Who reaps a Windfall? Exxon? Apple? or Obama?

I have written previously about the energy policies of the candidates, and I specifically wrote about the proposals from Obama and Clinton to create a “windfall profits” tax.  At the time I pointed out that, when attempted previously, windfall profit taxes failed to achieve their stated goals.

One more thing:  the last time this was done, under Carter, the expected revenues just didn’t materialize.  According to the report published in 2006 by the Congressional Research Service (CRS), “The $80 billion in gross revenues generated by the WPT between 1980 and 1988 was significantly less than the $393 billion projected. Due to the deductibility of the WPT against the income tax, cumulative net WPT revenues were about $38 billion, significantly less than the $175 billion projected.”

That got me thinking.  What people are really saying is not that they want to tax “windfall profits” (defined at the Financial Dictionary as “A sudden unexpected profit uncontrolled by the profiting party.”) but rather people are upset that the oil companies are making money by charging the consumer a higher price than they used to. Yup.  It apparently is unfair to charge a price that the market will bear.

Hillary Clinton, on May 1st is quoted as saying “The oil companies have made out like bandits, and there is no basis for them to have these huge profits.”

That said, I started to look around and see what other companies are earning these sort of “obscene” profits, during what has been described by Obama as “a recession, or worse.” So, first, I looked at the percentage profits earned by Exxon the most-oft used target of opportunity by the left.  For that past three years, Exxon has earned between 9 and 10 % profits (computed by dividing their “net income” into “total Revenue”–all data from http://finance.yahoo.com the hotlinks on the company names will take you to those pages)

Net Income    Total Revenue    “% Profit”
2005 36130              370680           9.75%
2006 39500              377635         10.46%
2007 40610              404552         10.04%

So, that doesn’t seem unreasonable to me, but perhaps I missed something.  Perhaps that 10% return in unmatched by any other company.  So, I decided to look at another company.  Yes, I had a biased selection.  I chose Apple, Inc, for two reasons.  First, Apple has had strong success making in-roads into several markets (computers, cell-phones, music), and secondly, because it seems Apple tends to be the computer platform of choice by those on the left. 

Well, it turns out Apple has performed comparably to Exxon in the first two years, while beginning to signficantly outperform Exxon in 2007.

Net Income    Total Revenue    “% Profit”
2005 1335                  13931           9.58%
2006 1989                   19315         10.30%
2007 3496                   24006         14.56%

Now, it was pointed out to me that people don’t need and iPhone, or an iPod, or even a Mac, so that comparison is flawed.  People apparently do need to consume gasoline however (I point to my previous discussion about the gas tax for why many do not need, or even consume, gasoline.)  I conceded this point.  I would, however, argue that computers have become ubiquitous, and no operating system is more prevalent than Microsoft’s Windows. So, it makes sense to look at Microsoft’s profits.

Net Income    Total Revenue    “% Profit”
2005 12254                39788           30.80%
2006 12599                44282           28.45%
2007 14065                51122           27.51%

Amazing.  If Exxon’s 10% profit is evil, I can only imagine what must be thought about Microsoft.

But, in all fairness, this doesn’t tell the most recent story. I can hear your critique now “but the oil prices only started really ramping up last fall, and didn’t really approach $4/gallon until the Spring 2008.”  Good point.  So what happens if we look at the quarterly numbers for these three companies, instead? (there will be some missing data, since not all companies report on the same dates.)

Exxon Apple Microsoft
6/30/2007 10.43%                          22.70%
9/30/2007 9.20%      14.54%         31.17%
12/31/2007 10.00%     16.46%         28.76%
3/31/2008 9.32%     13.91%         30.36%
6/28/2008 14.36%

So, even when Exxon was under attack from Senators Clinton and Obama, their quarterly earnings, though large, were still smaller than either Apple’s or Microsoft’s as a percent profit.  (And remember, if their total revenues were much larger than Apple’s so were there costs.)

The question then is:

Are we upset that oil, as Senator Clinton said ‘have made out like bandits, and … have these huge profits.”  Or are we upset at the price we must pay, and we lash out, without reason, at the oil companies because they are the most visible target?


n.b.: While I started this analysis back in May, It turns out the Wall Street Journal has recently undertaken a similar analysis, and arrived at similar conclusions, at least with respect to Exxon’s obscene profits of 10%.  They compared industries:

If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come.