A financial look at windfall profits and oil companies

Unless you’ve been living under a rock, you’ve heard about U.S. political leaders calling for a windfall profits tax on oil companies. Apparently, these oil conglomerates, like ExxonMobil, are making too much money, and the government should take more of it than they already do to use as they wish.

Are oil companies, like ExxonMobil, making obscene amounts of money at the expense of the American taxpayer? To determine the answer to that question, you have to do some research.

Let’s take two hypothetical companies — one we’ll call XOM, and the other we’ll call GOOG — and compare their hypothetical financials. However, XOM is a much larger company than GOOG — about 25 times larger. So, instead of comparing actual numbers, we’ll normalize them. (That’s a fancy way to say we’ll adjust the numbers as if both companies were the same size.)

Looking at that, which company has windfall profits? Consider…

• GOOG’s income was 94% higher than XOM’s.
• Despite that, GOOG only paid 14% more in taxes.
• GOOG’s after-tax income was 250% higher than XOM’s.

Of course, GOOG is none other than Google, and XOM is ExxonMobil. The actual financial numbers for year-end 2007 for each company follow.

Let’s look at what this means.

• Despite having 25 times tbhe revenue, ExxonMobil made only 9 1/2 times the after-tax income of Google.
• The oil business is an incredibly expensive business (83% of revenue to cover expenses).
• The Internet business is a much leaner business (67% of revenue to cover expenses).
• ExxonMobil’s $30 billion tax tab in 2007 covers 84% of the cost to run the entire Department of Homeland Security for 2007 (its 2007 budget was $35.6 billion — PDF link). Yes, you can thank one company, ExxonMobil, for funding a massive chunk of an organization primarily responsible for our non-military security.
• Put another way — ExxonMobil’s $30 billion tax tab covers NASA’s entire budget in 2007… with $15 billion to spare.
• Google has an effective tax liability of 25%, compared to ExxonMobil’s 43%.

Yes, oil companies make a lot of money, in large part because oil is a very expensive business. Supposed “windfall profits,” when put in relative terms, aren’t nearly as windfall as they seem.

UPDATE 9/18/2008:

On a recent showing of The O’Reilly Factor, Bill O’Reilly lambasted his guest, Neil Cavuto, on this very topic. Bill continually pressed, saying the oil companies are “bandits” and suggesting that they screw it to consumers purely to stuff their bottom line. The clip is a good heated discussion on the topic, and Cavuto deserves credit for keeping his cool when being yelled at. Listen through it, and you’ll see that O’Reilly is pretty clearly on the wrong, uninformed, fuzzy-math side of the argument.