Special Report

The Facts About Big Oil

Econ 101 for Washington's camera-ready demagogues: profits are cyclical, and the oil industry, like all industries, goes through peaks and valleys.

By 11.10.05

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Washington rhetoric over big oil's big profits has become so heated you'd think America had returned to the days of the robber baron. Even some Republican senators are painting images of cigar-chomping fat cats smoking their profits while widows freeze in their basements.

As proposals to stick the oil industry with a windfall-profits tax gain traction, it's time to separate fact from fiction.

Senators at this week's witch trial suggested American energy producers were engaging in price fixing and gouging. Fact: The world futures market determines oil and gas prices, and American oil companies are but a small part of that market today.

The inquisitors also argued big oil took advantage of consumers during the hurricanes. Fact: The biggest producer, Exxon Mobil, had to close its refinery in Baton Rouge, Louisiana, during Katrina, and then its refineries in Baytown, Texas, and Beaumont, Texas, during Rita. The Baytown plant is the biggest in the country, and it took a week to restart it, taking that huge supply off the market and contributing to the price spike.

Oil executives are said to be hoarding their record profits, greedily sitting on their pile of cash while showing no interest in building new refining capacity to increase supply and ease prices for the American people. Fact: Big oil has plowed billions back into their operations, not only on R&D and exploration but plant expansion.

Exxon Mobil, for one, has built the equivalent of three new refineries over the past 10 years by expanding existing plants in Texas, Louisiana, and Illinois. It plans to invest $18 billion this year; and back when oil was just $10 a barrel -- and profits slim -- Exxon still invested $15 billion. Over the last 10 years, the company has actually invested more than it's made. Shell has made similar investments, so oil companies are hardly sitting on their profits.

Isn't it funny how many of the same people who insist oil companies invest more in exploration and production also insist on making parts of America, such as the Alaskan refuge, off limits to exploration and production? Yes, there may not be the big elephant finds in ANWR as hyped, but it's time to find out. Only, environmentalists just killed a provision in the House budget bill to do just that. Allowing drilling off the Atlantic and Pacific coasts was also axed.

Politicians say oil barons are robbing consumers, and they need to put a stop to it with price controls and punitive taxes. But they haven't looked at the numbers. Fact is, real prices for gas and heating oil have gone down over the past 25 years, after energy regulations such as price controls were removed, and thanks to the great strides the American energy industry has made in efficiency and productivity.

It's now much more competitive globally. For example, Exxon Mobil's refining costs have dropped from $4 a barrel to just 60 cents a barrel, and it's passed those savings on to consumers at the pump.

And isn't it ironic that the same town complaining about big oil's profits benefits from them big-time? Oil companies fork over 35% of their profits to Washington -- and that doesn't include the average 16% cut government takes at the pump. Perhaps it should be the pols at the witness table explaining how they're spending their own multibillion-dollar windfall.

Never mind that, they say, oil companies have a responsibility to guarantee consumers low energy prices -- even if it means "sacrifices" on their part, demands Senator Barbara Boxer. Actually, oil companies' first responsibility is to shareholders, who expect them to profit when times are good so they can maintain share value when times are bad (and pols grilling oil CEOs conveniently forget the hard times the industry fell on not long ago). That's why Exxon Mobil plans to use some of its profits right now to buy back stock -- so it can be in a better financial position during the next down cycle.

But the corporate-responsibility nazis want big oil to bail out consumers with rebates. And they say Exxon Mobil, with its recent record $10 billion quarterly windfall, should lead the way. Yet no one bailed out Exxon and others in the oil industry when they suffered record losses during the oil glut. Funny how only profits are "obscene," but never losses.

Econ 101 for Washington: profits are cyclical, and the oil industry, like all industries, goes through peaks and valleys. And there's nothing criminal about this current peak, high as it may seem, especially when those profits are in line with other industries. Profit margins of 8 cents on the dollar hardly amount to profiteering.

Imposing punitive measures on the energy industry would only prevent it from investing aggressively in the development of new energy supplies that would help drive down prices for the little guy Washington's social engineers deign to protect. Their demonization of the industry, while good populist theater, is wholly misplaced.

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