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Double Dipping: Soaring Gas Prices, Tax Breaks Fuel Record Oil Company Profits

By August 1, 2008

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As consumers continued paying record-high prices for gasoline this week, major oil companies were celebrating another round of record-high profits, this time for the second quarter of 2008.

ExxonMobil led the way with a record-shattering profit of $11.68 billion—the highest ever posted by any U.S. company in the history of American commerce. Royal Dutch Shell ran a close second with $11.56 billion, BP raked in $9.5 billion, Chevron hit $5.98 billion, and ConocoPhillips posted $5.44 billion in profits.

It’s no surprise that consumers are none too happy about the growing disparity between their own fortunes and those of the oil companies, which are profiting so handsomely at their expense.

Congress Playing Politics with Oil Profits and Gasoline Prices
Democrats in Congress are trying to throw a little extra fuel on the flame of consumer anger by pointing out that oil-company profits went up even as production went down, and that oil companies have used their soaring profits to buy back billions of dollars worth of their own stock in an effort to drive up its value instead of investing in renewable energy.

Republicans have been blaming Democrats for the high gasoline prices for months, claiming that the Dems' refusal to support offshore drilling and oil exploration in the Arctic National Wildlife Refuge have prevented the United States from reducing its dependence on foreign oil. Congressional Democrats see the new surge in petroleum profits as an opportunity to deflect the blame back toward the oil companies and their Republican cronies.

Consumers Pay Oil Companies Twice for the Same Product
All of this political gamesmanship aside, consumers have good reason to be angry. Not only are the oil companies racking up extraordinary profits, they’re doing it while continuing to enjoy generous tax breaks and economic subsidies paid for by the same people who are also paying exceptionally high prices at the pump. Essentially, consumers end up paying oil companies twice for the same product, first subsidizing their production and then buying the finished product at inflated prices.

Neither the Democrats nor the Republicans seem to have a realistic plan to lower gasoline prices any time soon, but eliminating tax breaks and subsidies that oil companies clearly don’t need—as the House tried to do in 2007—would recoup billions of dollars that could be invested in renewable energy research and development, conservation programs, and clean-energy technologies.

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Comments

August 4, 2008 at 10:02 am
(1) guidoLaMoto says:

a) production is not down. Production can no longer meet demand. There’s a differnce.

b)Consumers don’t “pay twice”: cost of production can be met by profits + tax benefits or by profits alone. Either way, production cost stays constant. Consumers can run that money thru the hands of the govt first or give it directly to the producers.
c) Oil industry profits are about 17 cents per dollar sales, about average for many industies and way lower than pharmaceuticals, for instance. If the oil companies became not-for-profit endeavors, gas would cost $3.34/gal istead of $4/gal, still high by old standards, and there would be no incentive for further investment.
d) In the 20th century there was a grand experiment to test communism: it failed. Anybody can buy stock and enjoy the profits, too, if they like.
e) Both parties are acting stupidly here. Opening up rights to more drilling is part of a long term solution not short term. But there’s no reason not to do it.Taxation will only make things worse.

August 4, 2008 at 1:16 pm
(2) environment says:

Sorry, Guido, but I have to disagree with a few of your points. Here goes:

1) The oil companies are the ones who are reporting a drop in production. Yet despite producing less, their profits are higher than ever.
2) I agree production costs can easily be met by profits alone with no need for $14 billion in tax breaks, so I’d prefer to see the oil industry run its business without special help from taxpayers who are already paying record-high prices for its products.
3) Nobody is suggesting the oil companies become not-for-profit endeavors, but there is no reason that taxpayers should continue to foot the bill for companies doing so well. They don’t need our help to turn a healthy profit and to have plenty of money to invest.
4) I hardly think asking oil companies to pay their fair share of taxes instead of asking for an ongoing $14 billion tax break amounts to communism. Do you? And, no, not everybody can buy stock and enjoy the profits. Many people can’t afford to invest in the stock market, yet everyone feels the pain of high gas prices, whether fueling their own vehicles or paying the higher cost of goods that cost more to transport.

August 4, 2008 at 6:06 pm
(3) guidoLaMoto says:

http://moneycentral.msn.com/detail/stock_quote?Symbol=XOM
Exxon cost roughly $77/sh and payed a dividend of %1.60/sh. That’s only 2% return on your investment. You can get 4% on a CD. Investors are really gambling on a rise in share price. The profit is actually quite small on a share basis; only large in total due to volume of sales. It’s our fault, not theirs, that volume is so large.
Being a liberal (we must presume),You miss the point about tax breaks: They want a 2% profit apparently. If they don’t get the tax break, they’ll just charge us more. We pay it either way, but it’s not “twice”.
They, in fact, are taxed twice: corporate income tax, then shareholders are taxed on the dividend again as income. THAT is double taxation.

August 4, 2008 at 8:59 pm
(4) environment says:

Yeah, I understand how investments and tax breaks work, so maybe you wouldn’t mind presuming and patronizing a little less when offering your comments. Earlier, you seemed to think I was advocating communism, so I guess having you presume I am a liberal is a step up.

On the other hand, you were the one who said anyone could buy oil company stock and share in the profits, so it’s interesting that you’re now pointing out (correctly) that those record profits are not being passed on to shareholders.

Forgive me if I can’t summon any tears for Exxon. I’m not impressed with how Exxon and other major oil companies have used the money those tax breaks have saved them. I would just as soon have a more direct exchange of dollars for goods received, without $14 billion in tax subsidies cluttering the equation. I say again that companies this profitable should be able to run their businesses without special help from taxpayers or the federal government.

August 4, 2008 at 10:38 pm
(5) guidoLaMoto says:

I think we can agree that, for the immediate future anyways, we need oil. Therefore, we need Exxon et al. Note from the site I referenced above, there’s 5.19 bil shares of Exxon outstanding; multiply by the $1.60 dividend and we get $8.3 bil profit. Without the $14 billion tax break, they lose $6 bil. No need to stay in business if you’re losing money. I contend the tax break does the taxpayers more good than harm.
I won’t argue with you about obscene salaries for corp. officers etc. You win that one without a fight ;-)

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