Increase gas pump taxes now

Gas will be way more expensive soon enough anyway. Let’s grab the excess oil company profit now, while we can, and create new technology

by Kevin Potvin <kpotvin@republic-news.org>

Only six months ago, when Fortune 500 released its famous list of the largest companies in the world, to no one’s surprise, WalMart garnered top spot, with a total capitalization (number of shares multiplied by share value) of US$240 billion. But as of mid-September, the world-beater retailer has lost US$61 billion of that value, about the equivalent of the total capitalization of 12 th place Home Depot.

The two top-most executives of WalMart weren’t surprised. At the peak of the company’s value, reached one year ago this month, the Chairman of WalMart and the son of the founder together dumped US$650 million worth of stock in WalMart over a one-week period. Those who bought that stock, thinking the newspapers were right in saying the company had nowhere to go but up, have since lost US$162 million. The lost capital value of WalMart in just the last six months is already more than four-fifths of the lost capital value experienced by Enron, the biggest collapse of capital value in global corporate history.

The difference is, of course, no one in the business media, let alone the regular media, have taken particular notice of this inauspicious collapse nor has anyone offered any useful analysis of why it is happening. And that’s because the cause of the collapse of WalMart is the big bugaboo in US media: it isn’t just rising gasoline prices, but it’s also the exhausted inventories of oil around the world.

Analysts have made the mistake of checking the stock values of oil companies for evidence of an impending collapse of that industry. Because those stocks have only risen, analysts have mistakenly concluded that the collective wisdom of market investors shows strong confidence in the future of the oil industry, and has therefore judged that oil has a long history still in front of it.

But the profits of oil companies will likely rise even more dramatically as the last of the available oil is drawn from the Earth. Already, many oil companies have begun winding down explorations for new recoverable reserves and are content to run what holes they have dry and call it a day. That abandoned expense alone spells increased profits for the time being, driving up share prices. But as the precious fluid becomes more scarce, its price will rise even faster. Oil has tripled in market price in the last two years while costs of producing it have risen only about 20%.

Normally such very profitable companies can retain a good part of those profits for reinvestment into the company aimed at ensuring future growth on into the future, much the way a farmer will keep from the market some of the grain his crop produces in order to spawn another crop next year. As long as the share value of oil companies increases with larger and more numerous oil reserves, better technology, new markets, etc, shareholders are happy to forgo collecting all the profits in the form of dividends. But since equity values of oil companies cannot rise any further (on account of there being no new reserves to find, no new markets to sell into, etc), shareholders are now demanding all the profits as dividends.

We might have hoped that, as oil supplies diminished, the enormously increased profits realized by oil companies would have been reinvested into research and development into alternative sources of energy. It would have been, we might have wished, in their interest to stay in business once oil-based energy ran out.

But instead, shareholders are stripping the companies down and burning the furniture. This is called the “income trust” model, and many energy companies in Alberta and around the world are generating massive profits for the time being for their shareholders by adopting it. This one-time opportunity to deploy excess capital in creation of new technology and new sources of energy is being squandered. The huge money being made today in the energy sector is masking a frightening truth: like a sun going super-nova, it’s a sure sign the end—darkness—is near.

The market knows this, but the analysts do not. This is why the market at the same time can bid up the price of stocks in oil companies and drain the capital out of retail giants like WalMart. If the future looked rosy, both would be up; if it looked terrible, both would be down. The fact one is up and the other is down tells a story outside the usual boom and bust narrative.

WalMart and ExxonMobil, by far the largest oil company in the world and the second half of the 1-2 combo sitting atop the global Fortune 500 list, are intimately connected. Almost all of WalMart’s products come long distances from overseas factories and are sent by truck all over the vast nation: WalMart’s supply-lines are extremely fuel-intensive. A lot of what WalMart sells to earn its US$287 billion in revenue is made of plastic—that is, oil. And most worrisome of all for shareholders, WalMart stores are mostly located well away from major concentrations of populations, in small towns or the outskirts of cities. All their customers must drive cars to get to them. And WalMart’s customers are the most price-sensitive around. They know exactly how much more it costs to take a trip to WalMart today compared to last year. And they’re going to start cutting back. Market investors have figured this out.

ExxonMobil enjoys full penetration in the world’s biggest fuel market, the United States. It has been estimated that the average American makes over 700 shopping trips by private vehicle per year. A goodly portion of those trips are to WalMart. There are ten times as many SUVs per capita in the US as there are in Canada: a big proportion of those 700 shopping trips per American per year are done in the most gas-guzzling vehicles ever sold into a civilian market. ExxonMobil and WalMart, the two biggest companies in the world, are largely fighting for revenue that is coming from the very same pockets. They can’t both win.

Both will likely lose. Oil companies will be bled dry by shareholders not interested in leaving profits in the companies to be reinvested in future technology and alternative energy. And WalMart will also be bled dry by a market able to calculate the shrinking space between ever-rising supply costs and an ever-decreasing customer base with less spending money. Though it is one of the world’s most profitable companies, it traditionally shows only a three-and-a-half percent difference between revenue and costs. There is not much wriggle room between profit and loss at WalMart.

The winners in the end will be retailers who capture transit-borne customers and companies that develop non-oil-driven transit systems. The market is too greedy to build this future, though, and the analysts who we expect to critique the market are too dim-witted to notice the looting. When the oil does run out, the people will be left without cars to drive to stores, and also without stores to get necessary stuff from.

The lucky people will be those who have government leaders noticing the gross negligence happening in the markets, and at the same time, able to see what kind of future lies in wait for us. Those policy makers, backed by trusting constituents, can use the levers of power to intervene benevolently into the markets and guide energy and retailing companies to the future: smaller, more nearby retailers selling more locally-made, natural products to customers using transit, bikes, or walking to get to them.

The way those bright policy makers can do this is by taxing the hell out of energy companies now to capture as much of the excessive profits as they can that should by rights, and by tradition, be re-invested, not dispersed to shareholders. But since it is not easy to massively increase taxes on those huge multinational companies, policy makers need to collect where they can: in the transaction between fuel buyers and fuel companies at the gas station.

Commuters may think now would be a terrible time to increase taxes at the pump. But in fact now is the right time. Since we know for sure that oil, and hence gasoline, is going to rise in price steadily and steeply from here on in, any tax relief measure to reduce the cost at the pump will provide only momentary help. As prices go up, oil companies will sell less oil, which is how the market works: there will also be less oil to sell. We could raise taxes at the pump now, thereby bringing on earlier the inevitable decline in demand for gasoline, thus depriving oil companies’ shareholders their excess profits and steering the money instead through government hands where proper investments into transit and other sources of energy can be more intelligently made.

It’s a severe option to consider, but the effect will only be to put us through what is going to come sooner or later. The difference is, if we wait a bit for it to happen later, we will have no resources for development of other transportation options when the crunch comes, whereas if we bring on the high fuel cost future today, we will have resources enabling us to build our way out of these looming problems by the time they hit.

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