Oil companies are an easy target for the current high gas prices we are now facing in this country.
But, let's 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.
But taxes haven't stayed the same...not even close. In 1950, the tax per gallon of gasoline was roughly 1.5%. Today, taxes on gasoline make up about 20% of the posted price of gasoline, and a significant portion of the cost you pay to fill 'er up.
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.
Add to this the fact that the United States hasn't built an oil refinery since 1976. Government regulation has pushed this issue for the last 30 years. Some countries have nationalized their oil industry, making investors nervous which in turn causes a risk premium to be priced into oil (thus affecting gasoline prices).
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" were the real concern, then politicians would be hitting up other industries that have higher profit margins and - all other things being equal - make more money per product sold.
For example: The profit margins for the [Periodical] Publishing industry is 24%, the shipping industry has 18% profit margins, application software boasts 22% profit margins, the tobacco industry rakes 19%, water utilities operate at 10.2%.
How do we solve this problem? Do we cut back on distribution? No, that will cause a bigger problem. What's another solution? Legislate tighter controls and regulations on oil company profit margins? That will cause oil companies to jack the price even higher in an attempt to meet shareholder expectations and stay in business.These companies already operate on thin margins.
Of course, we could just leave them alone. We could demand fewer laws and regulations and, of course, reduced government spending along with lower taxes. After all, that's how this country became so wealthy and technologically advanced in the first place. They call it "dance with who brung ya".
But, let's 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.
But taxes haven't stayed the same...not even close. In 1950, the tax per gallon of gasoline was roughly 1.5%. Today, taxes on gasoline make up about 20% of the posted price of gasoline, and a significant portion of the cost you pay to fill 'er up.
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.
Add to this the fact that the United States hasn't built an oil refinery since 1976. Government regulation has pushed this issue for the last 30 years. Some countries have nationalized their oil industry, making investors nervous which in turn causes a risk premium to be priced into oil (thus affecting gasoline prices).
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" were the real concern, then politicians would be hitting up other industries that have higher profit margins and - all other things being equal - make more money per product sold.
For example: The profit margins for the [Periodical] Publishing industry is 24%, the shipping industry has 18% profit margins, application software boasts 22% profit margins, the tobacco industry rakes 19%, water utilities operate at 10.2%.
How do we solve this problem? Do we cut back on distribution? No, that will cause a bigger problem. What's another solution? Legislate tighter controls and regulations on oil company profit margins? That will cause oil companies to jack the price even higher in an attempt to meet shareholder expectations and stay in business.These companies already operate on thin margins.
Of course, we could just leave them alone. We could demand fewer laws and regulations and, of course, reduced government spending along with lower taxes. After all, that's how this country became so wealthy and technologically advanced in the first place. They call it "dance with who brung ya".
About the Author:
Author: David Lewis, RFA is a professional financial adviser. If you would like more detailed information about any aspect of personal finance, please visit David's website.
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