There has been much wailing and gnashing of teeth in the last week or so over the reports from major oil companies of increased profits. These reports have given many Americans the opportunity to exhibit their total ignorance when it comes to matters economic. For this we can thank our wonderful government schools, where basic education in economics is, for all practical purposes, non-existent.
October survey shows that 72% have an unfavorable opinion of oil companies. In the Sunday "Vent" in the Atlanta Journal-Constitution several of Atlanta's more poorly educated citizens chimed in with their thoughts on oil companies and their profits:
"When do the oil company profits for the quarter become proof of price gouging?"
"Oil company profits show we have been hosed."
Oil company profits can not in and of themselves be proof of price gouging, neither can they be proof that we've been "hosed." Once again the "Vent" serves as a platform from which people can demonstrate their ignorance.
Now .. just what have we read about oil company earnings. Generally, we've read that oil company profits are up. This, if you read the public opinion polls, is evidence of evil. How dare the oil companies allow their profits to go up? Now .. a little test. Ask someone in your office, school ... whatever ... what the difference is between profits and profit margins. See if they can come up with an answer. Simply put, your profits are the money that's left over from gross revenues after you pay the costs of doing business. Profit margins are the percentage of gross revenues that are left over after you pay those costs. I would bet you five bucks against a stale donut that 95% of seniors in our illustrious government high schools couldn't tell you the difference between the two ... and it will be those 95% who are screaming bloody murder about oil company profits.
Now ... for those of you who went to government schools, let's expand on the explanation. Let's say that the total gross revenues for a company for one year equal $1,000,000. That's a million bucks. This company spends $930,000 to bring in that million. The difference between the one million and the $930,000 is $70,000. That's your profit. Divide the $70,000 by the one million and you get 0.07, or 7%. That's your profit margin. Now let's say that the very next year the company sells twice as much product the second year and brings in two million bucks. Let's also say that the cost of making those products doubles as well .. to $1,860,000. How much money did you have left over? Those of you who went to government schools get out your calculators .. the rest of you can figure it out in your head. You have $140,000 left over. That's your profit.
Wait! Your profits have doubled! How dare you? What are you doing, price gouging? These are excess profits -- windfall profits -- and the government ought to step in immediately and take them away from you, you greedy capitalist pig!
Hold on ... before we get carried away with our little price gouging rant here, let's grab those calculators again. Divide the $140,000 in profits by the $2,000,000 in gross receipts and what do we have? Why, it seems the answer is once again 0.07, or 7%! The profits have doubled, but the profit margin remains exactly the same!
The problem here is that, thanks to the hideous education the vast majority of Americans have received at the hands of the government, few people know the difference between a profit and a profit margin. Whey they read that oil company profits have gone up they have no educational basis upon which to balance the fact that oil company revenues have also gone up ... thanks to the increase in the price of crude oil. Revenues go up. Profits go up. It's not really that hard to understand.
Now, as I've said, that explanation is rather simplistic. The tragedy is that most Americans don't understand the concept of profits and profit margins even at that basic level. Someone will now come along and point out that the oil company profit margins have been rising along with the profits themselves. They're right. You see, costs don't necessarily double when revenues do. There are some costs that remain fixed even when the prices for raw materials (crude oil) increase. This will mean that profit margins will also increase, though not anywhere near as much as profits themselves. Is this necessarily a bad thing? Hardly. Just where do you think the energy companies, including the oil companies, get the money they need to explore for new sources of oil, to build new refineries, and to conduct research on additional or alternate energy sources? That money comes from profits. If profits increase due to high demand met by a scarcity of product the oil companies will be in a position to use increased profits to expand production and to search for new sources of oil. If the government seizes these profits, as suggested by Hillary Clinton, then those dollars would not be available for energy company investments into expanding our energy resources.
Hillary's brilliant idea of seizing profits does not come as a surprise to many. After all, Hillary was identified by her college professors as a budding young socialist many years before she achieved fame as Bill's "wife." Hillary's idea is for the oil companies to hand over about $20 billion a year to the government to be used for "research" and to subsidize consumers. The subsidies, of course, would become just another government entitlement that Democratic politicians would use to buy votes. The research? Well, sad to say there are actually people out there who think that the government can do a better job conducting research to insure our future energy needs than can the private sector. The impact of state education is widely felt.
Let's explore Hillary's profit-seizure idea a bit more. Another source of funds for oil companies to use for exploration and the development of additional energy resources would be the money that comes from investors. These investors purchase shares of stock in oil companies because they believe that their investments will appreciate in value and, in some cases, will pay dividends. If the government bows to the paranoia and anti-capitalist ignorance of the state-educated masses and seizes those profits, what then will be the reason to invest in these oil companies?
Look. I'm not trying to hammer the government schools here; but the more I think about it the more I'm convinced that so many of the problems that we face today as a nation are the direct or indirect result of the abysmally poor education most Americans get from their state-operated schools. It's clear that vast numbers of Americans have scant knowledge of the role of prices in the allocation of resources by the marketplace, and the relationship of profits to those prices. Politicians, like Hillary Clinton, exploit that ignorance to enhance their personal political power at the expense of our economic liberty.