Out of Control Policy Blog

Stick Yahoo with a windfall profits tax?

    If we simply divide Exxon Mobil's net income by sales, we discover that the company reported a 10.7% profit margin in the quarter. That's probably a bit above the U.S. industrial average, but it is hardly remarkable.

    For instance, the nation's moist prominent critic of "oil profiteering" - Fox News personality Bill O'Reilly – works for a company (News Corp.) that reported a 10.2% profit in the fourth quarter.

    If you're after big earners, check out Yahoo (a 45.5% profit margin), Citigroup (33.4%), Intel (24%) or Apple (22.7%).

    Returns on invested capital over a longer time frame are even more telling. Analysts at Goldman Sachs found that returns on investment capital in the oil and gas sector from 1970-2003 were less than the U.S. industrial average over that same period. The oil industry would have to earn record profits for some time before it would produce above-average returns for its long-term investors.

Column here.

Those who are peeved about oil industry profits are often left unsatisfied when they ask who sets the price of gas and analysts reply "the market." Many imagine some cigar-chomping fat cat gleefully setting whatever price he chooses, however:

    World crude oil prices - and thus retail gasoline prices – are established in commodity spot markets. Exxon Mobil executives do not plot in back rooms to decide what to charge at the pump. Instead, Exxon Mobil's contracts with its own stations tie wholesale fuel prices to prices in the nearest spot market plus transportation costs.

Likewise, if you sell your house, who sets the price? Sure you could put your railroad-adjacent fixer-upper on the market for $20 million, but no one will buy it. If you really want to sell your house you'll pay attention to what the market says the price is.

Related: What the Oil Execs Should Have Said

Ted Balaker is Producer


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