Originally Posted by steve_rightwing_christian Blame the ones who deserve the blame: government that imposes high taxes and environmental groups that push for more regulation that is un-necessary.

Originally Posted by steve_rightwing_christian The cause of higher gas prices is simple: less supply and higher demand. The best solution is to increase the supply of oil that we currently have. To increase the supply of a natural resource, we must first increase access to that natural resource by drilling in places that environmental regulation currently forbids, such as the Arctic National Wildlife Refuge where approximately 10 billion barrels of oil exists untapped as we speak. On top of that, this country has not built a new refinery since 1976, which is something else that this country should place high on the priority list. There is another good solution for relieving the gas price burden on Americans. Republican presidential candidate and Arizona Senator John McCain offered to institute a “summer gas tax holiday” that would “suspend the 18.4-cent federal gas tax and 24.4-cent diesel tax from Memorial Day to Labor Day” according to his campaign website. Finally, we need to realize who is to blame for the problems. The popular thing to do these days is to blame the “big, bad oil companies” for all of the ills of the world. Many people do not realize that the bulk of the blame lies with government, not the oil companies. Punishing the ones that give us the oil will only magnify existing problems. Blame the ones who deserve the blame: government that imposes high taxes and environmental groups that push for more regulation that is un-necessary. We do not have an energy crisis. We have an environmentalist, government, and a supply and demand crisis. The sooner America realizes that and votes people into office that will deal with the real problems, the better off we will all be.

Steve,

I agree with your point about avoiding politically-motivated blame of the oil companies on account of their profits. For all the headlines concerning oil company profits, their profits as a percentage of revenue are not all that extraordinary. For example, in 2007, Exxon-Mobil's profit amounted to $0.10 for every $1.00 in sales. That is a 10% profit margin--healthy but not excessive. In contrast, Microsoft's profit margin was 27.5%, Google's 25.3%, and Coca Cola's was 20.5%, 3M's 16.7%, and GE's 12.9%. Increased taxation of oil companies would only reduce their propensity to invest in capacity expansions and additional exploration/drilling. The long-run consequence would tilt things further in the direction of a demand imbalance.

In my opinion, the "gas tax holiday" suggested by Senators Clinton and McCain is little more than a political gimmick. The relief it would provide would be both small and temporary, at best. Moreover, there would be the possibility that a temporary suspension in the gasoline tax could also trigger an increase in demand for gasoline for that timeframe. If so, that development could exhaust any of the savings to consumers that might have resulted.

In the short-run, perhaps the most effective measure that could be taken is for the White House and Treasury to embrace a stronger dollar. A shift toward fiscal discipline would be conducive to a stronger dollar. As oil is denominated in dollars, appreciation of the dollar could make it less expensive than would otherwise be the case for the U.S. to purchase oil on the world market. Unfortunately, the prospects for a shift toward fiscal discipline are probably remote at this stage. Instead, a record-setting budget deficit in excess of $500 billion appears more likely.

Should the Fed avoid cutting interest rates tomorrow (a 25-bp cut is likely: latest implied probabilities by the markets: 1.75%: 4.7%; 2.00%: 68.6%; 2.25%: 26.6%; 2.50%: 0.1%) or at least signal that interest rate hikes are possible in the not-too-distant future, that could also bring about a measure of dollar appreciation. That move would confirm the recent signal on Fed Fund Futures implying a Fed Funds rate of ~2.00% for May 2008 rising to ~2.75% by May 2009. At this point, a measure of leadership from the Fed is probably more likely than a restoration of fiscal discipline and confirming market expectations could suffice for now. A more aggressive stance in favor of leaving the Fed Funds rate unchanged would be even better for the U.S. dollar on the foreign exchange markets.

In the longer-run, there is little doubt that supply issues will need to be addressed. A credible energy policy that focuses on increased oil production in the near-term and an aggressive R&D effort aimed at developing a viable substitute or range of substitutes will be essential. As a viable substitute(s) grows more likely, the U.S. would become less vulnerable to a demand-imbalance in the oil market should world oil production have difficulty meeting growing demand, as well as geopolitical shocks or supply disruptions that could inflict economic harm from causing spikes in the oil price.

Originally Posted by donsutherland1 For all the headlines concerning oil company profits, their profits as a percentage of revenue are not all that extraordinary

No. There is no credible evidence that the profits being earned by Shell and other oil companies are exceeding the economic profits associated with labor and capital inputs. A much higher profit margin might hint at such a situation, but even that would not be assured. Indeed, if abnormal profits were being realized, one would expect to see an influx of companies into the industry and profit margins to shrink substantially as that happens. That is not happening.

As a share of revenue, Shell's profit came to 9.3%, which was somewhat lower than British Telecom's profit margin. For the first 3 quarters of FY 2007 (Q4 data is not yet available), British Telecom's profit margin amounted to 9.7%. Shell's profits was just over 10X that of BT, but that was only because Shell's sales were just over 11X those of BT.

Originally Posted by donsutherland1 There is no credible evidence that the profits being earned by Shell and other oil companies are exceeding the economic profits associated with labor and capital inputs.

Indeed, if abnormal profits were being realized, one would expect to see an influx of companies into the industry and profit margins to shrink substantially as that happens. That is not happening.

As a share of revenue, Shell's profit came to 9.3%, which was somewhat lower than British Telecom's profit margin.

Size of profits is not the same thing as abnormal profits.

There is no "manipulation" of statistics. The data is taken straight from Shell's and BT's financial statements. Net Income Margin (Profit Margin) is a straightforward calculation (Net Income/Revenue).

Originally Posted by donsutherland1 Size of profits is not the same thing as abnormal profits.

No. That is not correct. Price > Costs = Profit; Per Unit Price > Average Cost Per Unit = Per Unit Profit. That is not abnormal profits.

Your reference to "windfall profits" is a subjective judgment.

Profit margin is not "manipulation." It is one measure by which a firm's profitability is assessed.