Saturday, June 28, 2008
Getting gas
I was recently asked what I would do to solve our gas price situation. My solution is to remove the government from the equation.
First, I would enact the FairTax. Granted, this is a more all-encompassing solution to other problems in our over-taxed society, but it would have a marvelous impact on the oil industry. Without burdensome corporate taxes on oil manufacturing, the oil industry would have more funds for exploration, drilling, and refining. On a side note, it would also place the tax burden where the environmentalists claim to want it: on consumption, at the retail level.
Second, I would open ALL federal lands and coastal areas for drilling, with the only exception being historic landmarks and locations with buildings on them. Oil companies would bid on the exploration and drilling leases as they do now.
Third, I would end all federal subsidies for ethanol production. It is a waste of money and energy, that is only creating a food crisis. In addition, it would remove a big disincentive from the oil industry: One of their main excuses for not building more refineries has been the amount of money the government has poured into alternative energy.
Fourth, ease the environmental restrictions on construction of oil wells and refineries. Of course, the oil companies will still have to deal with localities where they build these structures, but at least the federal government will be less of a factor. Specifically, I would eliminate any federal restrictions based on threats to wildlife. Sorry polar bears, but my tank of gas is MORE important than your existance. If you can't survive an oil well being built, then you don't deserve to live.
Fifth, we need significantly more nuclear power plants in this country, therefore public utilities should enjoy the same benefits mentioned above as the oil industry. What does this have to do with oil? Simply put, most of the alternatives to oil will require large amounts of energy to implement, such as hydrogen power. Even if we don't implement these alternatives in the area of transportation, we need more and cleaner power as our routine energy consumption increases.
With all these carrots, if the oil industry can't find a way to bring prices down, THEN government intervention would be necessary. However, I don't think it will come to that. Most of these proposals should lead to immediate relief at the pumps, with future prices dropping even further.
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First, I would enact the FairTax. Granted, this is a more all-encompassing solution to other problems in our over-taxed society, but it would have a marvelous impact on the oil industry. Without burdensome corporate taxes on oil manufacturing, the oil industry would have more funds for exploration, drilling, and refining. On a side note, it would also place the tax burden where the environmentalists claim to want it: on consumption, at the retail level.
Second, I would open ALL federal lands and coastal areas for drilling, with the only exception being historic landmarks and locations with buildings on them. Oil companies would bid on the exploration and drilling leases as they do now.
Third, I would end all federal subsidies for ethanol production. It is a waste of money and energy, that is only creating a food crisis. In addition, it would remove a big disincentive from the oil industry: One of their main excuses for not building more refineries has been the amount of money the government has poured into alternative energy.
Fourth, ease the environmental restrictions on construction of oil wells and refineries. Of course, the oil companies will still have to deal with localities where they build these structures, but at least the federal government will be less of a factor. Specifically, I would eliminate any federal restrictions based on threats to wildlife. Sorry polar bears, but my tank of gas is MORE important than your existance. If you can't survive an oil well being built, then you don't deserve to live.
Fifth, we need significantly more nuclear power plants in this country, therefore public utilities should enjoy the same benefits mentioned above as the oil industry. What does this have to do with oil? Simply put, most of the alternatives to oil will require large amounts of energy to implement, such as hydrogen power. Even if we don't implement these alternatives in the area of transportation, we need more and cleaner power as our routine energy consumption increases.
With all these carrots, if the oil industry can't find a way to bring prices down, THEN government intervention would be necessary. However, I don't think it will come to that. Most of these proposals should lead to immediate relief at the pumps, with future prices dropping even further.
Labels: Gas
Wednesday, May 23, 2007
It's a Gas Gas Gas!
EdMcGon:
AIP brought up the question of how much of our current gas prices go to taxes, versus oil company profits.
A simple answer can be found in a typical oil company financial statement. For the sake of discussion, I will use Exxon Mobil.
According to Exxon's last SEC quarterly filing from March 2007, Exxon paid over $23.6 billion in taxes, whereas their after-tax net income was $9.2 billion (although that figure includes over $3 billion in non-oil related income).
Of course, government taxation doesn't end with the oil company. Since most gas stations are franchised or independently owned, they pay taxes too. According to the Department of Energy's website, 14% of April's retail gas prices were for severence taxes, import tariffs excise taxes, and royalties paid to the government. Since I am using the March data for Exxon, I will also use the March figure from the DOE, which was 15.5%.
Here is where it becomes tricky to determine an actual figure for the cost of government taxation, because the DOE figures do not include income tax cost. For the sake of argument, I will drop the consideration of income taxes paid by gas retailers, since most of their income is derived from other operations. Even the DOE figures for March 2007 put the distribution and marketing costs (where the gas retailer's profits would be, as well as their related income tax cost) at 8.5%. (Ironically, since 2000, it seems the distribution and marketing costs seem to go up when the retail price of gas drops. Although the statistical correlation is not precise.)
Based on the DOE definitions, the income tax passed through to the consumer by the refiners would seem to be included in the "refining costs and profits" category, which is defined as "the difference between the monthly average of the spot price of gasoline...(used as a proxy for the value of gasoline or diesel fuel as it exits the refinery) and the average price of crude oil purchased by refiners (the crude oil component)." The cost for this during March was 23.6%.
If we assume Exxon is the typical oil refiner (admittedly a huge assumption), and apply Exxon's income tax costs as a percentage onto the DOE figures from March, then 25%* of the DOE's "refining costs and profits" was paid to income taxes.
25% of the 23.6% of the retail price of gas means an additional 6% of the retail price went to the government, on top of the other 15.5% that went to taxes. This makes 21.5% of the retail price of gasoline going to the government. Considering this is a potentially conservative estimate because it gives no consideration is given to gas retailers' income taxes, plus I overestimated Exxon's passed along costs (thereby minimizing the income tax impact on the pass along costs), this is a pretty hefty amount. Of the average retail price in March of $2.563/gallon, 55.1 cents went to the government.
How much did Exxon walk away with? 35% of the DOE's "refining costs and profits", which is 8.2% of the retail price of gas. Of the average retail price in March of $2.563/gallon, 21 cents went to oil company profits.
As I have said before, there are a lot of assumptions built into these numbers, and feel free to point out flaws in my math. But the truth is that government costs more than oil companies, even if my figures are off.
On a related note, one thing I noticed in the DOE figures is that crude oil as a percentage of the retail cost of gas has gone up in the past seven years, from 41.4% in April 2000, to 50.3% in April 2007. While it has fluctuated over this period, from a low of 35% in May 2001 to a high of 60.1% in January 2006, the overall trend has been towards the price of crude oil driving the retail price of gasoline. Supply and demand anyone?
*The actual numbers used to determine the 25% were:
Exxon's total income taxes - $6.784 billion
Exxon's selling, general and administrative expenses - $3.392 billion (this may include expenses not related to oil refining, however the bulk of it would apply)
Exxon's total net income (including non-oil related income) - $9.280 billion
UPDATED: I stand corrected.
I was listening to the radio yesterday, and a representative of an oil refiners trade organization (I forgot his name, sorry) pointed out that up to 15% of our refined oil is IMPORTED. That little factoid is not presented in the DOE or Exxon figures, but is quite important to consider.
Another thing he pointed out is that it takes up to 20 years to build and run a new refinery before an oil company can see a profit from it. If you were an oil company in the current energy environment, how comfortable would you feel doing that?
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AIP brought up the question of how much of our current gas prices go to taxes, versus oil company profits.
A simple answer can be found in a typical oil company financial statement. For the sake of discussion, I will use Exxon Mobil.
According to Exxon's last SEC quarterly filing from March 2007, Exxon paid over $23.6 billion in taxes, whereas their after-tax net income was $9.2 billion (although that figure includes over $3 billion in non-oil related income).
Of course, government taxation doesn't end with the oil company. Since most gas stations are franchised or independently owned, they pay taxes too. According to the Department of Energy's website, 14% of April's retail gas prices were for severence taxes, import tariffs excise taxes, and royalties paid to the government. Since I am using the March data for Exxon, I will also use the March figure from the DOE, which was 15.5%.
Here is where it becomes tricky to determine an actual figure for the cost of government taxation, because the DOE figures do not include income tax cost. For the sake of argument, I will drop the consideration of income taxes paid by gas retailers, since most of their income is derived from other operations. Even the DOE figures for March 2007 put the distribution and marketing costs (where the gas retailer's profits would be, as well as their related income tax cost) at 8.5%. (Ironically, since 2000, it seems the distribution and marketing costs seem to go up when the retail price of gas drops. Although the statistical correlation is not precise.)
Based on the DOE definitions, the income tax passed through to the consumer by the refiners would seem to be included in the "refining costs and profits" category, which is defined as "the difference between the monthly average of the spot price of gasoline...(used as a proxy for the value of gasoline or diesel fuel as it exits the refinery) and the average price of crude oil purchased by refiners (the crude oil component)." The cost for this during March was 23.6%.
If we assume Exxon is the typical oil refiner (admittedly a huge assumption), and apply Exxon's income tax costs as a percentage onto the DOE figures from March, then 25%* of the DOE's "refining costs and profits" was paid to income taxes.
25% of the 23.6% of the retail price of gas means an additional 6% of the retail price went to the government, on top of the other 15.5% that went to taxes. This makes 21.5% of the retail price of gasoline going to the government. Considering this is a potentially conservative estimate because it gives no consideration is given to gas retailers' income taxes, plus I overestimated Exxon's passed along costs (thereby minimizing the income tax impact on the pass along costs), this is a pretty hefty amount. Of the average retail price in March of $2.563/gallon, 55.1 cents went to the government.
How much did Exxon walk away with? 35% of the DOE's "refining costs and profits", which is 8.2% of the retail price of gas. Of the average retail price in March of $2.563/gallon, 21 cents went to oil company profits.
As I have said before, there are a lot of assumptions built into these numbers, and feel free to point out flaws in my math. But the truth is that government costs more than oil companies, even if my figures are off.
On a related note, one thing I noticed in the DOE figures is that crude oil as a percentage of the retail cost of gas has gone up in the past seven years, from 41.4% in April 2000, to 50.3% in April 2007. While it has fluctuated over this period, from a low of 35% in May 2001 to a high of 60.1% in January 2006, the overall trend has been towards the price of crude oil driving the retail price of gasoline. Supply and demand anyone?
*The actual numbers used to determine the 25% were:
Exxon's total income taxes - $6.784 billion
divided by the sum of the below plus the figure above to get the percentage of the income tax passed alongExxon's production and manufacturing expenses - $7.283 billion
Exxon's selling, general and administrative expenses - $3.392 billion (this may include expenses not related to oil refining, however the bulk of it would apply)
Exxon's total net income (including non-oil related income) - $9.280 billion
UPDATED: I stand corrected.
I was listening to the radio yesterday, and a representative of an oil refiners trade organization (I forgot his name, sorry) pointed out that up to 15% of our refined oil is IMPORTED. That little factoid is not presented in the DOE or Exxon figures, but is quite important to consider.
Another thing he pointed out is that it takes up to 20 years to build and run a new refinery before an oil company can see a profit from it. If you were an oil company in the current energy environment, how comfortable would you feel doing that?
