Excess Profits

OK, I’ll admit it – I hate to pay for gas. I drive a lot to and from work, almost all highways in Atlanta, with an average speed of 76 mph. So I fill up regularly and notice every price change. But I am also a capitalist and generally anti-legislation, so I was awfully suspicious when congress decided to yank oil company executives into hearing on “excess profits”.

See, the term “excess profits” usually means “we want to take your money’ amid claims the profit makers are immoral, even evil. It is done when politicians think that the weight of public opinion is against the industry being targeted, so the businesses won’t dare complain too much. It seems a safe bet right now – people are upset by gas prices that went over $3 a gallon in places and the oil companies *did* make billions of dollars in profits at that time.

But I am a bit nervous about anyone simply deciding that someone made “too much” profit and taking it from them, especially the government. So I did a little research (thanks are owed to Conoco Philips and the American Petroleum Institute) and learned the following.

The average profit per gallon is about 9 cents – meaning that if the oil companies made no profit at all, gas prices would fall about 5%. Not much of a profit, really. Now, since I got this profitability data from an oil company, I looked at other sources (Gibson Consulting, the Houston Chronicle, and the Foundation for Taxpayer and Consumer Rights); they all agree that oil company profits for gasoline sales range from 8 cents to 10 cents a gallon with an average of, in fact, 9 cents per gallon.

Is that so much? Not really; based upon the oil companies’ investment that is an overall profit of 9 cents per dollar of investment (different than profits per gallon). This means that the oil company (with a profit margin of 9%) is less profitable than long distance and cellular phone service companies (average of 9.5% profit margin), software companies (average 11% profit margin) or banks (average profit margin of a whopping 19%). This means that the total profits (the amount earned per month) are so large because Americans use a lot of gas (more than 775 million gallons per day)!

There is something that the senators investigating “excess profits” don’t mention – taxes. The federal gas tax is 18.5 cents a gallon, or about twice the profit per gallon of the oil companies. And state taxes are generally worse – only Georgia and Alaska have per-gallon gas taxes lower than the profit of the oil companies. State gas taxes average 20 cents a gallon and range as high as 31-32 cents a gallon (New York and Wisconsin). So consumers are paying an average of 38 cents in taxes for every gallon of gas they buy, not counting sales taxes! In New York or Wisconsin your taxes can go as high as 50 cents per gallon; adding in weighted sales taxes, citizens of New York state add an additional (average) 8 cents a gallon for a total tax load of 59 cents per gallon, or almost $12 in taxes to fill a 20 gallon tank.

Compare that with the $1.80 in profits that the oil companies make for that same full tank and determine which is hurting consumers more – oil company profits or taxes?

The majority of federal gasoline taxes go into the federal transportation bill as what is known as ‘highway money’. The scandal over the waste of tax money in the transportation bill is justly legendary. In the bill just passed and signed there were more than 6,300 “special projects” ranging from lights for a music center to the infamous ‘bridge to nowhere’. All told, these pork projects add up to more than $24 billion, or almost 9 percent of the total $286 billion road bill (the bridge to nowhere alone is almost a quarter of a billion dollars).

Here’s a suggestion – cut all that pork and reduce the federal gas tax by 1.5 cents to 17 cents a gallon? That would be a wash; the reduction in pork and taxes are equal. Or let’s repeal past pork (road bills often set up payments for 5-10 years, meaning we pay for pork for decades) from the last 6 road bills and reduce the tax. I bet that we could drop the tax to 12 cents a gallon without trying too hard. State taxes are certainly no different – I bet that the elimination of government pork and corruption could reduce the federal and state gas taxes by 8 cents a gallon immediately, probably with money left over.

Instead, we have senators, many nominally conservative senators, chastising oil executives for “excess profits” while fighting for gas tax pork with both hands.