Windfall ProfitsIt's all too typical of the Democrats that they are bringing up the notion of taxing the "windfall" profits of the oil industry. But the fact is that windfall profits are often followed by windfall losses. Why? Well, a little example will show how.
Let's suppose that you're a jewelry store owner, and that your main product is gold chains. We'll say that the gold chains weigh about one ounce apiece. Gold costs about $460 an ounce (current prices are around there), and because of your business you have about 100 pounds of gold on hand. Your markup on the chains is $50.
Well, if you sell all the chains, you will make about $80,000 in profit. (100 pounds times 16 ounces per pound, times $50 markup).
But suppose tomorrow, gold prices go to $560 an ounce when gold miners go on strike. What happens? Well, you have a "windfall" profit because you do not continue to sell the chains at $510 apiece, you mark them up to $610 apiece. And you'll make $150 per chain, or a total of $240,000 in profit.
Sounds wonderful, right? But time goes by and you've sold all your gold and you have to buy 100 pounds more at the $560 price. And, unfortunately for you, the miners suddenly decide to settle the strike and the price of gold drops back down to $460 per ounce. Now, you could try to sell the gold chains at $610, but there aren't that many suckers out there, P.T. Barnum not withstanding. So you bite the bullet and drop the price to $510. You lose $80,000 on the shipment, so that for the two sets of transactions, your profit is $160,000, or exactly what you would have made if the price of gold had stayed steady at $460.
That's what will happen to the oil companies. The difference, of course, is that with the gold example we saw the full cycle, while with oil we've only seen the first half. But the losses are coming; we can see it in the declining prices at the pump today.
