Oil Companies are Not Evil!

October 7, 2008

After reading Donna’s post today, “Is Exxon really evil?”, I wanted to add some additional comments. There are so many, I will number them.

(1) People have a huge misconceptions about who is making the money. The people who are making the money are the Exxon shareholders and people who invested money into a company that provides us with Energy. They invested their money not to be nice to everyone else. They did so in hopes of a return on their investment. Just like everyone else who has invested money into other stocks, mutual funds or even a certificate of deposit at the local bank. They deserve a return on their investment. I am willing to bet that almost all Americans that invest at most any level own some portion of Exxon (or the other oil companies). Most of us own mutual funds. Most diversified mutual funds are going to own some oil company stocks.

Let’s examine this return. In 2007, Exxon made $40.6 billion in Net Income. I have heard many people say, “No one should be allowed to make this much money in this economy!” As of this morning, Exxon’s market capitalization was $411 billion – a massive company by any measure. Based on Exxon’s market capitalization, Net Income only yielded a return of around 10%. Their return on assets was only 16.8%. Under no stretch of the imagination are these rates of return excessive.

(2) Another thing to consider is that the majority of Exxon’s profits are non-US profits. Seventy-five percent (75%) of their Net Income was earned outside of the United States. Certainly, when a US company earned $30.5 billion in profits outside of the country, it is a good thing. After all, they are bringing the bulk of those profits home to American shareholders.

(3) Exxon had an Effective Income Tax rate in 2007 of 44% for a total of $30 billion in income taxes. (Yes, 44% – that is not a typo.) Yet, many politicians want to take them more? In addition to Income taxes, they also have to remit a sales-based tax each time they sell a gallon of gas – these totaled $32 billion in 2007. They also have a host of other excise taxes and duties that they pay annually – totalling $44 billion in 2007. After adding up everything from Exxon’s activities – their 2007 tax bills totaled $106 billion. Their Net Income after taxes was only $40.6. In other words, for each $1 that Exxon got to keep, they paid out $2.61 in taxes.

(4) The above does not include the taxes that the shareholders (anyone that owns stock in Exxon either directly or through a mutual fund), had to pay when they got their dividend. This has got to be the biggest travesty to me. Why does the government get to double dip? Why do they get to tax Exxon on the profits and then when they give the shareholder’s their share – tax them again? This is the case with all C-Coporations. In my opinion, dividends should not be taxed. The income has already been taxed once. Regardless, Exxon issued dividends of $7.6 billion in 2007. There is no way to determine how much tax was paid on this since, there are many considerations such as different tax rates, differed taxes through retirement plans, etc. I would estimate another 20% – for another $1.5 billion paid into the system by shareholders.

(5) If we could simplify Exxon to be only a gas vendor (which we can not because it is so much larger than that), the amounts they make on a gallon of gas would break out something like this. Assuming the price they received for a gallon of gas was $3.50 per gallon, the following would flow through: Cost of acquistion of crude oil/product and converting it to gasoline and delivering it to the pump, an average of $2.33 per gallon, Sales-taxes included in price paid by consumer that must be remitted by Exxon, an average of $0.28 per gallon. Other taxes and duties that Exxon is require to pay, an average of $0.37 per gallon. Income taxes that Exxon is required to pay, an average of $0.27 per gallon. Income that is available to be distributed to shareholders $0.15 per gallon (which are taxed again at the individual level once distrubted). A net of a mere 4%. Seems like they are not making enough to me. Of course, as I said before, we can’t simplify things this much.

(6) Another way to look at the Exxon tax situation is that if Exxon did not have to pay or remit their $106 billion in worldwide taxes last year, they could have charged everyone a lot less for a gallon of gasoline and their shareholders could still have made the same return on their investment. They could lower the price of all of their products by 33% and make the same profit!

The oil companies are not the problem. The problem is that the government is too big and it takes way to much capital to run it. We have got to stop throwing money at our problems – it does not work. We need solutions to problems – not more money thrown at them.

Donna Bordeaux, CPA with Calculated Moves

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly, and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux.  They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.