Oh Those 'Enormous and Unreasonable' Profits

By Doug French
  • Monday, April 28, 2003

Hardly a week goes by without one of the local newspapers printing a letter from some reader ranting that the big oil companies are “price gouging” consumers. It never fails: gasoline hits two bucks a gallon and here comes the outrage.

This time even Nevada’s new attorney general, Brian Sandoval, is getting into the act. “Sandoval has sought written explanations from oil companies,” goes one report, “stepped up price monitoring and shared information with other attorneys general.” There are your tax dollars at work: An A.G. wasting his—and businesses’—time, forcing people to explain why they are charging what they are charging for a product that consumers are buying willingly. 

Tim Hay, the A.G.’s “consumer advocate,” goes even further; calling for legislation prohibiting price gouging. Las Vegas Sun columnist Jeff German quoted “veteran petroleum consultant” Tim Hamilton as saying, “Because anti-trust laws in Nevada and other states don’t define gouging, the oil companies are allowed to artificially raise their prices as long as they do it independently and not as part of any organized plot.” These threats of punishment are reminiscent of Russian commissars prosecuting “economic crimes” in the Soviet Union’s communist heyday. 

Just what constitutes price gouging? How much profit is too much profit? And who decides? Politicians from coast to coast believe that they should decide. “It’s an increase [in gasoline prices] directly attributable to profit-taking by the oil companies,” proclaims U.S. Senator Dick Durbin (D-Illinois). Simply earning a profit is now a crime? Back in 2000, Al Gore (remember him?) was beating the same tambourine: “We know that, according to the latest available statistics, oil company profits have increased by as much as nearly 500 percent in the first part of this year. These enormous and unreasonable profits suggest that big oil is gouging American consumers.”

Well, are big oil companies earning “enormous and unreasonable” profits? Exxon Mobil’s return on equity for the last four years (1999 through 2002) was 12.4 percent, 25 percent, 21 percent, and 15 percent respectively. For the same four years Coca Cola’s return on equity was 25.5 percent, 23.3 percent, 34.9 percent, and 25.8 percent respectively. By that measure, perhaps it’s the drinkers of soda pop who should be writing the letters to the editor.

If “Big Oil” is earning “enormous and unreasonable” profits, the stock prices of the major oil companies should be going through the roof, right? Exxon’s stock price has fallen 12 percent over the past year, Royal Dutch Petroleum is down 20 percent, and Shell is down 12 percent. It looks like oil company stockholders are getting hammered, not consumers.

Could it be the local convenience store operators, rather than the oil companies, who are “gouging” customers? Industry experts say local operators only average 10 cents per gallon (profit). That’s barely enough to keep the lights on and pay the guy or gal behind the counter. The fact is, convenience store operators make their profits from merchandise sales and gaming machines, not gasoline sales. The gas pumps are there just to get you into the store.

So, if gas prices are so high, just who is making out like a bandit? Turns out it’s those same folks who are so eager to investigate the alleged “gouging”—in other words, the political class. The federal tax on gasoline is 18.4 cents per gallon. Then the State of Nevada, on top of that, levies another 33.7 cents. That’s 52.1 cents a gallon going to the government. Thus residents of the Silver State today pay the third highest gasoline tax in the nation—behind only New York and Hawaii.

But the politicians, both state and federal, want even more. “In Washington, D.C., as well as in more than half the state capitals,” reports CNNMoney.com, “there are proposals to increase the levies governments charge on gasoline, diesel, and other automotive fuels. If plans become law, they could add more than 25 cents a gallon in state and federal taxes, on top of the 40-to-50 cents a gallon most Americans already pay.” And Rep. Don Young (R-Alaska), chairman of the House Transportation and Infrastructure Committee, is seeking to increase the federal gasoline tax by roughly 80 percent, upping it to 33 cents by 2009.

Back here in Nevada, Sandoval, Hay and Hamilton can attempt to demonize Big Oil all they want, but the facts remain clear: It’s Big Government that is making the “enormous and unreasonable” revenues from gasoline sales.

Doug French, executive vice president with a Southern Nevada bank, is a policy fellow with the Nevada Policy Research Institute.

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