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Oil Company Profits - Logical And Good

By Sammy of Stone Marmot

Sept. 19, 2008

Many people are complaining about the record oil company profits when gas prices are at record highs. If they stopped to think about it, this makes perfect sense, is to be expected, and there is nothing wrong with it. In fact, it shows our economic system is working.

Profits are usually a percentage of sales. If an oil company get 10% profit on any sales and gas is selling for $0.30 a gallon, they will be making $0.03 a gallon. If gas sells for $3.00/gal., their profit will be $0.30/gal. If gas sells for $4.00/gal., their profit will be $0.40/gal. So, record gas prices will also be record total profits, even though the per cent profit on sales stays the same.

This all assumes demand stays the same, which it pretty much does. There has been some drop off is gas sales recently at prices above $3.50/gal., but not in inverse proportion to the increase in gas prices, so overall sales, and correspondingly profits, still increased.

The reason demand hasn't dropped off is that people are addicted to their gasoline. They feel they absolutely must live 30 miles from work or school. Parents feel they must drive their kids to school rather than letting them walk or ride the bus. People feel they must make ten trips a week to the store to immediately get what they want rather than planning ahead a little and getting it all in one trip a week. They feel they must drive those 100 miles to see their favorite football team or to go to a concert. Effectively, they have voted for high gas prices and, correspondingly, high oil company profits, with their lifestyles.

Companies also need to make profits. If they don't make a profit, they eventually go out of business. They need profits to attract investors, and most investors are not multimillionaires, but pensions, IRAs, 401-Ks and the like. Without corporate profits, you would have no retirement income other than Social(ist) Security. Do you want your pension plan or IRA to invest in a company that isn't going to make any money?

Would you yourself work for no profit, getting just enough of a paycheck to cover your costs for going to and from work and any special work expenses, such as work clothes? Why should you expect others to work for no profit?

Ignoring investors, profits are also necessary for a healthy business. It is profits that allow oil companies to finance the exploration for new oil fields. It is profits that allow oil companies to finance research for better ways to extract the hard to get at residual oil left in older existing fields. It is also profits that allow companies to absorb and recover from hurricanes and other unexpected emergencies. If a company is just barely squeaking by financially, it is not going to be investing in such luxuries as research and exploration. It will be too concerned with simply making ends meet. Any unexpected major expenses, such as hurricanes, will destroy it.

If you really don't like large oil company profits, quit giving these profits to them! Stop using and buying so much oil!

(Personal disclosure: I have no direct involvement with the energy industry in any form. I probably have some investments in some energy companies through my some of my mutual funds in my retirement plans, especially the index funds which buy a cross section of the whole stock market, though I haven't looked recently so I really don't know and I doubt that they are a significant portion of my investments. I don't like how much money the oil companies make or how much control they have over society. But I have also reduced my gasoline consumption by about 80% since 1999 without changing my place of residence and am still driving the same type of vehicle. I did it mostly through lifestyle changes and getting a more efficient version of my vehicle preference and am still having as pleasant a life as I've ever had.)

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