Gas prices...

Had a conversation with Tamar about how rising gas prices is going to make us (and other Americans) change our behavior. It led into a discussion about the possibility of oil companies price gouging and a tax on windfrall profits. (That was from Tamar's side.) I'd share my side, but my friend, Jacob Licht, did a pretty good job of summarizing it in an email to me the other day.

"All this talk about penalizing oil companies and giving Americans $100 rebates for gas is ridiculous.

Thought you’d enjoy this quick chart I made comparing profit margins at several companies where Americans spend their hard-earned dollars.


2005 Net Income 2005 Revenue NI as % of Rev

Microsoft 12,254,000 39,788,000 31%
google 1,465,397 6,138,560 24%
Ebay 1,082,043 4,552,401 24%
cisco 4,401,000 22,045,000 20%
exxon 36,130,000 370,680,000 10%
Apple 1,335,000 13,931,000 10%
Chevron 14,099,000 198,200,000 7%
Ford 2,024,000 177,089,000 1%

As you know, I have no interest in penalizing highly profitable companies (or those with low profits), so I don’t get the focus on the oil companies’ profits. In the scheme of things, they’re not such a profitable industry (see above). When you make a 7-10% margin on lots of revenue, your net income will be a large number, but at the end of the day, your margins are still only 7-10%.

You’ve studied some economics, right? When demand for a product declines, a new equilibrium between supply and demand occurs at a lower price. Shouldn’t we be focusing on reducing our demand for oil instead of penalizing the companies that are supplying it? We could also focus on increasing supply, but there’s not much that an average American can do about that. We can, however, reduce the amount of oil we consume.


I didn’t realize it until after I’d run my numbers, but Krauthammer’s op-ed today is along similar lines. It’s such a pity when economics makes politicians look dumb.

http://www.washingtonpost.com/wp-dyn/content/article/2006/04/27/AR2006042701693.html "

Between Licht and Krauthammer, the argument was summed up quite well. Thanks, team!