Economics, Energy and the Environment

Now that It’s Open Season on Big Oil, Here Are Some Facts

Oil company executives from the five largest oil companies appeared before the Senate Finance Committee to: a) get grilled about the generous “taxpayer subsidies” they allegedly receive, b) justify their recent “windfall profits” and c) explain their role in higher oil and gas prices. Leading up to today’s hearings were the first quarter reports on profits for the oil companies, with ExxonMobil receiving special attention for its $10.65 billion in profits during the first three months of 2011. Here are some facts about earnings for the oil industry and ExxonMobil to provide some balance to this year’s “open season” on oil companies.

1. In the most recent quarter, the “Major Integrated Oil and Gas” industry earned an average profit of only 6.2 cents on every dollar of revenue. In comparison to the several hundred other industries in the United States, the profit margin of the oil industry ranks No. 114 out of 215 industries, placing Big Oil right in the middle of profitability for private industries. If Obama and Congress want to target “excessive” corporate profits, there are hundreds of other industries that are much more profitable than the oil and gas industry. For example, the surge in commodity prices has resulted in “windfall profit” margins of 31 percent for the silver industry, 23 percent for the copper industry, and 19.8 percent for the gold industry.

2. Compared to the average manufacturing company in the United States, oil companies already face a much higher income tax burden as a share of before-tax earnings. In 2010, the total income taxes paid by oil and gas companies averaged 41.1 percent of their pre-tax earnings, compared to only 26.5 percent for all of the other firms in the S&P Industrials.

Turning specifically to ExxonMobil, and noting that its huge profits typically receive much more attention than the large sums it spends on taxes and capital equipment:

3. In the first quarter, ExxonMobil earned $18.9 billion and paid $8 billion in income taxes to various governments, which is about $22 million in income taxes each day, and almost $1 million each hour. Exxon Mobil paid almost half of its first quarter earnings in income taxes, for a 42.3 percent effective tax rate. And yet, according to President Obama and some members of Congress, oil companies “aren’t paying their fair share of taxes,” and should be taxed more.

4. Dwarfing ExxonMobil’s first quarter profits of $10.65 billion, are the total taxes paid or collected around the world by the company from January to March, which totaled $26.2 billion and included: a) $8 billion in income taxes, b) $7.9 billion in sales-based taxes, and c) $10.3 billion for all other taxes including property taxes, etc.

5. ExxonMobil spent $7.8 billion in the first quarter on capital equipment and exploration, or more than $21 million per day. Over the next five years, the oil giant will invest $175 billion in capital equipment and exploration—an amount equivalent to the entire gross product of Alabama in 2010—and will enable the company to continue to supply the U.S. economy with energy resources.

Bottom Line: What often gets overlooked by politicians in Washington is that real people, not corporations like ExxonMobil, ultimately pay all taxes. Higher taxes on oil companies will get passed on to actual people, and can only mean higher prices for consumers at the pump, lower wages and fewer jobs for employees, and/or lower dividends for shareholders. There might be a political payoff to raising taxes on oil companies, but it will be an economic disaster that will also make us more dependent on foreign oil.

5 thoughts on “Now that It’s Open Season on Big Oil, Here Are Some Facts

  1. Nice article, but I don’t do much purchasing of gold, silver, and copper. Maybe I would be more upset at those industries for their profits if my truck ran on either of those.

  2. Good article, and it’s really too bad that facts are irrelevant to demagogues like Obama and his kind. One thing you might have mentioned, Dr. Perry: at $4 a gallon, the oil company profits amount to about 25 cents, but government taxes are about 40-50 cents a gallon – so the government’s ‘profit’ is twice that of the oil companies’.

  3. So, if I read points 4 and 5 correctly ExxonMobil took in $43.65 Billion the first three months of this year. They paid out 75% in operating costs and walked away with $10.65 Billion in PROFIT. If gas was $3.00 per gallon, they could have paid less taxes, consumers would have more disposable income, the cost of goods would be less, the economy would be stronger and they still could have had $1 Billion in PROFIT.

  4. Good data, but I really wish you had cited your sources. Personally, I think we need to end corporate taxes completely. In 2009 we collected less than $150 billion in corporate taxes, and have pushed companies to put more than $1 trillion overseas to avoid corporate taxes. Seems to me that we’d get a $1 trillion stimulus for the cost of $140 billion by eliminating corp taxes.

  5. @Bill: I think you (and a lot of others) are operating under a false assumption that profits means that there is a bank account or vault somewhere with a huge pile of cash in it. That is simply not the case. While in its most basic form, profits are derived from subtracting out costs from sales, there are tons of day-to-day cash flow costs (especially in the oil industry) that are not allowed to be used as a deduction. Debt payments and capital investments in your business are not deductible. Businesses use their profits to reinvest and grow their business. For example, you buy 10 widgets at $1 and sell them for $2. You profited $10.. yay for you. But now, you need buy more widgets, so you take that $10 profit and buy 10 more. Now you have profited $20. You take the 20 and buy 20 widgets. And so on, and so on… You are using your profits to grow your business. If you didn’t have the profits, you would be dead in the water and out of business. Exxon is a HUGE company with hundreds of thousands of employees. It takes a lot of profit (operating capital) to keep the business growing and providing those people with those jobs. Plus, the profits they show each year, are either added to retained earnings which is directly related to the stock price or disbursed in dividends to the stock holders. If Exxon’s profits fall, then the stock price falls and that affects millions of portfolios and individual investors.

    You are also operating under a false assumption that by setting the price lower it would lower the cost of goods. The gallon price rises and falls based on the price per barrel and the labor and capital costs per gallon for refining, transporting, and storing the gas remain the same regardless of how many gallons they refine. Gas companies make around 7 cents per gallon profit. But because they sell billions of gallons of gas each year, the numbers add up. If the gas companies were to sell at $3 per gallon in this environment, they would be losing money so severely that they would be out of business within a year or two.

    What the government does not want you to know is that they get 18 cents per gallon, almost triple what the gas companies make in profits. On top of that most states match or exceed that number in state taxes. So, if Exxon make $10.65 B in profits in the quarter, that means that the federal government got $27.39 BILLION in taxes directly at the pump. And then the states divided up approx that same amount depending on where the gas was consumed. So, while the tax companies may not pay a big enough “income” tax to satisfy some people, they are paying a huge amount in taxes because their industry is hit with many specialized taxes that don’t apply to most other industries.

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