Exxon Profits Up, They Catch Hell While Government Skates

Exxon reported that its second quarter profits were 10.8 billion dollars and this has a lot of people screaming bloody murder. How oh how can this company make money when people are forced to pay three dollars or more for a gallon of gas. There are a few things that need to be explored before we condemn Exxon or any other company that makes money selling its products.

A barrel of oil is 42 gallons and when refined produces 19.5 gallons of gas. Three dollars times 19.5 yields 58.5 dollars which is well below the cost of the barrel. Well, the balance of the barrel produces other usable items such as jet fuel, kerosene, lube oils and other items. When those are sold they make up the difference between the cost earned from gasoline and the cost of the barrel.

Interestingly, the process of refinement has a cosy associated with it. The costs include 59% for the supplier, 10% for refining, and 11% for marketing. Now these are just the costs, not the profits. Refiner, marketer, transporter, and retailer profit accounts for 10c per gallon (total, not each). Of this, the person who owns the gas station gets 2 or 3 cents a gallon and the oil company gets 8 or 10 cents in profit for each gallon of gas. As pointed out earlier, they make money on the other products made from crude oil.

One item that is an associated cost for gasoline is the tax each state and the federal government tacks on to a gallon of gas. The Federal Excise Tax is 18.4 cents a gallon and states vary from around 7.5 cents to upwards of 32 cents a gallon. In addition, some states add other taxes (local, etc.). This explains why the cost of gasoline is different across the country but does not take into account costs associated with “boutique” blends of gas. The average of all states (and DC) is 21.1 cents a gallon. This means that the government makes 39.5 cents a gallon of gas and these government entities do not do anything to “earn” it.

For the sake of argument we will say Exxon makes the 8 cents a gallon and we will use the average for government of 39.5. What this means is that government makes 5 times as much money on a gallon of gas than the oil companies. Say it again slowly, the people who actually do all the work make one fifth of the money that the government, the entity that does absolutely nothing, makes. So my math tells me that if Exxon made 10.8 billion dollars then the government made 54 billion dollars (it is really more than this because of the variances in state values and because government taxes the other items made from crude). Why is there no outrage at the profit government made?

Exxon and all the other publicly traded companies have to come out each quarter and tell everyone how much money they made. Most people have no concept as to what it takes to make gasoline and the costs involved. They see a large profit and think gouging and this is egged on by the politicians who, it would seem, have no idea how things actually work (though many of them own oil company stocks). Perhaps it would be a good idea to make Congress come out each quarter and tell us how much money they took in from the taxes they impose on companies. Each state should be required to do the same. If I were Exxon I might come out and say “We made 10.8 billion dollars and the government made 54 billion dollars in profit from our sales.” If the information is put out there and people actually pay attention to it maybe they might point their outrage at the price of gas in the right direction.

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3 Responses to “Exxon Profits Up, They Catch Hell While Government Skates”

  1. sam says:

    Your entire argument is predicated on the assumption that oil is a market good. It isn’t. Because of subsidies and price collusion between producers, there is no true market for oil. Complain about gas taxes all you want, but until subsidies are eliminated, anti-trust laws are enforced, and environmental externalities accounted for, oil companies ARE making profits that they shouldn’t be able to make–profits that harm society. This isn’t a bullshit moral argument about “price gouging”, it is simple economics.

  2. Big Dog says:

    Simple economics involves supply and demand. The price per barrel of oil is not set by oil companies. In addition, the price today is about double what it was 5 years ago and the price per gallon is about double. Imagine that.

    Now, as for subsidies, I don’t think any industry should receive subsidies. Unfortunately, there are a lot of industries that get tax money in subsidies. I believe we should do away with all of them, but keep in mind how that will affect farmers and others. Does not bother me but many will complain. You can’t have it both ways.

    No one has proven price gouging because none exists. There are those who want oil companies to give money back because they are making a lot of money. Are you willing to pay them when they do not make a profit? How about other businesses. The point of this post is that the only gouging taking place is by government.

    Remember, it is supply and demand. The world demand is sky high and that drives prices up. We can do many things like drill offshore and build more refineries. If people are not willing to do this then there will continue to be a supply problem that drives prices up.

    That my friend, is simple economics.

  3. James Brinker says:

    When the opponents to big oil companies talk about oil subsidies, what are they?, I know here in Minnesota we have subsidies for ethanol, but I do not believe this is for the oil companies, that would be for the ethanol producers. Do oil companies get subsidies for exploration, production, transportation? Also I do believe that I heard that Exxon recieves 70% of its profits from overseas and I never hear that being stated by the main stream media. I agree this is a simple issue of economics of supply and demand,however there seems to be a lot of people who want to play the class of envy card.
    thanks for your blog.