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Windfall Profits; A couple of pieces (CSM and WSJ)
Topic Started: Aug 7 2008, 03:53 AM (42 Views)
George K
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Finally
Congress's unsound fury over Big Oil

Quote:
 
Movie theaters capture more windfall profit than oil companies.
By Justin Danhof

from the August 7, 2008 edition

Washington - With this summer's high gas prices, Americans are trading in their traditional vacations for "staycations" – vacations much closer to home.

But compared with other things Americans might do, driving is still a bargain.

Consider, for example, the costs of going to a movie:

To take a family of four to a movie at an AMC Theatre, it will cost anywhere from $55.75 to $71.50, depending on whether the family shares movie snacks or not, and this does not even include gasoline.

For that same $71.50, the family could purchase enough gas for their car (of decent gas mileage) to drive from Disneyland to Las Vegas and back again. And for the price of tickets and extra-large refreshments, , they could drive from Disneyland to the Grand Canyon and back again.

Where are the calls for federal investigation into price gouging at concession stands?

For years, populist politicians have dragged oil industry executives to Capitol Hill and accused them of price manipulation. Every time gas prices increase, liberal lawmakers direct the Federal Trade Commission to investigate oil industry price gouging. To their chagrin, the FTC has never found oil industry price manipulation.

What evidence does congress use to back their price gouging claims? Try none.

In 2005, Sen. Maria Cantwell (D) of Washington responded to a question on whether she believed oil companies were price gouging, "[a]bsolutely." she said. "I just don't have the document to prove it."

And this past May, in a speech on the House floor, Rep. Debbie Wasserman Schultz (D) of Florida targeted oil company executives when she said, "I can't say that there's evidence that you are manipulating the price, but I believe that you probably are."

Shouldn't we demand more from our politicians than unfounded accusations?

These congressional hearings are often followed by attempts to impose so-called windfall profits taxes on oil companies. The process is reminiscent of the medieval practice of trial by ordeal, in which the accused are subjected to a painful – possibly fatal procedure – with the expectation that the truly innocent will be saved.

So far, the oil companies have survived. The most recent attempt to impose such a tax on "unreasonable" profits failed in June.

And just what do congressional advocates of a windfall profits tax consider unreasonable?

In the first quarter of 2008, Big Oil had a profit margin of 7.4 percent. Over that same period, the pharmaceutical and medicine industry earned a 25.9 percent profit, the chemical industry earned 15.7 percent and the electronic equipment industry earned 12.1 percent.

What about those movie theater refreshments? Four large popcorns and four large sodas cost $31.50. The total raw ingredient cost is approximately $7.56. That equals a 76 percent gross margin. Where is the political outrage over that figure?

Still believe it is the oil companies gouging us? Speaker Nancy Pelosi seems to.

Ms. Pelosi has called oil company profits "obscene," and recently supported yet another measure to investigate alleged oil industry price gouging.

Let's take a look at where each dollar spent at the pump goes. In the first quarter of 2008, the majority – 70 cents – was spent to purchase crude oil, 17 cents was spent on refining and retailing, and 13 cents on paying taxes.

American oil companies cannot change the largest factor influencing gasoline prices – the cost of crude oil.

In The New York Times, columnist Edmund L. Andrews asked satirically last year "if the oil industry is so powerful, why did it let gasoline prices fall through the floor throughout the 1980s and part of the 1990s? For that matter why did it let gasoline prices fall sharply after they spiked in 2005 and 2006?"

Pelosi never decried this "obscene" lack of profits and shareholder abuse. Instead, she seeks to punish an industry that makes a modest profit margin on a high demand good.


What Is a 'Windfall' Profit?

Quote:
 
The "windfall profits" tax is back, with Barack Obama stumping again to apply it to a handful of big oil companies. Which raises a few questions: What is a "windfall" profit anyway? How does it differ from your everyday, run of the mill profit? Is it some absolute number, a matter of return on equity or sales -- or does it merely depend on who earns it?

Enquiring entrepreneurs want to know. Unfortunately, Mr. Obama's "emergency" plan, announced on Friday, doesn't offer any clarity. To pay for "stimulus" checks of $1,000 for families and $500 for individuals, the Senator says government would take "a reasonable share" of oil company profits.
[Barack Obama]

Mr. Obama didn't bother to define "reasonable," and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that "The oil companies need to know that there is a limit on how much profit they can take in this economy." Really? This extraordinary redefinition of free-market success could use some parsing.

Take Exxon Mobil, which on Thursday reported the highest quarterly profit ever and is the main target of any "windfall" tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we're missing some Obama-Durbin business subtlety.

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon's profits don't seem so large. Exxon's profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that's what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery -- both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau's industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.

In a tax bill on oil earlier this summer, no fewer than 51 Senators voted to impose a 25% windfall tax on a U.S.-based oil company whose profits grew by more than 10% in a single year and wasn't investing enough in "renewable" energy. This suggests that a windfall is defined by profits growing too fast. No one knows where that 10% came from, besides political convenience. But if 10% is the new standard, the tech industry is going to have to rethink its growth arc. So will LG, the electronics company, which saw its profits grow by 505% in 2007. Abbott Laboratories hit 110%.

If Senator Obama is as exercised about "outrageous" profits as he says he is, he might also have to turn on a few liberal darlings. Oh, say, Berkshire Hathaway. Warren Buffett's outfit pulled in $11 billion last year, up 29% from 2006. Its profit margin -- if that's the relevant figure -- was 11.47%, which beats out the American oil majors.

Or consider Google, which earned a mere $4.2 billion but at a whopping 25.3% margin. Google earns far more from each of its sales dollars than does Exxon, but why doesn't Mr. Obama consider its advertising-search windfall worthy of special taxation?

The fun part about this game is anyone can play. Jim Johnson, formerly of Fannie Mae and formerly a political fixer for Mr. Obama, reaped a windfall before Fannie's multibillion-dollar accounting scandal. Bill Clinton took down as much as $15 million working as a rainmaker for billionaire financier Ron Burkle's Yucaipa Companies. This may be the very definition of "windfall."

General Electric profits by investing in the alternative energy technology that Mr. Obama says Congress should subsidize even more heavily than it already does. GE's profit margin in 2007 was 10.3%, about the same as profiteering Exxon's. Private-equity shops like Khosla Ventures and Kleiner Perkins, which recently hired Al Gore, also invest in alternative energy start-ups, though they keep their margins to themselves. We can safely assume their profits are lofty, much like those of George Soros's investment funds.

The point isn't that these folks (other than Mr. Clinton) have something to apologize for, or that these firms are somehow more "deserving" of windfall tax extortion than Big Oil. The point is that what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.

It's what politicians do in Venezuela, not in a free country.

A guide to GKSR: Click

"Now look here, you Baltic gas passer... "
- Mik, 6/14/08


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Mikhailoh
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If you want trouble, find yourself a redhead
The Democrats accuse Republicans of trotting out the boogeyman to scare the voters.. at the same time as they trot out their own boogeyman - the well to do. It's THEIR fault you can't afford to drive to the casino.

At least our boogeymen actually attacked the US.
Once in his life, every man is entitled to fall madly in love with a gorgeous redhead - Lucille Ball
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QuirtEvans
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I Owe It All To John D'Oh
AHA! YOU ADMIT THAT IT'S A BOOGEYMAN! WE HAVE YOU NOW, YOU DEMAGOGUE!!!

:P
It would be unwise to underestimate what large groups of ill-informed people acting together can achieve. -- John D'Oh, January 14, 2010.
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