THOSE EVIL OIL COMPANIES AND THEIR PROFITS
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 75. 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.<s
