The truth about energy profits

ExxonMobil posted quarterly earnings of $10.7 billion on Thursday, up 69 percent from last year. And on Wednesday, ConocoPhillips reported quarterly earnings of $3 billion, reflecting an increase of 43 percent from a year ago.

Impressive, but not shocking given the current price of crude oil.

No less predictable was the outrage voiced by politicians. President Obama called for new taxes on the oil industry, and Senate Majority Leader Harry Reid promised to introduce legislation to that effect when Congress is back in session.

Talking tough when pump prices are high might be safe politically. After all, it's easy to get outraged while people struggle to fill their tanks. But we should consider some facts about the American energy industry before breaking out pitchforks or enacting knee-jerk policies.

Yes, pump prices are high, but companies like ExxonMobil and Chevron have as much control over the price of gasoline as they do the price of speeding tickets.

The single biggest factor affecting pump prices is the cost of crude oil, which is set by global futures markets subject to the laws of supply and demand.

Right now the recovering global economy, Mideast turmoil, and the declining dollar are driving up the price of crude. The truth is ExxonMobil can't control the price of a barrel of oil, but the higher price naturally results in higher revenues.

No one is asking drivers to shed a tear for gasoline stations forced to charge high prices at the pump. But equally unfair is the assumption that those high prices mean 24-hour champagne and limos for company executives. The U.S. oil and natural gas industry actually operates at lower margins than most American manufacturing.

In arguing for higher energy taxes, politicians cite that America's five largest oil and gas companies had a net income of $484 billion from 2006 to 2010. What they don't tell you is those companies' profit margin during those years was 6.65 percent, below the U.S. manufacturing average.

Because of the large size of the industry, profits sound exorbitant when stated in absolute dollars. But those dollars are distributed to millions of ordinary Americans who are shareholders and plowed back into oil exploration and next-generation energy R&D.

The caricature of greedy oil company executives falls apart even further when one considers who owns most energy companies. Only 1.5 percent of oil and gas shares are owned by those companies' executives. Fifty-three percent of the shares are owned by mutual funds and individual investors.

Twenty-seven percent are owned by pension funds, and 14 percent are held by IRAs. In other words, average investors, people who have begun saving for retirement, and retirees benefit from their investments in energy companies – and these investments are paying off.

A new study examined the performance of oil and natural gas investments in the two largest public employee pension funds in four states – Michigan, Missouri, Ohio, and Pennsylvania. The oil and gas investments had returns between 41 percent and 49 percent from 2005 through 2009, while the funds'

non-oil and gas investments had returns between 10 percent and 17 percent. And the gains are not just enjoyed by a select few – these funds account for between 50 percent and 89 percent of the total membership and total assets of all public employee pension programs in these states.

The Obama administration's 2012 budget proposes almost $90 billion in new taxes for the U.S. oil and natural gas industry. These taxes will hurt ordinary Americans and public employees, and the energy industry already pays one of the highest effective income tax rates in the country.

About 44 percent of every dollar earned by oil and gas companies goes to income taxes, while retailers pay about 33 percent.

Caricatures shouldn't be the basis for government policy. In reality, energy profits have not been excessive compared to other industries, are plowed back into exploration, and benefit ordinary Americans. Congress and the Obama administration shouldn't impose higher taxes or other sanctions on the industry. Instead, they should eliminate barriers to oil production, helping consumers at the pump.

Lawrence J. McQuillan, PhD, is director of Business and Economic Studies at the Pacific Research Institute.