Fairness for oil companies

While Dora was keeping my granddaughter entertained yesterday, I had an hour or so to think through (in a little more detail) the arguments of the anti-oil-company bandwagon.  So far this vacation week, I haven't run into too many friends, neighbors, or relatives who don't think the oil companies are giving us the shaft with those high prices and profit levels most people (especially one side's politicians) are so fond of labeling "obscene."  As much as I tend to think the cause those higher prices has more to do with my friends', neighbors', and relatives' desire for gasoline (combined with OPEC's knowledge of that fact), I decided to re-evaluate things before blaming all of them and thereby making the rest of the week less fun for everybody. 

Let's see, I thought: If politician X "knows" that the oil companies are making "too much" profit, doesn't that imply that she (or he) has to know what amount of profit is "okay" or "just right"?  Of course it does; otherwise, how would she know that the current profit level is "too much"?  And by extension, she also knows how much profit is "not enough." 

All of that has to be the case, if she's being honest—instead of just engaging in opportunistic political hyperbole after reading the polls and deciding what the people would like to hear.  After all, Rudy Giuliani in effect warned us to watch out for that style of so-called leadership:

"Leadership is first figuring out what's right, and then explaining it to people, as opposed to first having people explain to you what's right, and then just saying what they want to hear."

In any case, wouldn't it be unfair of me not to give politician X the benefit of the doubt?  Shouldn't I assume she's being honest, at least until evidence to the contrary becomes undeniable? 

So, I reasoned further, if person X supposedly knows when an oil company's profits are (a) too high, (b) just right, and (c) not enough, and also thinks it's the government's job to step in and correct abnormalities, then it's a mistake to call her proposed remedy an "excess profits tax" or "windfall profits tax."  Those are misleading labels, because they only describe half of the government's supposed responsibility.  What if the profits were "not enough"?  Then we'd have to think up a different name for the same policy—something like "insufficient profits subsidy"—to describe the government's corrective action. 

Why not just simplify the proposed policy, and call it something like "abnormal profits correction"?  That would be a simpler, more-accurate description of a policy proposal intended to treat the oil companies fairly, wouldn't it?  (Fairness is important, isn't it?) 

Of course, if the only intent of the "windfall profits" rhetoric were to capitalize politically on the public's reaction to high gasoline prices, that changes everything.  Is that what's really going on, I wondered?  Do the politicians really have no intention of being "fair" to the oil companies by also proposing to send government checks to them whenever the politicians' expert judgment revealed that profits were "too low"? 

With Dora's adventure coming to an end, I needed to wrap up my thought process quickly—so I decided to give those who are complaining about "obscene" oil company profits a chance to explain what they'd do when profits are "too low."  A few more weeks should give them ample time to elaborate, I figured.  Until then, I won't be able to judge the fairness of their proposed policy.  And jumping to a conclusion wouldn't be fair of me, would it? 

Comments

[Jason]

Sadly, that's essentially how the federal government currently operates. There are industries that receive the "insufficient profits subsidy" and with $3 trillion swishing around, I can't imagine any business that wouldn't want a piece of the action.

[PseudoNoise]

More expensive gas, please!

And for parents of Dora fans, I love this TV Funhouse episode:
http://youtube.com/watch?v=Sb7eLgaddI4

Have a good 4th, Steve.

[Matt]

I cannot wait until oil independence day, when this entire conversation will be tired and old. I am going to be waiting a while though. Nevertheless, I think the public is OK with any company having record profits. This is America, and that is the whole point of capitalism. However, people get there blood boiled when a company, ANY company, is making record profits, and is receiving significant government subsidies. I am surprised more conservatives are not outraged by this. We do not let people on welfare keep their monthly government check and food stamps if they find a decent paying job. Why should it be any different for corporations?

[Bob]

Income taxes as a percent of income less interest - Fiscal Year 2006

Connoco 41.5%
Exxon/Mobil 41.4%
Chevron 37.6%
WalMart 33.5%
Berk-Hath 32.8%
Microsoft 31.0%
Apple 29.4%
IBM 29.3%
Merck 28.7%
GE 16.0%

I guess if you make light bulbs and wind power generators you're under the radar.

[marmico]

It's all about the "crack spread" Dora, really, it's the crack spread Hillary, Nancy, really...

http://zmansenergybrain.com/wp-content/uploads/2007/07/cracks-tso-062907.jpg

Don't worry Dora, Saudi Aramaco is building refinery capacity, so it's always going to be about the oil exporters cracking oil into gasoline in their own markets for internal consumption. Let the obese, overindulgent, overindebted oil importers subsidize corn ethanol production to increase the crack spread.

Now Dora, when I'm talking about the crack spread, it ain't powder from Bolivia. But the free markets seem to work well when it comes to the cost of crack. Cocaine is half as much and gas is twice as much since the millenium turned over.

[rick]

I found this article to be good reading.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=989827

[rufus]

If Global Demand really does get to 88 million barrels/day by the end of this year you folks will start coming up with some more ideas, I'll betcha.

[Harvey Farr]

I found this article to be interesting. They are entitled to all the profit they can buy. Long live fair trade, free trade, the free market and free $$speech$$ on the campaign trail.

http://news.bbc.co.uk/1/hi/world/americas/1138009.stm

[Harvey Farr]

As a follow-up to my link to the BBC article on oil money and the Bush cabinet I have some Fourth of July thoughts your analysis of oil company profits.

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices.” Adam Smith, Wealth of Nations 1776.

“A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly understocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate.

The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion, indeed, but for any considerable time together. The one is upon every occasion the highest which can be squeezed out of the buyers, or which, it is supposed, they will consent to give: the other is the lowest which the sellers can commonly afford to take, and at the same time continue their business.

The exclusive privileges of corporations, statutes of apprenticeship, and all those laws which restrain, in particular employments, the competition to a smaller number than might otherwise go into them, have the same tendency, though in a less degree. They are a sort of enlarged monopolies, and may frequently, for ages together, and in whole classes of employments, keep up the market price of particular commodities above the natural price, and maintain both the wages of the labour and the profits of the stock employed about them somewhat above their natural rate. Such enhancements of the market price may last as long as the regulations of police which give occasion to them.” Adam Smith, Wealth of Nations 1776.

“I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength, and bid defiance to the laws of our country.” Thomas Jefferson, 1816

“We may congratulate ourselves that this cruel war is nearing its end. It has cost a vast amount of treasure and blood…. It has indeed been a trying hour for the Republic; but I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed. I feel at this moment more anxiety for the safety of my country than ever before, even in the midst of war. God grant that my suspicions may prove groundless.” 1864 Abraham Lincoln

Finally I think that is the era of corporate cash equaling free speech, a Treasury Department with a revolving door to Wall Street that allows China to maintain the value of the Yuan artificially low dumping product on our markets, corporations demand domestic suppliers move operations to China and the complete infiltration and subjugation of our democracy to corporate rule, we would do well to remember the East India Company and the Boston Tea Party and the blood and sacrifice shed for our freedom those colonial farmers and merchants.

“To the Tradesmen, Mechanics, &c. of the Province of Pennsylvania … Hereafter, if they succeed, they will send their own Factors and Creatures, establish Houses amongst us. Ship us all other East-India goods; and in order to full freight their Ships, take in other kind of Goods at under Freight, or (more probably) ship them on their own Accounts to their own Factors, and undersell our Merchants, till they monopolize the whole Trade. Thus our Merchants are ruined, Ship Building ceases. They will then sell Goods at any exorbitant price. Our Artificers will be unemployed, and every Tradesman will groan under the dire Oppression. The East India Company, if once they get Footing in this (once) happy country, will leave no Stone unturned to become your Masters. They are an opulent Body, and Money or Credit is not wanting amongst them They have a designing, depraved, and despotic Ministry to assist and support them. They themselves are well versed In TYRANNY, PLUNDER, OPPRESSION and BLOODSHED. Whole Provinces labouring under the Distresses of Oppression, Slavery, Famine, and the Sword, are familiar to them. Thus they have enriched themselves, thus they are become the most powerful Trading Company in the Universe. … excerpts from a broadside signed “A Mechanic,” Philadelphia, December 4, 1773

HAPPY FOURTH OF JULY

[Bob]

According to the BEA, corporate income tax revenue in 2006 amounted to 457.2 billion dollars.

Income taxes paid by Exxon/Mobil, Chevron and Connoco/Phillips totaled roughly 55.5 billion.

Three companies out of the Fortune 500 contributed roughly 12% of ALL 2006 corporate income tax.

I still wonder how GE manages to weasel it's way out of paying their fair share.

I'm starting to feel better about gassing up instead of buying a GE appliance or light bulbs. In fact, I might boycott GE products altogether.

[Aaron]

I wonder if it has to do with the nature of oil...like its some magical resource you just find and can sell for a lot of money, as opposed to corn or something (also rising in price, must be price-gouging, no?)

I'd also be curious to see if such a bias exists less so in oil-producing regions, i.e. do Texans and Alaskans also grumble about gas prices being from "greedy" companies as much as New Yorkers and Chicagoans?

[Grodge]

Bob, do you have a reference on the BEA tax stats for Fortune 500 companies?

[Bob]

Grodge,

BEA does not have tax stats on Fortune companies. They do have numbers on total corporate taxes collected. Sorry, I didn't record the exact URL.

I grabbed companies income tax numbers from their respective income statements. Reference is made to Fortune 500 only as an illustration. Actually, the oil companies percentage is likely higher as the BEA reports ALL corporations.

[Steve]

Harvey:
Milton Friedman said some similar things:
"The two chief enemies of the free society or free enterprise are intellectuals on the one hand and businessmen on the other, for opposite reasons. Every intellectual believes in freedom for himself, but he’s opposed to freedom for others… He thinks there ought to be a central planning board that will establish social priorities… The businessmen are just the opposite—every businessman is in favor of freedom for everybody else, but when it comes to himself that’s a different question. He’s always the special case. He ought to get special privileges from the government, a tariff, this, that, and the other thing."

And...

"The case for free enterprise, for competition, is that it’s the only system that will keep the capitalists from having too much power… The virtue of free enterprise capitalism is that it sets one businessman against another and it’s a most effective device for control."

I agree with that sentiment. What irks me is when government gets into bed with the corporations -- such as Obama's corporate welfare proposal of relieving the Detroit auto companies' pension burden in return for acquiescence to the central planning idea of higher gasoline economy for conventional, internal combustion vehicles -- thereby subsidizing the poor performing fat cats, instead of letting the fat cats sink or swim in the face of competition that could render the internal combustion engine obsolete.

[Bob]

Steve,

I'm not taking sides for or against Obama's idea. However, today large corporations yield tremendous influence and power, especially when it comes to medical insurance. Absent affordable individual coverage or a single payer system it is the large corporations that provide the bulk of affordable coverage to the employed. In the case of Detroit automakers that coverage is extended to include retirees, I believe, pro bono.

A few weeks ago I recall mention in the WSJ that the Detroit automakers are going to the UAW for drastic benefit reform. Don't know how it is going or any details.

For true free markets to work in today's market place they will require participation on a global scale. That's not realistic.