It is easy enough to blame oil companies for the "record high" gasoline prices we are now facing in this country. But, one must ask: are gas prices really outrageous? And secondly, are the oil companies really to blame for our current situation?
Examine the facts:
In 1950, $1 would buy you a lot of goods and services. Today, that same dollar is worthless in comparison. What cost $1 in 1950 now costs $8.78 today. Gas prices in 1950 were about 30 cents a gallon. Today, adjusted for inflation, gasoline prices should be $2.64, assuming taxes remained the same.
The problem is that taxes haven't stayed the same.In 1950, taxes on a gallon of gasoline was roughly 1.5%. Taxes on a gallon of gasoline today make up about 20% of the price of gas.
That 30 cents a gallon in 1950 should cost you about $3.13 today. But this assumes supply and demand has remained constant. It hasn't. China and India are probably the most visible examples of this. China and India are quickly rising to the top of the "food chain" in terms of consumption, and they are requiring more and more energy every year.
The last oil refinery built in the United States was completed in 1976. Government regulation has prevented any refineries from being built since then. Other countries have nationalized their oil industry which makes investors nervous about doing business with a dictator or group of dictators (I wonder why) which in turn causes a risk premium to be priced into the oil we must buy from other nations.
Lastly, about 9.5% of the price of gasoline goes to the oil companies. A whopping 20% goes to Federal, State, and local taxes. A very small percentage goes to privately held gas station owners and the rest is used up in the cost of production and getting the product to market.
If "windfall profits", or high, "excessive" profit margins were the real issue, why not go after other industries who bring in much larger profits than oil companies?
For example: the [Periodical] Publishing industry operates at a 24% profit margin, application software - 22% profit margins, the shipping industry has 18% profit margins, the tobacco industry takes in 19%, and water utilities boast 10.2%.
What can we do about all of this? Well, we can cut back on distribution of oil and gas. But, that will cause a problem (naturally) because demand is going up, not down. We can take away more of the oil company's profits. They already operate on pretty thin margins, so they will likely have to jack prices up even higher to compensate for a "windfall profits" tax. Then, they'll really be the bad guys won't they?
A third option is to leave them alone. Tell your representatives to eliminate coercive laws, regulations, and then demand lower taxes and spending in Washington.
Examine the facts:
In 1950, $1 would buy you a lot of goods and services. Today, that same dollar is worthless in comparison. What cost $1 in 1950 now costs $8.78 today. Gas prices in 1950 were about 30 cents a gallon. Today, adjusted for inflation, gasoline prices should be $2.64, assuming taxes remained the same.
The problem is that taxes haven't stayed the same.In 1950, taxes on a gallon of gasoline was roughly 1.5%. Taxes on a gallon of gasoline today make up about 20% of the price of gas.
That 30 cents a gallon in 1950 should cost you about $3.13 today. But this assumes supply and demand has remained constant. It hasn't. China and India are probably the most visible examples of this. China and India are quickly rising to the top of the "food chain" in terms of consumption, and they are requiring more and more energy every year.
The last oil refinery built in the United States was completed in 1976. Government regulation has prevented any refineries from being built since then. Other countries have nationalized their oil industry which makes investors nervous about doing business with a dictator or group of dictators (I wonder why) which in turn causes a risk premium to be priced into the oil we must buy from other nations.
Lastly, about 9.5% of the price of gasoline goes to the oil companies. A whopping 20% goes to Federal, State, and local taxes. A very small percentage goes to privately held gas station owners and the rest is used up in the cost of production and getting the product to market.
If "windfall profits", or high, "excessive" profit margins were the real issue, why not go after other industries who bring in much larger profits than oil companies?
For example: the [Periodical] Publishing industry operates at a 24% profit margin, application software - 22% profit margins, the shipping industry has 18% profit margins, the tobacco industry takes in 19%, and water utilities boast 10.2%.
What can we do about all of this? Well, we can cut back on distribution of oil and gas. But, that will cause a problem (naturally) because demand is going up, not down. We can take away more of the oil company's profits. They already operate on pretty thin margins, so they will likely have to jack prices up even higher to compensate for a "windfall profits" tax. Then, they'll really be the bad guys won't they?
A third option is to leave them alone. Tell your representatives to eliminate coercive laws, regulations, and then demand lower taxes and spending in Washington.
About the Author:
David Lewis is a Registered Financial Associate and provides objective financial information about life insurance, SPIAs, bank CDs, stocks, and other topics related to retirement & financial planning.
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