Monday, November 14, 2005

The Government's Windfall Profits

Gasoline prices have been dropping steadily. Just last week I paid $2.13/gallon. What happened to the greedy oil executives? Did they suddenly decide that profits weren't so important after all? Or perhaps in the absence of hurricanes and other phenomena that shift the demand for oil upward, prices naturally drop.

Although we generally find it best to use a combination of gasoline and automobiles to get from one point to another, as the price rises, other means become more profitable. Long ago, oil companies discovered that the demand for gasoline is not as inelastic as once thought. In one form or another, substitutes abound and people make changes to their lifestyle rather quickly. For example, in the short time that gas prices were high, I noticed that traffic was much lighter, but friends of mine who use public transportation noticed that there were more people who also utilized buses and subways. More people were carpooling or biking. Now that the price of gasoline has dropped, more people have resumed driving to work and traffic seems to have increased.

Oil executives, as much as they would like your money, simply can't force it from you. They have to offer you a deal that you are willing to accept and a deal that is better than a deal from their competitors. Politicians are under no obligation or incentive to offer you either. We complained about gasoline prices rising by $0.25-0.50/gallon in the short run, yet for years we have paid approximately $0.36/gallon in taxes, or more, depending on where you reside. There are 42 gallons in a barrel and we consume approximately 8 million barrels each day. In aggregate, this amounts to $120,960,000.00 per day in windfall profits for the government. (Caveat: some forms of oil receive different levels of taxation. For example, diesel fuel is taxed at five cents more per gallon, whereas home heating fuel is taxed less.) Using the $0.36/gallon approximation, the government receives $10.886 billion per quarter in windfall profits. This is much higher than Exxon Mobil, a company being investigated for earning $10 billion last quarter.

Government makes this windfall profit every quarter. Exxon Mobil does not. Lest we forget, taxes that we pay on oil are only a small portion of the taxes related to the production and distribution of oil. Exxon will pay corporate income taxes on their $10 billion earnings. Exxon employees will pay income, Medicare, and Social Security taxes. Gas stations will pay real estate assessment taxes and will pay taxes on their profits. Trucking companies will pay taxes on their vehicles used to transport oil and truckers will pay income taxes as well. Rather than investigate the "windfall profits" of Exxon Mobil last quarter, perhaps we might investigate the "windfall profits" that our government takes every quarter.

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