedient.

  • Broc

    Yep my head just exploded….thx!

  • Andrew Smith

    While I agree generally that taxing big oil won’t solve the problem and will still hurt main street, the bit problem is the monopoly oil has in the the energy industry. They have no motivation to innovate because they are selling the ONLY product we have to make things like cars, buses, and trucks move. If you are sitting on a cash cow that produces enough income to allow you to buy a member of Congress to prevent the change in meaningful regulation or stifle research in alternative fuel technology, why bother changing at all as change would just single the down fall of the empire?

    From an investment perspective, the only thing higher taxes on oil companies could do is generate funds for research projects for alternatives. Then again, the electric car has been dead for so long, Dr. Frankenstein would have a problem bringing it back. In addition, it is very rare for those research projects to break into the market. I think Tesla Corp. is one of the few examples and they are struggling to stay afloat.

    Maybe we should go back to the first automobile prototype, it was steam powered…

    • Bob

      A couple of points:
      1. The problem with buying a member of Congress is not with taxation or profits, but with ethics and fraud, and I don’t think that’s germaine to this conversation.
      2. I don’t think that Congress necessarily has to do ANYTHING in order for innovation in the energy sector to happen. They don’t have to raise taxes; they don’t have to provide “investment;” they don’t have to regulate so that there’s more incentive to to R&D for alternative fuels. Market conditions will eventually make it cost-effective to produce alternative energy; we don’t have to force it.

      • Andrew

        Bob, does his mean we can conclude that all of this is little more than political pandering? Also, does this mean that the market change required to prompt innovation will be the reduction of profits such that these businesses must create new products to continue to survive? If the second is true, then how can we meaningfully change the market when the companies we hope will take the initiative and create that new product that is better for everyone are selling the only product that satisfies the current consumer need? The only option would be for people to stop buying gas and petroleum based products (read plastics). This would require the destruction of the middle class and/or the consolidation of populations around metropolitan areas with viable public transit systems. I fail to see the oil companies having any motivation to produce something cheaper and eco-friendly when they hold the market on the only thing that makes my car go down the street.

        Oddly, lets say the hydrogen infused fossil fuel replacement hits the market, and can be used in regular cars without any modification, and is sold at half the price of the national average (nearly $4/gallon) that most normal people would gladly pull up to the cheaper pump. Wouldn’t it sell more of that product, and resulting in more profits for that company. Maybe this is the cost of that kind of inflation. Gas needs to hit $6/gallon before we start screaming for a viable alternative that we end up paying $3/gallon for. Who really loses in this equation?

        As far as buying a congressman, whenever big business, corporate tax, and attempts to change the law are involved, it is unfortunate that ethics and fraud are germane to the topic. Thanks to Citizens United v. FEC (which admittedly did a lot to protect the First Amendment), it is easier to make that purchase and pay lip service to the concept of ethics since the rules haven’t been broken.

        Then again, when it comes to politics and the economy, maybe I am just a pessimist who sees the net result of all of the political and economic stupidity that has occurred since 1997.

        • Bob

          Andrew, I don’t think that the impetus for the introduction of new products into the energy market will be government-driven. The government isn’t going to effectively force companies into alternative energies. Sure, they can try to take away profits (which only taxes the consumer more, because the companies pass on the increased taxes to consumers), or they can try to subsidize alternative energy (which, ironically, also hurts the consumer, because we pay for it on the other end–in taxes).

          What’s really going to effect change is the natural progression of the market. When we reach peak oil (if we ever do), then the price of oil will naturally rise, which will make other sources of fuel cheaper in comparison. Those companies that have invested their profits in the innovation of new products (i.e. alternative energy) will thrive when the price of oil goes up and the demand for alternative energy increases naturally.

          There are already companies that are making the necessary investments now, and those will be the companies that will be the companies of the future. If those companies are the current oil companies, and have sufficient long-term vision, than more power to them.