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Political Magic Tricks and the Price of Gas

  • Political Magic Tricks and the Price of Gas

  • 15 May 2011 by 0 Comments

Political Magic Tricks and the Price of Gas

By Richard Larsen

Published – Idaho State Journal, 05/15/11

One of the greatest tools of magicians is misdirection, or distraction. While causing attention to be drawn to a nonessential hand movement or gesture, the other hand is engaged in the prestidigitation that creates the magical trick. Some politicians, obviously having learned the art, are giftedly adept at the process.

A superb case-in-point was the dog-and-pony show conducted by the Senate Energy Committee this week as they brought in the top oil company chief executives to grill them on high gas prices and threaten to eliminate oil company tax deductions. That was the distraction and misdirection. What it was designed to do was play to populist frustration over high gasoline prices.

Meanwhile, the real trick has been played by their political leader in the White House and his Department of Energy, which somehow seems inappropriately titled. It would be more accurately referenced as the Department of Non-Energy, as it continues to do everything possible to restrict domestic production of the black gold, increasing our dependency on foreign supplies, and consequently contributing to the higher gas prices we all pay at the pumps.

Drilling, refinement, and delivery of oil products for our daily consumption adds up to about 16% of the cost of gasoline. Crude oil prices, determined by the commodity exchanges like the Chicago Board of Trade, comprise 70% of the cost of a gallon of gasoline. Federal, state and local taxes make up the remaining 14%.

That means for a gallon of gas priced at $3.65, we’re paying about $.58 to the oil companies for their costs, excluding the actual cost of the crude oil. Of that, about 7-9% is profit. On a percentage basis, a 9% profit on $4.00 gas versus $3.00 gas is 30% higher, resulting in record quarterly earnings by the oil companies in the first earnings quarter. But because of those record earnings, they become perfect scapegoats for the populist politicians in the White House and the Capitol, and play well into their magic trick of misdirection.

The oil companies pay over $12 billion in taxes, or about $35 million per day. So while the magician-politicians are pounding the table decrying the record profits of the companies that do all the heavy lifting to keep America moving, they’re collecting about the same amount of cash with the other hand. And what do they do to earn their share? They make it nearly impossible for the oil companies to explore, drill, and refine their product. Now how’s that for gratitude?!

The major oil companies generate a relatively modest profit. The five biggest oil companies (Exxon Mobil, Shell, BP America, and ConocoPhillips) average a 6.05% profit margin. Collectively, the S&P 500 average profit margin is 8.9%. Oil company profits pale in comparison to other sectors, especially information technology which boasts an average 18% profit margin. That includes the likes of Microsoft with a hefty margin of 33%, and Apple Computer with a 22% margin.

And now the magician politicians want to eliminate the tax breaks that the oil industry gets. They get no subsidies (cash outlays). They only get the same kinds of tax breaks that any other business entity is eligible for. As former Colorado Congressman Bob Beauprez said this week, “Contrary to popular opinion and the President’s spin, oil and gas gets no taxpayer funded subsidies. The tax code does allow them certain tax credits and deductions to encourage continued investment in an industry that is heavily front-end loaded with capital expense.  These are the same kind of incentives available to Coca-Cola, General Electric, Ford, and Microsoft and other companies doing business in the U.S.”

As mentioned a few weeks ago, we have to acknowledge that this administration likes high energy prices for ideological reasons. During his presidential campaign, Obama declared that energy prices would “necessarily skyrocket” on his energy agenda. And his current Energy Secretary, Steven Chu has said that he thought our gas prices needed to be much higher as a means of weaning us from our reliance on fossil fuels . He told the Wall Street Journal two years ago, “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe.” At that time, gas prices averaged $8 per gallon there.

It’s obvious by now that their means to help drive up gas prices is to do everything within their power to thwart and restrict domestic oil production.

Just as it is with most aspects of our economy, from health care to energy, the largest contributor to higher costs is bad policy and poor regulation. Don’t be misled by the magic tricks of misdirection and distraction by the ruling political class. The politicians advancing an anti-oil ideology are the ones to be most upset with over high gas prices, not the ones who deliver it to us.



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