With fill-ups routinely costing $60 or more, cost-conscious drivers naturally look for someone to blame. And just as naturally, politicians are happy to blame others.
Enter “Big Oil,” the demagogues’ favorite villain. Gas prices soaring? It’s because oil companies want “excess profits,” as Barack Obama puts it. Right?
Wrong. The truth is more complicated.
Let’s look to California, driving capital of the world. Officials there watch gas prices carefully. During March and April, a state analysis found that “distribution costs, marketing costs and profits” made up about 10 cents of the cost of a gallon of gasoline, which ranged from $3.46 to $3.89. Notice that that dime is less than 3 percent of the total retail cost, and profits account for only part of it. So those “excess profits” are actually well below 3 percent of retail costs.
Of course, that’s little comfort to tapped-out drivers. And the big oil companies are certainly making big money -- Exxon Mobil alone earned $40.6 billion last year. But such profits follow naturally when a company sells a product that so many people want to buy. Some recent history offers us a bit of perspective.
In 1998, a recession in Asia created an oil glut. Prices plunged to historic lows (near $10 a barrel), and American drivers reaped the benefits, with gas dipping below $1 per gallon. So how did Exxon fare in those days of low prices?
According to Forbes magazine, Exxon earned more in profits than any other American company in 1998. Sales increased 3 percent over 1997 and profits jumped 12.6 percent, to $8.4 billion. Again, remember: Oil was remarkably cheap that year, yet Exxon earned double-digit profits. Few complained then.
The lesson is simple: When a company sells a product people want, it tends to make money, in good times and in bad. For years, oil has remained a product that Americans want -- and today’s high prices have done little to change that.
(Full disclosure: Yes, “big oil” gave to The Heritage Foundation last year. Their combined donations accounted for one-quarter of 1 percent of our revenues.)
It’s also worth noting that oil companies are probably the most investigated companies in America. Every few years, outraged legislators demand that the Federal Trade Commission determine whether oil companies are colluding to inflate prices. Repeatedly, federal regulators find that they aren’t. Continued... |