Video: Gas tax-o-nomics

By John W. Schoen Senior producer
updated 5/6/2008 11:33:42 AM ET 2008-05-06T15:33:42

With two of the three presidential candidates proposing a gasoline tax “holiday,” some readers are wondering: Why can’t the government do more to cut gas prices?

If the feds can help with cutting interest rates why can't they do something that really affects everything? Like high prices of gas. How can a billion-dollar industry still be allowed to make so much and affect so many people?
Lori H., Dodge City, Kan.

There are measures the government could take to ease the pain at the pump, but it’s hard to see how the U.S. government could directly control the price of a global commodity like gasoline — any more than it could limit what you can charge for that big-screen TV you’re trying to unload on eBay. Gasoline prices — like all market prices — are set by a willing buyer and a willing seller. (You may not be a “happy” buyer right now, but your purchases are still voluntary.)

The last time the federal government tried wage and price controls in the 1970s they didn’t work. Refiners chose not to make and sell gasoline at a loss, so there wasn’t enough to go around, and we all had to wait on gas lines.

Today, two of the three presidential candidates — John McCain and Hillary Clinton — have proposed a “holiday” on gasoline taxes. It sounds great, but it’s a terrible idea.

Eliminating the federal tax, about 18 cents a gallon, would encourage more driving, putting added pressure on supplies, and driving the underlying price of gasoline higher. Since gasoline taxes go to pay for rebuilding crumbling roads and bridges, this is probably not a good time to do away with them.

And making gas cheaper will only postpone progress toward developing alternative ways of fueling cars. Better to just give everyone a tax rebate (coming soon to a mailbox near you) to help ease the pain at the pump.

Our government could always subsidize the cost of gasoline, as some countries do. But that would cost money. We'd either have to borrow more money — adding to the debt we’re already piling up like there’s no tomorrow — or raise taxes elsewhere.

Some have suggested taxing the “windfall” profits of oil producers. So let’s look at those profits.

It’s true that as crude prices have surged, so have profits for the companies that produce the stuff. Exxon Mobil last week posted a $10.9 billion profit for the latest quarter — the second-biggest U.S. quarterly corporate profit ever. It may help to put that number in perspective. (Many readers don’t really want to do that, but here goes anyway.)

The reason big oil companies post such huge profits is that there are only a handful of them left after the price crash of the late 1990s sent crude prices to $10 a barrel, below the cost of production.

Major U.S. oil companies also found themselves bidding against bigger and better-funded state-owned competitors. (Today, U.S. oil companies produce about 10 percent of the world’s crude oil.) To fund those projects they needed lots of capital; getting bigger by merging was one way to do that.

But, hey, $11 billion for three months' work? Isn’t that a little much? On the next page, let’s look at how that compares with profits reported by other industries.

Let’s start with drugs. There are eight major drug makers in the Standard & Poor's 500; collectively they made $36.2 billion over the past 12 months on revenues of $237.2 billion. That means they pocketed about 15 cents of every dollar’s worth of product sold. Not bad.

How about software? The seven big companies in the sector (including Microsoft, which jointly owns with NBC Universal) took in $92.3 billion in revenues and earned $23.6 billion in profits, or about 25 cents on every dollar.

Banking? Despite their problems with subprime loans, the eight big “money center” banks in the S&P 500 took in profits of $41.3 billion on revenues of $267.3 billion, about 15 cents on the dollar.

Now let’s look at the three oil majors in the S&P 500. In the last 12 months, ExxonMobil, Chevron and ConocoPhillips took in $833.7 billion in revenues but reported profits of $71.8 billion. That works out to about 8.6 cents of profit for every dollar's worth of crude.

Refiners fared even worse. They sold $293.6 billion worth of gasoline and other fuels and made $11.9 billion in profits, or about 4 cents on the dollar.

We got our data from MSN Money's Stock Screener.

I was in high school when the last "Energy Crisis " hit. Then-President Carter set the speed limit back to 55 mph, no doubt saving fuel. Why have I not even heard this mentioned as a way to combat fuel prices/consumption?
— Bob M., Norwalk, Ohio

In urban areas, more than half the states already limit speeds on the Interstate to 55. And while lowering the speed limit elsewhere might help, it would be great if we could first enforce the limits we’ve already got.

Slowing down — and not driving like a maniac — can have a major impact on gas mileage. Though some critics have disputed the savings from the government-imposed speed limit in the 1970s, trucking companies today seem to believe otherwise; some have recently installed “governors” to cap the maximum speed of their fleets and save money. Airlines are slowing down their flights to save fuel.

There’s also plenty of research showing that your driving style is a major factor in determining the number of miles squeeze out of each tank of gas. Zooming away from one stoplight and slamming on the brakes a few yards before you get to the next one really zaps your mileage. And it’s really annoying for the rest of us.

If we could all increase mileage by as little as 15 percent, the impact on gas prices would be huge. Since hitting a seasonal low of 8.9 million barrels per day in January, gasoline consumption rose to 9.4 million barrels by the end of April — a gain of nearly 6 percent. Pump prices, meanwhile, rose by about 60 cents a gallon. When supplies are tight, it doesn’t take much of a change in demand to make a big difference in price.

So how do we cut demand? The government could certainly do more to promote conservation, a solution famously derided by the White House as a “personal virtue” that has no business in U.S. energy policy. The resulting energy policy means we have to figure out how to conserve anyway — because we can barely afford to fill up our SUVs without selling old jewelry.

But there’s no reason we need government to order us to cut back. Trade in your gas guzzler for a car that gets better mileage. Just one day a week, work from home or find another way to get to the office. Obey the speed limit.

And stop driving like a jerk.

Is it true that oil prices have been purposely manipulated to permit drilling in Alaska (ANWAR) and in other areas of the U.S. that are protected?
- C. J., Canfield, Ohio


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