Defending Oil Profits

While I may work for an oil company (well, technically sub-contracted) I make this post, not in defense of big oil and my livelyhood (though my pay rate stayed the same since Jan 1), but I make this post in defense of capitalism.

The American Petroleum Institute, an oil trade association, posts a defense of "big oils" evil profits.

The energy Americans consume today is brought to us by investments made years or even decades ago. Today’s oil and natural gas industry earnings are invested in new technology, new production, and environmental and product quality improvements to meet tomorrow’s energy needs.

The industry's earnings are very much in line with other industries and often they are lower. This fact is not well understood, in part, because reports typically focus on only half the story-the profits earned. Profits reflect the size of an industry, but they're not necessarily a good reflection of financial performance. Profit margins or earnings per dollar of sales (measured as net income divided by sales) provide a more relevant and accurate measure of a company or an industry's health, and also provide a useful way of comparing financial performance between industries large and small.

The link (sorry an MS Word file) has a graph of the profit margins of major American industries.

The top profit maker?

Banks. There's a lot of money in money. 19.6 cents on the dollar in fact.

Pharmaceuticals. 18.6 cents. Once you develop the drug the incremental cost is low. Of course those exhorbitant profits go towards more research, but look!

Software. 17 cents/dollar. Same deal as pharm. Maintenance and mass production of existing software is cheaper than developing it.

All of US Industry.... 7.9 cents.

Oil and natural gas are actually below average! 7.6 cents return for every dollar spent.

ExxonMobil has a similar document (PDF), entitled cleverly "Oil and Apples" in it's own defense.

Last year alone, our new capital investments approached $15 billion, primarily in new exploration and production, but also in refining capacity and new energy-saving and environmental technologies.

While earnings rise and fall with oil prices, our investments do not. That $15 billion was invested in a year when the oil price averaged just below $40 and earnings were high. But we also invested $15 billion in 1998, when oil dipped to $10 a barrel and annual earnings — at $8 billion — were far lower. In fact, averaged over the last ten years our annual capital investments for the future of the company exceed our earnings.

Ours is a capital-intensive business where investments can take many years to develop.

What a country we live in that a company had to put out ads to defend it's right to make an "average" profit on it's money.

Also today, the Senate finance committee decided to impose a windfall tax on oil companies!

The measure amounts to a one-year windfall profits tax, a concept that most Republicans had until recently denounced as a discredited idea from the 1970s. It was added to a larger bill that would cut taxes by about $61 billion over the next five years.

Conservative Senate Republicans who support the oil industry bitterly protested the measure, noting that Congress had just approved billions in new tax breaks to encourage oil and gas exploration. But every Republican on the panel voted for the overall package, which passed the committee by 14-8 and which the full Senate is expected to take up today.

I suspect the 8 Democrats that voted against the package didn't vote against because it's a dumb idea. It didn't go far enough.

Regrettably, I think the President will gladly sign this bill into law. Given that he's been painted as the "big-oil friendly" President and the VP has ties to Halliburton, using the Presidents first veto to kill this would make huge headlines.

I don't think a President who's still sore from the abuse will invite it upon himself.

Infuriating top to bottom.

Economics and Markets Posted by AlexC at November 17, 2005 1:28 AM