Oil is owned by governments

Yes, that's right. Not the evil oil companies. Ninety percent of the current reserves of oil on earth are owned by governments. Mexico? Gov't owned. Venezuela? Gov't owned. Russia? Gov't owned. All of the Mideast? Gov't owned. Indonesia? Gov't owned. Anywhere Africa? Gov't owned.

So where is the rest of the oil? The US, Canada, the North Sea. That's pretty much it.

What's the "so what"? Nothing really earth shaking. But consider these points:

• Almost every one of these government oil businesses subsidize energy usage
• This is not really a subsidy as much as revenue foregone, an opportunity cost
• The opportunity cost is borne to encourage economic development and make the public happy
• Indonesia has recently acted to greatly reduce the subsidy, and this has resulted in only sporadic rioting. If food prices continue to inflate, the situation could get worse. Indonesia is a bit unique in that it has the largest population by far of the oil producers except for Brazil, and is seeing growth in all economic sectors
  
• It's their business, literally
• The US is accused by some of subsidizing gasoline prices, but this is not true
• The net of gas tax/oil business subsidy is that we tax gas
• The so called subsidies are a set of tax laws that on balance benefit any company and encourage business investment and development
• Interestingly, some non net producing countries subsidize energy greatly
• China, which can afford to since the subsidy adds to a deficit that is only about .6% of it's GDP, and is sustainable. The net for China is that subsidizing energy is an investment in economic growth
• India is liable to have a big problem with it's current level of subsidy, as it is increasing a government deficit that is already too big and growing, as a percent of GDP

The bottom line: governments own and set the price for oil. Oil companies have nothing to do with the price of oil. They use it as a raw material to refine things like gasoline. And they make money doing so. When the price of a raw material goes up by say, 150%, you either find a way to cut costs by 150% (think about it- impossible), or you raise prices. Either way, if you don't deliver as a margin percentage a number as good or better than last year, you soon go out of business. So if the cost of oil at the well goes up, so do all costs, and in DOLLAR terms, all profits. Margins or percentages stay the same. This is precisely what has happened.



The last quarter's earning reports gave the media a chance to fill air time with some pretty irresponsible demagoguery (Shocking!). Profit for the most evil of the evil, Exxon was $0.28 per gallon of gasoline, or 9.5%. Compare that to the Governments' $0.46 profit. Oh wait, you can't make a profit on something you don't have any hand in producing, that is called a "windfall" and is so naughty you have to be impugned, excoriated, humiliated and have special punishment taxes levied on you. Unless you are the government. Now that is a business model I would love to invest in! Think about the margin- Exxon makes about 9.5% on sales, the government makes, wait, I am having calculator trouble, let's see- take $2.407 Billion, divide by sales of....sales of....wait, what again do they sell??????