Posted by: mulrickillion | March 12, 2012

Big Oil’s Banner Year – Higher Prices, Record Profits, Less Oil

ExxonMobil’s profit increased by 31 percent from 2010 to 2011 while its oil and natural gas production decreased by 5 percent during the same time period. Source: AP/Reed Saxon.

By Daniel J. Weiss, Jackie Weidman, and Rebecca Leber, Feb 7, 2012 —

>>Download full data on Big Oil’s profits and activities in 2011 (.xls)

General economic theory holds that companies will produce more of a good if its price is higher, or if it receives subsidies. Funny that these rules didn’t seem to apply to Big Oil in 2011, when the highest oil price since 1864 and $2 billion in subsidies to the five largest oil companies—BP, Chevron, ConocoPhillips, ExxonMobil, and Royal Dutch Shell—yielded lower oil production than in 2010. But these five oil companies combined made a record-high $137 billion in profits in 2011—up 75 percent from 2010—and have made more than $1 trillion in profits from 2001 through 2011.[1] This exceeds the previous record of $136 billion in profits in 2008.

PRODUCTION V. OIL PRICE V. GAS PRICE GRAPH

Here are some more highlights from the big five’s activities in 2011:

  • They produced 4 percent less oil and “oil equivalent” in 2011 compared to 2010.
  • They spent a total of $38 billion, or 28 percent, of their profits to repurchase their own stock.
  • They are sitting on more than $58 billion in cash reserves as of the end of 2011.
  • They spent $1.6 million on campaign contributions and $65.7 million on lobbying efforts.
  • For every $1 spent on lobbying in Washington, the big five received $30 worth of tax breaks.

Let’s dig a little deeper into this mystery to see why these companies are making more money while Americans see less oil and pay more at the pump.

Where the money goes

In spite of these high profits and oil prices, oil-equivalent production fell from 2010 levels for four of the big five oil companies. Shell’s profit, for example, increased by 54 percent from 2010 to 2011 while its oil and natural gas production decreased by 3 percent during the same time period.

profits up production down table

So if the big five companies are not using their additional earnings to increase production, what are they spending their money on? The answer: They’re buying shares of their own stocks and investing in politicians to maintain the policies that led to their enormous profits over the past decade.

Big Oil helps itself

Instead of heavily investing in job creation or production, the big five used $38 billion, or 28 percent of annual net income, to repurchase their own stocks. This practice enriches shareholders but it doesn’t add to oil supplies or investments in alternative fuels or other new technologies.

These companies also cling to tax breaks while maintaining $58 billion in cash reserves. This is nearly 30 times more than the estimated $2 billion in annual special tax breaks that these companies receive.

profits vs. cash assets

Tax breaks, but not more jobs

ExxonMobil, the most profitable of the big five, paid an effective tax rate of 17.6 percent (from 2008–2010 data), which is 3 percent less than what the average American family paid. But Exxon and other oil companies that receive these tax breaks do not pass benefits on to consumers. Instead, their board members, executives, and shareholders are the ones that profit.

These companies, along with the American Petroleum Institute—their political arm—fight relentlessly to keep their tax breaks intact by threatening economic and energy damage. API claims that eliminating tax loopholes for the oil and gas industry would “lose jobs … and energy production.” Yet higher oil prices and profits, combined with huge reserves and tax breaks, yielded lower, not higher, employment and oil production.

Last year, the Democrats on the House Natural Resources Committee released “Profits and Pink Slips: How Big Oil and Gas Companies are Not Creating U.S. Jobs or Paying Their Fair Share.” This report revealed:

Despite generating $546 billion in profits between 2005 and 2010, ExxonMobil, Chevron, Shell, and BP combined to reduce their U.S. workforce by 11,200 employees over that time.

Nor are many of these net revenues used for oil production. The report found that “among the Big 5 oil companies, less than 10 percent of profits are reinvested into exploration of new oil deposits.”

The report also concluded that:

The oil and gas industry is a mature and highly profitable sector that is no longer in need of generous tax breaks or royalty free drilling. The $43.6 billion in tax subsidies that the industry is set to receive over the next decade will not help consumers with rising energy costs.

One place where oil companies have no trouble spending money, however, is in Congress. Last year the big five spent $65.7 million on lobbying efforts, successfully persuading their congressional friends to retain tax breaks. Both the House and Senate had votes to scale back these tax breaks, and both proposals were defeated.[2]

And Big Oil’s lobbying expenditures were quite a bargain. For every $1 the big five spent on lobbying in D.C. last year, they effectively received $30 in subsidies disguised as tax breaks. This is equivalent to a 3,000 percent return on every dollar they invested in strong-arming Congress.

More than $1.6 million was spent on campaign contributions in 2011 from just four of the top five oil companies. And more than 90 percent of these campaign contributions were made to Republican candidates or committees. But that doesn’t even include their undisclosed contributions to the U.S. Chamber of Commerce, the American Petroleum Institute, or other organizations that also support tax breaks for Big Oil.

In the spirit of giving, three of the five Big Oil CEOs—Rex Tillerson of ExxonMobil, John Watson of Chevron, and Jim Mulva of ConocoPhillips—contributed an additional $75,000 to GOP candidates and committees.

Big Oil woos Congress

Enough is enough

Two days after his State of the Union address last month, President Obama spoke in Aurora, Colorado, about American-made energy. He reiterated his call to eliminate tax breaks for Big Oil:

We subsidized oil for a very long time, long enough. It’s time to stop giving taxpayer giveaways to an industry that’s never been more profitable.

Seventy-four percent of Americans agree with the president’s desire to eliminate tax breaks for the oil and gas industry.

Instead of benefiting oil companies that reward senior executives, board members, and stockholders, these taxpayer funds should be invested in projects that benefit all Americans. A University of Massachusetts study found that investment in clean energy creates anywhere from two to four times more direct and indirect jobs compared to the same investment in oil and gas production.

But let’s put these tax breaks in context. Ending the $2 billion in annual tax breaks for the big five oil companies could pay for:

Last September while addressing economic growth and deficit reduction, President Obama noted that as we cut federal program funding to reduce the budget deficit, “Either we gut education and medical research, or we’ve got to reform the tax code so that the most profitable corporations have to give up tax loopholes that other companies don’t get. We can’t afford to do both.”

After a year of near-record profits and a decade of more than $1 trillion in total profits, the least the five huge oil companies can do to help our nation is to relinquish their unnecessary and ineffective tax breaks.

Daniel J. Weiss is a Senior Fellow and the Director of Climate Strategy, Jackie Weidman is a Special Assistant, and Rebecca Leber is a Research Assistant at American Progress.

Special thanks to Gabe Manion and Linda Benesch, who are both interns with the Think Progress War Room.

Endnotes

[1] In 2010 BP suffered a net loss of $4 billion due to its huge expenditures related to the BP Deepwater Horizon oil disaster. If BP is excluded from profit calculations in 2010 and 2011, the four remaining companies had a 36 percent increase in profit.

[2] On March 1, 2011, the House voted 249-176 to defeat a “Motion to Recommit [that] would repeal oil and tax production tax breaks for major integrated oil companies.” On May 17 the Senate voted 52-48 on a motion to proceed to the Close Big Oil Tax Loopholes Act, S. 940. Sixty votes were required to end debate and proceed to the bill, so it failed.

Source: Big Oil’s Banner Year – Center for American Progress

_______________

See also U.S. petroleum product exports exceeded imports in 2011 for first time in over six decades:

Strong global demand helped propel distillate exports, as distillate fuel, which includes diesel, had a higher profit margin for U.S. refiners than gasoline. Refiners also had access to increased supplies of crude oil imports from Canada, which in 2011 topped 2 million bbl/d for the first time, and from North Dakota’s Bakken formation to process into petroleum products.

The United States remained a net importer of crude oil, some of which was refined into petroleum products that were then exported. Petroleum products were ranked second in value of all U.S. exports during 2011 at $111.1 billion, up 60% from 2010, according to U.S. Department of Commerce trade data. . . .


Responses

  1. This is a thought-provoking if, rather biased, post. For years Big Oil and Big Pharma have flip-flopped as being the largest contributors to our members of Congress. Members on both sides of the aisle have benefitted from their largesse – to the detriment of the American people.

    The statement that they are using their profits to re-purchase stock which benefits shareholders is certainly true. But it is also true that anyone who owns a conservative mutual fund either individually or through a 401-K is probably a shareholder. That includes a tremendous number of working people – not simply wealthy investors – as is implied in your article.

    As to the statement that there has been a decrease in both the amount of production and the number of employees working for Big Oil you are quite correct. However, what you fail to mention is that under the Obama administration, permitting for new wells has been curtailed. There is no doubt that oil companies would have to hire more workers were they simply allowed to drill for black gold. Perhaps some of your criticism should be directed to the White House.

    I would welcome a world in which we found a green solution to our energy needs and take personal steps to reduce my carbon footprint as much as possible. But the truth is that we are decades away from finding such a solution – if one even exists. The most optimistic forecast I have heard on renewable sources – wind, solar and thermal – is that at best they might ultimately supply five percent of our energy requirements.

    We have subsidized the production of ethanol for decades. This is one of the least efficient ways to attempt to reduce our emission levels. And in the meanwhile, the American people “invested” in the failed Solyndra to the tune of $400 million. While the company created a few jobs – they were short term in nature.

    Your point that we are subsidizing Big Oil through tax breaks is unarguable. One should expect nothing less from a document that is 62,000 pages in length. However your assumption that if we eliminated these preferential benefits to Big Oil things would be utopian, belies the way in which the real world operates.

    All businesses (with the obvious exception of government) operate with the goal of making a profit. If a business finds itself challenged with increasing costs it has only two ways to compensate for that. It can attempt to reduce costs (which was probably one of the main reasons for the BP oil spill) or it can increase the price for which it sells its product.

    It is simply naive not to realize that if we eliminated the subsidies that Big Oil receives as part of our Byzantine tax code, rather than subsidizing them on a Federal level, we would find that the American consumer would continue that subsidy – but on an individual basis every time we went to fill up our cars.

    I sincerely doubt that there is a single politician running for office this November who would like to face the electorate with gasoline selling for $8.00 a gallon at the local Shell station. (If you can find one, I’ll happily vote for him).

  2. I appreciate your interest in the issue. As for bias, I do not think this article fits the script because, as you said, both Republicans and Democrats, but mostly Republicans, have been the target of their lobbying efforts. Moreover, what strikes me as the biggest problem are the tax breaks, because they are sitting on $58 billion in cash reserves and soaring profits, and actually record-breaking profits in 2011. The later leaves me to wonder why with such a large cash reserve should taxpayers continue to give them $2 billion a year. It does not make sense to me, and I do not see this as good government policy. From my perspective, under these circumstances, it is tantamount to government’s waste of taxpayer dollars. Otherwise, I do appreciate your insights, and thank you for your comment.


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