Random Thoughts about Oil...

Mortgage and Lending with Jay Epstein State Farm Insurance

The big American oil companies post RECORD profits and all people seem to talk about is our horrible dependence on foreign oil.  If foreign oil is costing so much, how are the oil companies posting record profits?  Aren't profits what you get after you subtract expenses?  So how is the $4.00+ cost of gas per gallon blamed on foreigners?  What about the AMERICAN oil companies who are gouging us?  Why isn't anyone protesting their greed?


Comments (5)

David Holzmann
Holzmann & Associates - Mountain View, CA

I just found your post.

You asked, "What am I missing?"

I think you're missing a few key parts of the equation.

1) American oil companies have posted record PROFITS, not record profit MARGINS.  Those profits are a result of selling record amounts of gas at approximately the same margin they've had for quite some time. (Roughly 8%)

2) You're right, profits are what you get after you subtract expenses.  One of the American oil companies' expenses is the cost of the oil - most of which is bought from foreigners.  When OPEC increases the price-per-barrel of oil, (most of that is controlled by limiting the supply) the American oil companies have to increase their price-per-gallon of gas to compensate.

3) The real greed here - that's hardly, if ever, talked about - is the greed of our government.  While the American oil companies' profit margins have remained roughly the same (8%), our governments' (local, state, and federal) take - in terms of taxes - have increased substantially (resulting in an effective tax rate on the top US energy companies of roughly 40%.)  And the suggestion has been made (numerous times) to increase that money-grab even more.  (The Fed. Gov't's tax revenues from the top energy companies alone went up from under $49B in 2004 to over $90B in 2006!)

By drilling for oil here, and building more of our own refineries, we would be able to better control our costs.  Then, if OPEC decided to drop their production in order increase oil's price (and their profit margin per barrel), we would be able to mitigate at least some of that by increasing our own production or at least turning more to our own output for supply.  (Just look at what happened to world oil prices when Bush suggested drilling here - even though the Legislature refused to go along with that.  Even the suggestion of increasing the supply caused a significant drop in price.  How much bigger would the drop be if the Legislative Branch chose to not be obstructionist?)


As a lender, if you saw record numbers of loans closing in your office, would you drop your prices to make sure you didn't show record profits?  What would you do if your costs tripled?  Wouldn't you pass along those increased costs to your clients - to assure that you didn't lose money?

Have you ever calculated what your average profit margin is?  If so, how does it stack up against the American Oil Companies' profit margins?  I would guess your margin is quite a bit larger, and you'd be pretty unhappy if the government came in to take away everything in excess of an 8% margin.  (For every $92 you spend, you're not allowed to make more than $8.)


Does that clarify what you were missing?

Sep 17, 2008 06:19 AM
Lisa Epstein
Jay Epstein State Farm Insurance - Ukiah, CA

David - your answer makes no sense at all.  Profits are profits - regardless of the margin. 

Sep 25, 2008 11:04 AM
David Holzmann
Holzmann & Associates - Mountain View, CA

So, to your way of thinking, margin doesn't matter?

You charge the same fees and the same interest rate to all your clients regardless of YSP?  That makes no sense at all.  Yet that's an equivalent of ignoring margin.

And do you drop your fees when your volume increases to avoid having record profits?  That makes no sense.  Yet that's the equivalent of what you'd demand of the American oil companies.

And despite the gov't taxing the oil companies at increasingly burdensome rates - purportedly to punish them for their increased sales volume, yet really just to gain more money and vote-buying power - you don't see that as greedy.

That makes no sense at all.

Sep 26, 2008 01:07 AM
Lisa Epstein
Jay Epstein State Farm Insurance - Ukiah, CA

Of course margin matters.  But again, profits are posted AFTER the margin is factored in.  Do you have a few million in big oil stock or something?

Sep 27, 2008 09:22 AM
David Holzmann
Holzmann & Associates - Mountain View, CA

OK, so we agree that margin matters.

So, if you've reduced your profit margin to a minimal 8%, what's going to happen to your profits if sales go up?  Your profit will go up.  And if your sales go up to a new high level, what will happen to your profits?  They will be "record profits."

And if your costs go up, you'll have to increase your prices in order to keep the same minimal margin.  As long as sales don't decrease too much, with higher prices - even at the same margin - you'll again make "record profits."

The American Oil Companies had both increased costs and increased sales without increasing their profit margin.  This caused the record profits - with a minimal margin.  (And their shareholders are grateful that they didn't decrease their margin in order to avoid making reasonable profits.

No, I don't have "a few million in big oil stock."  I believe I probably have at least a few cents in big oil stock though - through a mutual fund or two, as I imagine many others here do as well.

What's your interest in keeping others from making a reasonable profit?

I want to see the free market remain free.  That way there's still some hope that as I improve my skills and service to others, and am able to earn more money, I'll be able to keep the money I've earned, rather than get punished for "making too much."

Sep 27, 2008 11:00 AM