© David Burton 2008

Here we go again!

Last month (January of 2008), Big Oil announced profits of $72 billion dollars. To most people; that is a huge number, and indeed it is. But how many people who looked at the number realize what it means?

The revenues of the three biggest oil companies totaled $772 billion, so the profit is really about 9% of revenue. In 2005 (last year numbers were available as of posting), the Fortune 500 companies had $9.1 trillion in revenue with $610 billion in profits, which is 6.7% of revenue on average. Big Oil’s profit margins are therefore in line for big companies especially considering that they all have shareholders to answer to.

Of course, the record earnings make good fodder for liberals and politicians eager to play the class warfare card. Unfortunately, there are many who are eager to take something from a company just because they can or they want to. Companies, like those in Big Oil, put forth the effort and the risk. They are entitled to earn the rewards. It’s easy to take something from someone, it’s harder to go and earn it yourself. The largest Big Oil company, Exxon-Mobile, last year earned $40.6 billion on sales of $404 Billion. It could avoid the charge of making obscene profits by simply splitting itself up into 10 smaller companies whose individual profits would “only” amount to $10 billion each. For comparative purposes, take a look at the profits of a few large companies in 2006.

     Company           Profit ($ billions)         Profit Margin (%)
     Exxon-Mobil               36                             11
     Citigroup                     25                             21
     Bank of America         17                             19
     General Electric           16                             11
     Microsoft                    13                              32
     Johnson & Johnson    10                              21

If we’re going to take away obscene profits, why not take away the large profits of Microsoft, Johnson & Johnson, Citigroup, and Citigroup?

In return for its 9 or 10 % profit margin, Exxon-Mobile has to make large and risky investments to find and develop energy resources — more than $80 billion between 2002 and 2006, with an additional $20 billion planned for 2008. “Our earnings reflect the size of our business,” Kenneth P. Cohen, Exxon-Mobile’s vice president for public affairs, said on a conference call with journalists.

“POLITICIANS, ESPECIALLY DEMOCRATS, love to beat up on Big Oil these days. Company executives are routinely caricatured as price-manipulating, environment-hating villains who are enriching themselves obscenely at the country’s and the world’s expense.”

“Washington’s responses have been bizarre, almost comic. Meaningful measures are left undone or substantially watered down. And most of the measures actually taken will do little good, if not outright harm.”

Privately owned oil companies “have been ramping up capital expenditure. Chevron, for instance, has more than doubled annual outlays, from $8.3 billion three years ago to approximately $19.6 billion this year. True, earnings have soared. But, unlike much of the rest of corporate America today, oil companies are spending heavily to expand instead of clutching their cash or primarily engaging in buybacks of their shares.”

Two years ago, when the price of oil soared past $70 a barrel and gasoline was selling at $3.00 or more a gallon, the American consumer screamed for congressional investigations of petroleum companies, SUV sales plummeted and hybrid vehicles became the rage. Suddenly, Nuclear power was no longer a dirty word, and a dozen technologies for potentially supplementing or replacing petroleum came into vogue. Some of our political demagogues called for opening up the strategic oil reserves and reducing the gasoline tax to relieve the financial strains caused by the rise in fuel prices.

At that time when energy costs were peaking in November of 2005, I wrote an article on ways to solve “America’s energy dilemma”. In the article, I pointed out that “Most experts agree that the surest way to reduce demand is to raise gas taxes, as Europe has done ...”. To date, our government has taken no action. Instead, we have had politicians eager to curry favor with the voters propose to raid the strategic oil reserves to reduce the price of gasoline and they rant and rave about “taxing the obscene profits” of the oil companies.

“…the leaders of the Democrat-controlled Congress are intent on levying new taxes. They want to bar oil companies from being eligible for the tax reduction enacted to benefit manufacturers… Companies drilling in the Gulf of Mexico are being browbeaten into paying royalties to Washington that weren’t part of their original agreements with the feds when the leases were bought in the 1990s. These and other punitive measures blissfully ignore the lessons learned in the 1970s and 1980s, when Washington monetarily harassed the oil industry: Investment plummeted. We are now more dependent on foreign oil than ever.

“Other boneheaded congressional moves: ** It refuses to open up the vast oil- and natural gas-rich Outer Continental Shelf (OCS) for exploration and drilling. Politicos fan fears that offshore drilling will lead to oil spills, desecrating America’s shorelines. They ignore the fact that today’s technology is eons amore advanced than that of the 1960s. “Britain, Norway and the Netherlands permit vigorous offshore drilling programs, and no one would accuse those countries - or the rest of Europe - of being environmentally insensitive.”

“… Congress has enacted no meaningful steps to remove the ban against most offshore drilling, despite the almost certain prospect in years ahead that the OCS would substantially boost our domestic oil and natural gas output. “Even the proposal by Chevron’s CEO … that the Minerals Management Service conduct a thorough geophysical survey of the OCS - which would tell us which areas are likely to be oil/gas rich and which are not - has been stymied by the Democrats.

“The Gulf of Mexico - Texas, Louisiana, Mississippi and Alabama have no offshore drilling hang-ups - has already proved to be a treasure trove. Recent exploration in a new area revealed estimated oil and natural gas reserves of 3 billion to 15 billion barrels.

“** And, of course, allowing environmentally sound exploration in the oil/gas-rich Arctic National Wildlife Refuge - as ugly an area, esthetically, as one can find in Alaska and amounting to 2,000 acres in a refuge of 19 million acres - remains a nonstarter.”

“** Alternative energy? We massively subsidize corn-based ethanol, even though sugar-based ethanol appears to be far more efficient and less costly.”

“If Washington politicians could apply to productive proposals a fraction of the energy they expend in demagogic posturing and the pushing of pork barrel projects, we would deal our enemies and a goodly number of kleptocratic despots a gusher of hurt.”

We Americans are our own worst enemies! We blame everyone else instead of ourselves for problems that we should be (and should have been) addressing. All I’ve heard over the last 2 or 3 years are the following totally unsubstantiated railings of the uninformed:

“There’s no shortage of oil. There are more than a hundred year’s of reserves. The oil companies are not pumping it in order to raise the price of oil.”

While there is certainly great uncertainty about when the earth’s oil reserves will be exhausted, there is no uncertainty that it will one day be exhausted. The time remaining is not measured in hundreds of years, it is measured in tens of years, primarily depending upon the growth of economically developing nations such as China and India. The reason that oil prices have risen from less than $30 a barrel to $100 a barrel in the last few years is mostly tied to the ubiquitous supply and demand issue and the availability of that supply. Demand is catching up with supply and will shortly pass it, i.e., There will be more demand for oil than can be supported by new oil discoveries.

“President Bush, his father, Don Cheney and the Haliburton Company are all bosom buddies with Saudi Arabian royalty and they are colluding with the Saudi’s to raise the price of oil.”

While this is a popular theme of the anti-Bush faction and their fellow traveler conspirators, there has never been one fact established to support this canard. Here, as usual, the proponents of conspiracy, state a premise and then declare it to be fact without a shred of supporting information.

“The big oil companies are making ‘obscene profits’ at the expense of the American consumer.”

Let’s look at the real facts. How are the costs of a gallon of gasoline distributed? Here are the cost elements in a $3.00 gallon of gasoline:

     Distribution Costs, Marketing Costs and Profits      $0.08        2%
     Crude Oil Cost                                                          1.65      55%
     Refinery Cost and Profits                                          0.58      19%
     State Underground Storage Tank Fee                        0.01      <1%
     State and Local Sales Tax                                          0.23        8%
     State Excise Tax                                                        0.23        8%
     Federal Excise Tax                                                    0.23        8%
                                                                                   _____     _____
     Retail Price of 1 Gallon of Gasoline                     $3.00      100%

As we can see, crude oil costs comprise some 55% of the cost of a gallon of gasoline, taxes eat up some 24%, while distribution Costs, marketing costs, refinery costs and profits amount to 21%, of which 9% (27 cents) or less is actual earned profit to the oil companies. If anyone is making obscene profits, the case can be made for that party being the state and federal governments which take in 69 cents or 24% on every gallon of gasoline that we buy. In other words, the state and federal governments make about 3 times as much money from a gallon of gasoline as do the oil companies and they do nothing to earn that money. Note that some 55% of cost of our gasoline is a result of the cost of crude oil and the truth of the matter is that “95% of the world’s known oil and gas reserves are controlled by national oil companies, not private entities such as Chevron, BP, Conoco-Phillips and Exxon-Mobil.”

Big Oil’s profits are high because Big Oil is big business and sells a lot of product. Profits are not high because the oil companies are earning obscene profit margins.

If Big Oil’s profits are obscene, so are those of Disney. As its most recent first quarter earnings showed, Disney earned $723 million, on $8.7 billion in sales. In other words, Disney’s profits as a percentage of sales are 8.83%, about the same as Big Oil. Where are the protests against Disney’s “obscene” profits and the cries to impose an excess profits tax on Disney?

“The Big Oil Companies control the most of the world’s oil reserves and are keeping the price of crude oil high in order to increase their profits.”

Western majors, which once dominated the global energy business, now control only about 6 percent of the world’s oil reserves. Last year, PetroChina overtook Exxon as the world’s largest publicly traded oil company.

In 2006, the Senate Committee on Energy and Natural Resources found that 75 percent of the world’s oil reserves were in the hands of national state-controlled oil companies and this percentage was expected to keep growing. High oil prices were making these oil exporting countries so rich, they really don’t need the international oil companies, their capital or their technical expertise anymore. Today 95% of the world’s oil reserves are controlled by state-controlled oil companies and only 5% by private oil companies.

We Americans are obsessed with conspiracy theories, whether it’s the government withholding the truth on UFO’s, the cover-up of the real facts in the assassination of JFK or the government’s conspiracy to spy on each and every American citizen. With respect to the energy and petroleum issues, there are the following posits:

“The big oil companies are conspiring as a group to raise the price of petroleum products.”

With all the accusations about the big oil companies conspiring to rip off the American consumer, the fact remains that with all the posturing in Congress and the congressional hearings designed to “get to the bottom” of the high prices of gas and oil, neither Congress nor the Judiciary branch of the government has found one iota of evidence to support these charges. While our Congressmen and Senators bluster and posture in front of the TV cameras by browbeating the CEOs of Big Oil, they have accomplished next to nothing, and they certainly have not shown Big Oil to be doing anything but providing gas and oil to the American public at a profit margin no greater than in any other segment of our economy.

My liberal and anti-business friends tell me that their solution is to take away the obscene profits of the oil companies, i.e., tax, big oil profits. What they are saying is that they will make big oil the whipping boy and they will determine what are allowable profits for the oil companies.

Questions: Who are “they”? Why not do this for all companies in America that have profit margins above, say 5%? Why not establish czars to determine and enforce acceptable profits, production goals, etc. as totalitarian socialistic anti-capitalistic regimes have done? Why not institute the failed managed market policies of Communist era Russia here in America? “Look fellas, the command-and-control, state-run economics experiment was tried. It was called the Soviet Union. If you hadn’t notice, it was a miserable failure.” Why not put in place the past policies of Communist China that they are now replacing with an American style free-market capitalistic economy that has resulted in their emergence as a real economic power instead of a starving basket case? “Deng Xiaoping launched China’s ‘open door’ policy in December 1978, discarding Soviet-style central planning in favor of a free-market approach. Since then China has achieved a stunning 9% or higher yearly growth rate 19 times.”

Instead of looking for scapegoats, let’s look in the mirror and face the truth. We Americans received a warning about petroleum and energy more than 30 years ago during the Arab oil embargo. For over 30 years we (you and I) have done essentially nothing to respond to that warning.

• We imposed a national speed limit of 55 mph to conserve gasoline and then we raised speed limits to 65 and 75 mph. On our highways today, we drive at speeds of 75 to 90 mph.
• We imposed fuel economy standards of our automobiles and then we allowed these standards to be ignored by classifying SUV’s as trucks instead of as automobiles. Most passenger vehicles on the road today get only 20 to 30 mpg instead of 30 to 40 mpg as they should.
• We prohibit oil drilling off the coast of Alaska to save the wilderness for polar bears.
• We prohibit oil exploration off the New England Coast to supposedly protect the environment rather than human beings.
• We fight against the siting of wind-powered generators off the New England coast because it may spoil the view of a few prominent sail boat enthusiasts.
• As opposed to countries like France and Japan, we effectively shut down the nuclear power industry, which offers pollution free energy and independence from fossil fuels.
• Go out at night in any large city. The night is ablaze with lights for advertising and a myriad of non-essential reasons. Does that advertising sign need to be lit up from midnight till sunrise?

1. http://www.lorien1973.com/oil-company-profits-whats-the-big-deal/, January 30, 2008.
2. The Forbes 2000, Forbes Special Report, March 30, 2006.
3. Exxon Mobil Profit Sets Record Again, Jad Mouawad, The New York Times, February 1, 2008.
4. Gas Bags, Steve Forbes, Forbes, Pg 33, April 16, 2007.
5. Disney profits are up, but image is down, Krysten Crawford, CNN/Money, February 1, 2005.
6. America Needs 4 to 7 Dollar-a-Gallon Gasoline, David Burton, www.sonofeliyahu.com, May, 12, 2007.
7. Solving America’s Energy Dilemma, David Burton, www.sonofeliyahu.com, November 15, 2005.
8. A Billion Laughs, Lawrence Kudlow (New York Sun), reprinted in Forbes, Pg 18, February 25, 2008.
9. Asia’s Growing Role in Financial Markets, Lee Kuan yew, Forbes, Pg 21, February 25, 2008.
10. Where Industry Has Failed Us, Paul Johnson, Forbes, Pg 25, February 11, 2008.
11. Big Gulpers, Forbes, Pg 38, February 25, 2008.
12. Estimated 2006 Gasoline Price Breakdown & Margins Details, WWW.ENERGY.CA.GOV / GASOLINE / MARGINS / 2006, California energy Commission.
13. The Peak Oil Crisis: Congressional Hearings - Round #2, Tom Whipple, Falls Church News-Press Online, January 18, 2007.