Big Oil, Big Profits, Big Target

Wisconsin governor, Jim Doyle, has Big Oil in his crosshairs again. Last year, when gas topped $3 a gallon, he threatened to have oil company executives subpoenaed so that he could kick their butts in public. But gas prices dropped and he maintained a commanding lead over his Republican challenger, so the idea faded away. Then Exxon announced their record profits of some $39 billion. Naturally, everybody in Madison was appalled and offended.

Now I expect that reaction from the typical Madison liberal for several reasons. The first and biggest reason is that most people in general, and, seemingly, liberals in particular, haven’t got a clue about how our economy works and the role that prices and profits play in that economy. Oh, they will give lip service to “supply and demand,” recognizing that those two things do affect prices. And they will also offer faint praise for small or what they consider “reasonable” profits. But their perspective on the economy as a whole is naïve at best and, often, flat out wrong.

The first fundamental mistake they make is to treat the money supply as a fixed amount, and financial activities as a zero sum game. And that is why they get so offended when somebody makes a profit. If somebody made a profit, that means somebody else lost money. In their minds, Exxon took $39 billion out of our collective pockets and they don’t intend to give it back. And to make matters worse, the executives at Exxon are probably going to use that money to buy themselves another Hummer and maybe an Escalade for the wife. Oh, the injustice of it all. Why you could eliminate poverty with that $39 billion! Hillary declared that she wanted to “take those profits and put them into a strategic energy fund.” It was bad enough that she felt perfectly comfortable “taking” somebody else’s private property, but you should really look at the clip on Youtube to see her facial expression when she says the phrase “record profits.” It’s akin to the face you’d make if you were to say the words “rancid monkey vomit.” She is beyond appalled. Profits are bad, and huge profits are hugely bad. To them, profits are just another way of saying “money we screwed people out of.” They equate it with stealing, even though they know enough not to say that out loud.

The aggravating thing about their prevailing attitude is this notion that Big Oil lucked out and doesn’t really deserve those profits. And using the term “windfall profits” is ideal for that purpose. Of course the high price of oil (which they do not control) was the reason for most of that profit. But where were they when oil was stuck at $13 per barrel? Well maybe I get ticked off about it because I grew up in oil country and worked in the industry. But I do have a pretty good idea about what’s involved in the “awl bidness.” So let me point out a few details you’ll never hear from Jim Doyle.

Great offense was taken because of the shear size of the profit, $39 billion. But not mentioned is the fact that Exxon has assets of $223 billion that they used to make that $39 billion. That’s a return on investment of 18%. That’s pretty good, but not unheard of in the way of a return.


Oil industry profits work out to about $.08 for each gallon of gas they sell. Their net cash flow is even less because capital expenditures are deducted in the form of depreciation spread over many years. For their $.08 per gallon they explore for, find, drill, pump, transport, refine, and transport again so that you can pick up a pump handle and fill your gas tank. The state of Wisconsin on the other hand gets $.32 per gallon each time you fill up. What do they do for it you ask? They pass laws saying you have to pay them $.32 per gallon. The federal government is somewhat less of a pig. They pass laws that say you only have to pay them $.18 per gallon.

So Doyle wants to tax the oil companies with a special tax that “cannot be passed on to the consumer.” I don’t know how he plans to do that, but he suggested that they would audit the oil companies and there would be jail time for the executives if it was found they were “passing the tax on.” Considering the ambiguity of such a situation, if I were an oil company executive, I’d try to stop doing business in Wisconsin. Why would you risk it? Doyle wants a trophy. He’d like nothing better than to see the president of Exxon doing the perp walk. And frankly, so would the morons who blame oil companies for high prices. I think they believe there is one guy at each oil company who gets up each morning and says “I wonder what we should charge for a gallon of gas today?” Let them get their gas from someone else. Maybe a few years of chronic shortages and gas lines would bring them around.

Nope, we can’t let those oil companies “pass it on.” After all, the state doesn’t pass it on. They just take it directly out of your pocket.

UPDATE: The Wisconsin Department of Revenue today sheepishly confirmed what I said before. They were careful not to appear as opposing Doyle's hairbrained "can't-pass-it-on" tax, so they just put out a statement that their analysis showed that it would inevitably raise gasoline prices as much as $.05 per gallon. They also declared that such a law would be almost impossible to enforce. Trust me, this won't faze the pinheads in the least. It will be full speed ahead.

UPDATE II (5/11/07) Well, Department of Revenue be damned! Apparently the fact that it will raise gasoline prices and the fact that they can’t enforce such a law are not enough to stop Jim Doyle from being a demagogue on this issue. His press conference was pathetic. The highlight was when he invoked poll results as justification for going after “big oil.” (BTW, does that mean “little oil” is off the hook? You know there are small oil companies.) He declared that this is a good tax because “the majority of people in Wisconsin support it.” All I could think of was a quote I recently read in a Jonah Goldberg column. “The people of Nebraska are for free silver, and I am for free silver,” proclaimed William Jennings Bryan. “I will look up the arguments later.”

I wonder how the poll question read. I’m thinking it went something like, “Would you favor taxing the crap out of the big oil companies, as long as we can guarantee they can’t pass it on to you?” I think it would be hard for the typical high school drop out to answer that any way but “yes.” By the way, they would also answer “yes” if you asked them if they’d like to get a free Playstation 3, but that doesn’t mean we should give them one. He launched into a bit about how oil companies benefited form the roads we build here and then generously offered that he doesn’t expect for them to pay for ALL the roads, just a portion. And of course he couldn’t let a microphone pass by without mentioning big oil profits.

So I’m going to point out, again, that the typical profit, industry wide, on a gallon of gas is between 8 and 9 cents. While the Wisconsin tax alone is 32 cents per gallon. So whatever profits they make in Wisconsin, the state is making four times as much (which apparently not enough.) And keep in mind that the oil companies actually do something. They find, pump, transport and refine that oil into gasoline before shipping it to Wisconsin. On the other hand the state of Wisconsin does nothing other than collect their cut.