Exxon Mobil makes a lot of money; billions of dollars per quarter, to affix some scale to the notion. During those quarters that the massive firm only makes a few billion in profit, most Americans are oblivious. When those same Americans have to pay $4.00 per gallon to go to work, they get a little testy at the mention of “Big Oil”. The political hot air competition (Republicans blame prices on the inability to drill everywhere, Democrats blame them on greed and reckless subsidy) is getting us nowhere. But, just for the sake of argument, let’s cover the two arguments, and be done with them.
Taking $4 billion in subsidies away from Big Oil (if those subsidies went exclusively to those firms; which they don’t), would not lower gas prices. Period. For the same reasons that The Rational Middle lampoons GOP legislators for their attacks on Big Bird and Food Stamps, a $4 billion cash grab by Democrats is a stab at chump change in the scale of our budget. Yes friends, $4 billion, on the scale of the budget of the greatest country on Earth, is very nearly as important as the freshener you might see in a public urinal. As to the Republicans shrill, incessant, and obnoxious screams to Drill, Baby, Drill…
IT WON’T LOWER GAS PRICES NOW, AND NOT MORE THAN A QUARTER OR SO OVER TEN YEARS!
I am sorry friends; it is a fact, not a political ideology or subjective assumption. We are dealing with the harsh realities of economics and simple arithmetic. Perhaps another look is waranted:
- To Sarah Palin, are you a Socialist? Because drilling in America doesn’t mean Americans get to keep the product, unless you plan on nationalizing the oil companies. And that is the first problem with the assumption; anything harvested in our nation gets summed into the world supply, thinning the downward pressure extra supply has on price.
- The United States has 22.3 billion barrels of provable reserves. The United States consumes 20 million barrels per day. That is a three year supply (if we went on the Palin Plan/logic of nationalizing oil).
- Under an optimistic scenario, an aggressive drilling and production plan could raise our output by perhaps 2 million barrels per day, which, if we nationalized, would push prices down by perhaps 10%-15%. (So, drill everywhere, risk more BP scenarios, go communist and nationalize the oil companies, and save $0.60 per gallon.)
- If we didn’t nationalize, that very optimistic 2 million barrel per day raise in production would get pushed into the world market (90 million per day), meaning that, after 8-10 years or so, we would see price declines of perhaps $0.20 per gallon.
We could, of course, go in a different direction and plan more mass transit (lowering demand and cost). We could also pass a federal law mandating a 50 mpg average for passenger vehicles in 10 years (easily achievable, without additional cost to automakers, since they retool everything at least every 10 years.) The savings in average cost per gallon of gas, equivalent to that achieved by turning America into an oil field, are easily found in dozens of less intrusive plans. But none of those plans are appealing to legislators who are well compensated by oil companies.
This year alone, the oil and gas lobby has given over $39 million to Congress! Last year, they funded the Republican Revolution in the midterms to the tune of $145 million. These same companies have also spent a mint sharing their warm and fuzzies with us (see picture at right).
But the topic we the people are currently concerned with isn’t lobbying, it is windfall profits and our broken and diminished summer vacations. Republicans in Congress (and elsewhere) have informed us that profit is good, and punishing profit in un-American. I mostly agree with them. It is a fundamental tenet of Marxism that profit is the result of exploitation of the working class. As I am not a Marxist, I believe that profit resulting from value added to a market is always good.
The key here, is added value. When a firm, individually owned in a small town or corporately owned in Manhattan, creates profit by adding value to a market, it is good. If a business treats its customers better, sources higher quality products at the same cost, improves its process, or brings a new and unique product or service to a market, the profits they receive are earned. The question for our democracy, is not how much profit is Exxon earning, but how much profit are they receiving without returning added value to the economy. If there is excess profit without added value, then how does the democracy handle the market failure while preserving free enterprise. We can’t do it by taxing windfall profits…the margin for error is just too large.
The subject of taxation is another prickly cactus of a notion. Exxon will tell you that they pay an average tax rate of around 40%. They are absolutely correct. Such knowledge is usually enough to make the average taxpayer stop and say, “They are paying their share.” But, without condemning or supporting the idea, it is important to understand the difference between corporate taxes and individual taxes. A typical household in the U.S. last year made about $50,000. They paid, right off the top, about 16%-20% (given FICA, income, standard deductions and the like). They paid that before the mortgage, utilities, cars, food, college, clothes, church donations, or Christmas presents. Corporations like Exxon get to pay all of their expenses first.
Last year, Exxon’s total revenue was over $383 billion dollars; that is about 20% of the United State’s total revenue. Their gross profit (total revenue minus the direct cost of that revenue), was over $149 billion, which is roughly similar to what it cost to fight (annually) in Afghanistan and Iraq. But they only paid taxes on $53 billion of that total (13.9% of total revenues and 35.6% of gross profits). The next time some arrogant fool of a commentator calls you a freeloader because your standard deduction brings your effective rate down to 10% or so (after you have paid 7% to FICA), tell him to shut up! Companies pay taxes, after they pay all of their bills; individuals pay taxes, then hope they have enough to pay their bills. Taxes aside, a situation where-bye a firm like Exxon can earn massive increases without adding value is a market failure.
We can and should examine the reasons for the market failure, and move to find the least invasive democratic correction at our disposal. The reason that gas prices surge the way they do is that speculators with no connection to the end-use of commodities are allowed to buy and sell commodities. Markets, for stocks and commodities, are important. They provide liquidity, which greases the wheels of commerce. But markets, created to serve the god of liquidity, have been perverted to the creation of profit without production. Traders earn profit without adding value to the economy. They produce only profit, and that is an exploitation even in the context of capitalism. One possible solution to this problem would be to ban sales of commodities (or derivatives based on commodities) to parties that are not end-users of the commodities themselves.
These prices don’t help anyone but top-tier executives at Exxon. Exxon Mobil is sitting on $300 billion in retained earnings; they aren’t using the funds to develop or explore, they aren’t distributing the funds to shareholders, they aren’t hiring Americans who wouldn’t already be employed. The convenience stores and gas stations that sell their product (mostly owned by small business persons), are hurt when prices surge. Keep in mind that if the price is going up fast, the owner of that station you are mad at is probably losing money on every gallon (street prices rarely go up as fast as delivered prices). Exxon produces and sells a highly substitutable product (gas is gas); if they disappeared tomorrow, they (and the jobs they do produce) would be replaced the day after.
Oil is something we will live with for decades to come (until it runs out in the late 22nd Century). Exxon is a legal company selling legal products and operating in the open. Profits are generally good. But the construction of the oil and commodity markets is rife with problems that cripple our economy. We live in a democracy; we can do something about it.
The Rational Middle is listening…