Executive Summary: with recent discussions calling for “windfall’ profit taxes on Big Oil, to Ms. Warren, Mr. Sanders and others supporting it, I very lovingly, very thoughtfully, very politely say to them “F@&K off.” Unless of course we want to tax all “windfalls” alike, in which case Big Government will also need to call their friends at Pfizer, Moderna, Google, Amazon and Microsoft, because after all, they are much richer than Big Oil.

If we want to solve problems, we have to be honest about what they are. Equally, we have to be genuine about wanting to solve them. Perhaps that is the most frustrating thing about politics today: the lack of thought into anything other than “party talking points.” Are we really being intellectually consistent when Joe Biden says:

To the oil and gas companies and to the finance firms that back them: We understand Putin’s war against the people of Ukraine is causing prices to rise.  We get that.  That’s self-evident.  But it’s no excuse to exercise excessive price increases or padding profits or any kind of effort to exploit this situation or American consumers. Russia’s aggression is costing us all, and it’s no time for profiteering or price gouging.

Meanwhile…

Or Elizabeth Warren tweets this:

Meanwhile…

What Is a Windfall Profits Tax?

A windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. Inheritance and taxes levied on lottery winnings can also be considered windfall taxes on individual profits.

In that context, we must evaluate when economic conditions result in large and unexpected profits. So when Democrats pump out a talking point that “Big Oil raked in $174 billion…” as Ms. Warren suggest, we must have some context to that number. Over what size asset base? What was the expected profit? What are the drivers to the “unexpected profits?” We will come back to Ms. Warren at the end of the post but for now, I want to look at Google and Pfizer in the context of “unexpected profits.”

In 2021, Alphabet (Google parent company) had $76 billion of net income and hold a market capitalization of $1.7 TRILLION. They own Google, YouTube, Google Cloud and Android. They hold $136 billion in cash and securities, bought back $50.3 billion in stock (up 62% from 2020) and do so on tangible “Property, Plant and Equipment” assets worth $84.7 billion. To assess “windfall profits” I ask the following questions.

1. What would Alphabet have earned without COVID?
2. Did they play a role in driving the COVID narrative?
3. Should they pay a windfall profits tax?

Here are some highlights from their 2021 Annual Report.

Revenues were $257.6 billion, an increase of 41%. The increase in revenues was primarily driven by Google Services and Google Cloud.

Operating cash flow was $91.7 billion, primarily driven by revenues generated from our advertising products.

Capital expenditures, which primarily reflected investments in technical infrastructure, were $24.6 billion.

1. What would Alphabet have earned without COVID?

Alphabet’s growth in 2021 was 41% in revenue over 2020. Looking from 2018- 2020, revenue growth was slowing dramatically and one might project they should have only grown 8%. It grew 41%. Based on this, it would be fair to say that “windfall revenue” was 33% of the growth.

Translating to net income, their growth over 2020 was 90%. Margins grew from 2019 to 2020 from 20% to 21%, so one might calculate their margin should have been 22% in 2021. In fact, their margin was 29.6%. Based on this it would be fair to say that “windfall income” was 7.6%.

NOTE: The only year with a growth rate in net income like 2021 was 2018 where Google realized a $8.5 billion unrealized gain due to an accounting change that impacted some of their investments, and 2017 was working off a base substantially below 2016. Backing out the gain in 2018 and working off of 2016, their income grew by 6% a year.

Without COVID, Alphabet would have made $61 billion less in revenue (at a margin of 29.6%) and $32 billion less in net income overall.

2. Did they play a role in driving the COVID narrative?

5 billion views of YouTube occur EACH AND EVERY day. Google captures 93% of the search globally. Google gets 29% of all digital marketing dollars spent.

Short answer. Yes.

3. Should they pay a windfall profits tax?

If you had the power to manipulate he narrative to grow your business, worked hand in hand with government to determine “misinformation,” took money to promote a vaccine and lockdowns through ads and saw your business increase massively and your stock price double, should you?

Let’s ask it another way. On $24 billion of capex and $85 billion in assets, is $76 billion in net income reasonable?

What does Nancy Pelosi think about windfall profits? This from a Fortune magazine article in July 2021.

The week before the House Judiciary Committee voted on reigning in big tech, Speaker Nancy Pelosi’s husband exercised a bullish bet on Google-parent Alphabet, in a timely transaction that netted him $5.3 million.

So far, she hasn’t weighed in. Don’t hold your breath

How about Pfizer? Did they have “windfall profits”?

Revenue up 96%. Net income up 141%. $14.8 billion of property, plant and equipment (plus $49.2 billion of “goodwill”… i.e. buying companies for a lot of money with few tangible assets and matching the book value). No liability for their product. No liability for the change in 95% efficacy. Please don’t make me show the all-cause mortality data from the trial.

Did I make my point? Maybe just one more headline.

Let’s talk oil producers and for simplicity, I’m going to start with Robert Reich’s Substack echoing the call for windfall profit taxes on Big Oil this morning (don’t say I don’t read all points of view, I’m a subscriber).

Last year, when Americans were already struggling to pay their heating bills and fill up their gas tanks, the biggest oil companies (Shell, Chevron, BP, and Exxon) posted profits totaling $75 billion. This year, courtesy of Vladimir Putin, Big Oil is on the way to a far bigger bonanza.

OK, Robert, I’ll bite. Is $75 billion a lot? I know it matches Google’s net income in 2021 and is just under double what Pfizer alone made in excess revenue.

Property, Plant and Equipment

In 2020, Shell, ($209.7 billion) Chevron ($349 billion), BP ($209.7 billion) and Exxon ($233.6 billion). That’s $1 TRILLION of P,P&E. $75 billion of net income is 7.5% return on “P,P&E”. Alphabet made 88%. Pfizer, including Goodwill, made 34%.

In 2019, Shell ($16.2 billion), Chevron ($2.9 billion), BP ($4.0 billion) and Exxon ($14.3 billion) had $37.4 billion in net income. That’s 3.7%.

In 2020, Shell ($-21.5 billion), Chevron (-$5.5 billion), BP (-$20.3 billion) and Exxon (-$22.4 billion) had -$69.7 billion in net income. That’s -7.0%.

So in 3 years, Big Oil made $42.7 billion in total profit in 3 years on $1,000,000,000 (TRILLION) of assets, which represents a 1.4% return.

Windfall profits tax? F@&K off.

Love and hugs,

DRW