Taxation the Big Beneficiary of Oil Production

Contributing Writer

As of May 6, 2011 the cost of a gallon of gas (national average) was $4 per gallon, an increase of 11.98 cents in the two weeks since April 22, 2011. Many people, influenced by pundits and media coverage, place all of the blame for the higher gas prices squarely on “big oil” and the higher oil prices. The argument seems to be that oil companies make far too much profit, they alone are driving up the price of gas, it’s not fair, and oil companies should be taxed more because they make too much profit. It is a specious argument. Most consumers do not understand the economics of oil and how it relates to gas prices.

While it’s true that the cost of oil influences the price of gas at the pump, it’s not just the price of crude that drives the prices. According the U.S. Department of Energy, oil accounts for 65 percent of the cost of a gallon of gas, distribution and marketing comprises eight percent, refining is 14 percent and taxes account for 13 percent. Therefore, at $4 per gallon, $2.60 would be accounted for by the cost of oil, 32 cents would account for distribution and marketing, 56 cents would account for refining and 52 cents would be state, federal and other taxes.

In addition to the federal tax rate of 18 cents per gallon (cpg), Oklahoma applies a 17 cpg for every gallon of gas that a consumer purchases in this state. This, however, is better than Washington, where consumers pay 37.5 cpg tax.

Clearly, taxes account for a significant amount of the money made from the sale of gasoline. Statistics from the Bureau of Economic Analysis, U.S Energy Information Administration reveal that in the 28 year period from 1977 to 2004, the federal and state governments made more than twice as much money from gasoline taxes each year than the total profits of all of the oil companies combined.

However, many in the news media continue to sound off about oil companies’ high profits and fail to point out that oil companies are not making high profit margins (i.e. how much out of every dollar the company can actually keep in earnings; the ratio of profit to expenses). Nor are oil companies profiting from gasoline consumers. In the last quarter of 2010, for every gallon of gasoline, diesel, or finished products that Exxon manufactured and sold in the United States it earned a little more than two cents per gallon sold. Moreover, Exxon’s profit for every dollar of 2010 revenue from all of its businesses globally was less than eight cents. According to the American Petroleum Institute, third quarter 2010 profit margins for the oil and gas industries averaged six percent on the dollar.

Ahead of oil and gas with higher profit margins are all manufacturers at approximately nine percent, electrical equipment nine percent, computers and peripherals 16 percent, pharmaceuticals and medicines 19.5 percent, beverages and tobacco 20 percent, internet information providers 23.8 percent, and many other industries all the way up to closed-end fund-equity at a profit margin of 81 percent. In fact, the oil industry falls into the bottom half of industry profit margins (114 out of 215 industries).
Although the facts reveal that oil companies are not profiting nearly as much as
other industries, there remains plenty of rancor targeted toward the oil industry because of the public’s misconception about the relationship between the price of crude and the price of gasoline, and the misperception that oil companies make too much money. Many feel justified in complaining about oil prices and demanding higher taxes on oil companies, not realizing that oil serves many of our basic needs.
While most products serve one purpose only, i.e. people chew or smoke tobacco, drink beverages, take medicines, eat food, watch TVs, petroleum is a main component of more than 6,000 products including dresses, cassettes, vitamin capsules, skis, umbrellas, fishing rods, perfumes, electrician’s tape, lipstick, yarn, denture adhesive, antihistamines, CDs, s, movie film, heart valves, anesthetics, eyeglasses and many more items we need and use on a daily basis. The importance of petroleum, in addition to serving our energy needs, shouldn’t be underestimated, nor should the cost of capturing it. There is significant risk and cost involved.

The cost to drill and equip a single oil well rose 82 percent to an average of $4 million in 2007 as compared to $2.2 million in 2006. Overall industry spending on domestic oil and natural gas exploration rose to a record $226.4 billion in 2007, and according to the Independent Petroleum Association of America (), the petroleum industry is reinvesting a record amount of earnings into new energy sources for the nation. Many companies are reinvesting 150 percent of their cash flow to explore for new sources of oil and energy supplies for the petroleum needed to drive our cars, fuel our factories and make the 6,000 different products of which petroleum is a necessary component.

Perhaps complaining about “big oil” with its 6 percent net profit margin because of the price of a gallon of gas reveals a simplistic mindset about this issue. Particularly so if one is complaining about big oil while drinking a Snapple which costs $10.32 per gallon, or a Jamba Juice which costs $21.82 a gallon, or while printing something from a printer using regular black printer cartridge ink which costs can cost as much as $8,000 per gallon. Or, while drinking a can of Coke amounting to $8.50 per gallon. Coca-Cola’s net profit margin for 2010 was 33.77 percent. That’s nearly 28 percent higher than “big oil.”

Next month: Independent oil producers are the backbone of the domestic oil industry, and Oklahoma reaps big financial benefit from its independents.

Updated 05-23-2011

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