No oil tax?

[TheStatutoryApe]

Set their margin? Are you suggesting that the profits last year were based on some predetermined margin?

Supply and demand. Or are you suggesting that the oil companies will conspire to maximize profits?

Supply and demand only effects the price of oil. Do oil companies not charge for, or make money off of, any thing except the oil itself?

 

[Ivan Seeking]

Supply and demand affects the price of everything in a free market.

What is your point?

 

[TheStatutoryApe]

Supply and demand affects the price of everything in a free market.

What is your point?

If a company's after tax profit is lessened due to increase in taxes they should easily be able to increase prices to increase profits and offset the tax burden shouldn't they? They may not legally be able to play with the price of oil directly but can increase the fee's attached for things such as processing, transportation, ect, right?

 

[Ivan Seeking]

That is still governed by supply and demand - ie. the price at the pump. Go ahead Exxon, raise the price artificially. BP will gladly take the business.

 

[russ_watters]

Set their margin? Are you suggesting that the profits last year were based on some predetermined margin?

Yes! You didn't know that? Why do you think the profits are higher when the price is higher? The margin is the same.

Supply and demand. Or are you suggesting that the oil companies will conspire to maximize profits?

[edit] I said margin, but I really meant markup. Markup is the multiplier for the commodity price. Margin is after all overhead is subtracted out, what is left. Similar, but not exactly the same. But of course that means that the margin actually grows when the price increases and the markup stays fixed... [/edit] Supply and demand determines the commodity price, but the markup is essentially fixed: Competition determines the markup, but unless something radical changes, the market stabilizes and the markups become essentially fixed. Every business works that way. How can you not know this? Haven't you ever noticed that certain gas station types are always a few cents cheaper than others in an area, yet the price varies from one area to another. Here, the cheapest is almost always Wawa (but you've probably never heard of them_. Supply and demand determines where the price can be at a certain location and the home office decides how far above or below that to set their price based on a profit margin they are willing to live with. Wawa is always cheaper because their business model includes a mini-market, which is where most of their profit comes from. Cheaper gas brings higher volumes of people into the market (where the markups are huge).

A similar example:
Best Buy sells a $500 TV and a $1000 TV. They have a set markup of 50% (a guess, but it is probably close), so the $500 TV gives them an income of $250 while the $1000 TV gives them a net of $500.

Another example:
I work at an engineering consulting firm that sets the target billing rates for the employees at 2x their pay rate. So if their pay rate goes up, their billing rate goes up. If a pay rate goes from $25 to $30, the billing rate goes from $50 to $60 and the profit per hour worked goes up $10.

[edit2] So regarding the example in post 24, those markup numbers would be too small. Lets say the markup is 20% and the final profit margin 4%. If the government puts a 50% profit tax, ExxonMobil increases their markup to 24% to compensate, keeping the "real" profit margin 4%.

 

[russ_watters]

That is still governed by supply and demand - ie. the price at the pump. Go ahead Exxon, raise the price artificially. BP will gladly take the business.

Haven't you ever asked yourself why, if that was true, did all the oil companies earn record profits last year? BP and Exxon determined through competition what markups they were willing to live with and when the price doubled, the profit doubled (actually, more than doubled since the fixed costs did not change). There is no reason for either of them to change their markup in that kind of situation. If you add a new tax, it does not affect supply and demand at all, it only effects profit. So both can simply pass the cost on to the consumer, and the competitive situation remains unchanged.

And no, BP cannot take the business. Supply and demand for oil are both very tightly constrained. BP could not siply undercut Exxon's price and take all of their business - they'd have to first spend billions of dollars for years to build the infrastructure. So if BP undercuts Exxon's price and runs out of gas because they can't meet the new demand, what does that mean? It means they could have charged more for the same amount of gas.

 

[russ_watters]

Another thing about oil company profits: their margins are pretty thin relative to other businesses. But they get a lot of press because the companies are truly enormous. So the profit numbers look big even though they are not relative to other businesses.

 

[russ_watters]

More: The oil market is more complicated than the simplistic examples I gave. Here's a good faq: http://www.theoildrum.com/node/2571 [Broken]

 

[Ivan Seeking]

Haven't you ever asked yourself why, if that was true, did all the oil companies earn record profits last year?

Price was driven by speculation in oil futures - betting on future supply and demand. The hyperinflation of crude prices was completely artificial. And it had nothing to do with the operating costs of the company. But it was caused by speculators, not oil executives, so it was still a function of supply and demand.

Consumers could care less about constraints. If gas station A has cheaper fuel than station B, I will likely go to station A.

We often used to see price wars between stations, and we still do at times, so there is genuine price competition. Also, if one company's price is artificially high, there is more than one company to take up the slack. Exxon doesn't want to lose 5% of their business, so they remain price competitive.

 

[TheStatutoryApe]

Consumers could care less about constraints. If gas station A has cheaper fuel than station B, I will likely go to station A.

We often used to see price wars between stations, and we still do at times, so there is genuine price competition. Also, if one company's price is artificially high, there is more than one company to take up the slack. Exxon doesn't want to lose 5% of their business, so they remain price competitive.

According to what I have read on Snopes, in their article on the fallacy of gas station boycots, oil companies that are unable to sell their own oil (as gasoline) will then turn around and sell their excess to other companies who are in need of more oil to keep up with demand. Taking advantage of the problem of production vs demand they protect themselves in this way from market shifts at the pump. The gas stations themselves don't make much money from gasoline anyway.

 

[Supercritical]

ExxonMobil Q4 2008 (source)
Net Profit: $7.82 billion
Revenue: $84.696 billion
Profit Margin: 9.23%

Profit Margins from previous quarters (from Yahoo Finance and Exxon's investor reports):
Q3 08: 10.77%
Q2 08: 8.46%
Q1 08: 9.32%
Q4 07: 10.00%
Q3 07: 9.20%
Q2 07: 10.43%
Q1 07: 10.64%
Q4 06: 11.39%
Q3 06: 10.53%
Q2 06: 10.46%
Q1 06: 9.44%

It's interesting to note that many media outlets including the NYTimes reported the profit drop of 33% in terms of the current economic crisis, as though "the once high-flying oil sector is scrambling to adjust to a sharp downturn."

On the contrary, while oil prices varied from $60 to $140 and back to $40/barrel during the past 3 years, Exxon's profit margin remained in the range of 9-11%.

I think there's a lot of misplaced anger toward ExxonMobil, but it's died off substantially now that a gallon of gas is cheaper.

 

[Ivan Seeking]

Where are you getting your data. I don't see it.

I did see this:
Net income (U.S. GAAP)
4th qtr 08 7,820
3rd qtr 08 14,830
2nd qtr 08 11,680
1st qtr 08 10,890
4th qtr 07 11,660
http://www.exxonmobil.com/Corporate/Files/news_release_supp4q08.pdf [Broken]

Beyond that, it was public information that Exxon made greater profits recently than any company in history.

 

[Supercritical]

It's located about halfway down the page on each report (Q4 08 report).

It's true that ExxonMobil has set records for profits in terms of dollar amounts (although I haven't read if the all-time record is adjusted for inflation). However, China eats the most food in the world in terms of tonnage (speculative), but nobody says they eat too much. The point being: ratios and proportions tell more of the story. For instance, for the year 2007 Coca Cola made $5.98 billion profit on $28.9 billion revenue, amounting to a 20.73% profit margin. This means that if Coca Cola had generated the same amount of revenue as ExxonMobil did, Coca Cola would have raked in roughly twice the profit (assuming everything scaled).

In Exxon's case, it just so happens that businesses that are more profitable (pharmaceuticals, for instance) don't have the revenue/sales volume that Exxon has; and those giants that are less profitable (Wal Mart, as an example) don't have the sales to top Exxon's profits either.