Windfall Profits?
Posted in Uncategorized on June 14th, 2008 by JackThere has been a lot of talk recently, particularly by Obama and the democrats in Congress for re-enacting a Windfall Profits tax on the oil industry. But what exactly are windfall profits and how does this apply to the startup entrepreneur?
The Economist defines windfall profit as a controversial concept, often used by politicians to justify imposing a TAX on PROFIT that in theory is earned unexpectedly, through circumstances beyond the control of the company concerned, and is thus deemed undeserved and ripe for the taking by the tax authorities.
Does this definition fit the current situation? Clearly, the tax authorities (Congress and the Democratic Candidate for President) want to take the profit. And clearly the authorities believe that the profit is undeserved. Many of the proponents of the current proposals for windfall taxes on oil have been claiming that Chevron or Exxon are making $1300 a minute in profit, or a billion a day, or many other shocking claims on the absolute value of the profit. And, if you’re not involved in big business on a day to day basis, the numbers are really, really big.
But are the authorities, particularly Obama and the Democrats, correct?
Here’s a basic analysis using the 2008 Fortune 1000 list.
| N = 1000 | Revenues ($ millions) |
Profits ($ millions) |
Profit % |
| Average | 11,975.07 | 724.46 | 6.0% |
| Min | 1,629.70 | -38,732.00 | -118.3% |
| Median | 4,619.50 | 253.30 | 5.4% |
| Max | 378,799.00 | 40,610.00 | 70.9% |
| Standard Deviation | 26,308.06 | 2,814.67 | 11.6% |
- Ranked by Revenues, only 2 Oil companies make the top 10. Wal-Mart ranks #1 at $6 billion more than Exxon Mobil. The only tech company AT&T at #10.
- Ranked by Profit, only 2 Oil Companies make the top 10. Exxon-Mobil ranks #1, but GE takes #2 before Chevron’s #3. In tech, Microsoft ranks 6, and AT&T 9.
- Ranked by Net Margin, no Oil companies make the top 10. Exxon-Mobil, with 10.9% margin ranks 219. Chevron, with 8.9%, ranks 298. This compares to Microsoft (27.5%) at 25 and Google (25.3%) at 34.
It will take a long time for a startup or entrepreneur to make the F1000. However, high-tech businesses do have high profit %. Looking at the % ranking, we see Mirant, an electricity generator at 70.9%, which may be an outlier, as the next in rank is Blackstone, in the PE business, at 53.2%. Gilead Sciences, at #7, is at 38.2%.
When I created the financial model for my business, I calculated a 39% net profit long-term. Looking at these figures, I don’t find it completely out of the question. Of course it’s aggressively high. But if I don’t shoot for that goal, I’ll never create a real business.
On the other hand, it is pure hubris for Congress to go after the oil business, and to not, at the same time, attack GE, Bank of Ameria, or the Oracle of Omaha.
The Rankings
Top 10 Gross Revenue
| Fortune 1000 Rank |
Company | Revenues ($ millions) |
Profits ($ millions) |
Profit % |
| 1 | Wal-Mart Stores | 378,799.00 | 12,731.00 | 3.4% |
| 2 | Exxon Mobil | 372,824.00 | 40,610.00 | 10.9% |
| 3 | Chevron | 210,783.00 | 18,688.00 | 8.9% |
| 4 | General Motors | 182,347.00 | -38,732.00 | -21.2% |
| 5 | ConocoPhillips | 178,558.00 | 11,891.00 | 6.7% |
| 6 | General Electric | 176,656.00 | 22,208.00 | 12.6% |
| 7 | Ford Motor | 172,468.00 | -2,723.00 | -1.6% |
| 8 | Citigroup | 159,229.00 | 3,617.00 | 2.3% |
| 9 | Bank of America Corp. | 119,190.00 | 14,982.00 | 12.6% |
| 10 | AT&T | 118,928.00 | 11,951.00 | 10.0% |
Top 10 Net Profit
| Fortune 1000 Rank |
Company | Revenues ($ millions) |
Profits ($ millions) |
Profit % |
| 2 | Exxon Mobil | 372,824.00 | 40,610.00 | 10.9% |
| 6 | General Electric | 176,656.00 | 22,208.00 | 12.6% |
| 3 | Chevron | 210,783.00 | 18,688.00 | 8.9% |
| 12 | J.P. Morgan Chase & Co. | 116,353.00 | 15,365.00 | 13.2% |
| 9 | Bank of America Corp. | 119,190.00 | 14,982.00 | 12.6% |
| 44 | Microsoft | 51,122.00 | 14,065.00 | 27.5% |
| 11 | Berkshire Hathaway | 118,245.00 | 13,213.00 | 11.2% |
| 1 | Wal-Mart Stores | 378,799.00 | 12,731.00 | 3.4% |
| 10 | AT&T | 118,928.00 | 11,951.00 | 10.0% |
| 5 | ConocoPhillips | 178,558.00 | 11,891.00 | 6.7% |
Top 10 Profit %
| Fortune 1000 Rank |
Company | Revenues ($ millions) |
Profits ($ millions) |
Profit % |
| 708 | Mirant | 2,815.00 | 1,995.00 | 70.9% |
| 666 | Blackstone Group | 3,050.10 | 1,623.20 | 53.2% |
| 855 | ENSCO International | 2,143.80 | 992 | 46.3% |
| 853 | Equity Residential | 2,147.20 | 989.6 | 46.1% |
| 913 | MEMC Electronic Materials | 1,921.80 | 826.2 | 43.0% |
| 402 | Charles Schwab | 6,063.00 | 2,407.00 | 39.7% |
| 536 | Gilead Sciences | 4,230.00 | 1,615.30 | 38.2% |
| 816 | DST Systems | 2,302.50 | 874.7 | 38.0% |
| 959 | CME Group | 1,756.10 | 658.5 | 37.5% |
| 297 | Qualcomm | 8,871.00 | 3,303.00 | 37.2% |
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