Don't Pick on Big Oil For Having Big Profits

Repeal the so-called subsidies to oil and gas? Ostensibly this is a punitive measure that targets oil companies for the rise in the price of gasoline at the pump, even though most gas stations are independently owned, and need to make a profit in their businesses.

First of all, these are not subsidies per se.  Rather they are tax breaks aimed at the entire manufacturing industry -- a category that includes oil & gas - and which can be broken down into four components, only one of which is specifically targeted to the industry.  (It also is the least significant.)

• Domestic manufacturing tax deduction-- $1.7 billion.  This is a tax deduction given to every manufacturer in the US as an incentive to keep manufacturing facilities in the United States.
• Percentage depletion allowance -- $1 billion.  Any business can write down the cost of its capital equipment.  Oil in the ground is treated as capital equipment.  Again, all companies get it, not just oil companies.
• Foreign tax credit-- $850 million.  All companies get credit for taxes they pay to other countries, not just oil companies.
• Intangible drilling costs -- $780 million.  As opposed to over the life of an investment, the oil industry is allowed to write-down drilling credits in year one.  This is the only “subsidy” that treats oil companies differently than the rest of the manufacturing world.

So what are we talking about here?  A total annual savings to the federal government of $4.3 billion?  (And this assumes no negative economic impact which is hardly a guarantee.)  This is enough money to run the government for less than ten hours.

If you want to have a debate about all subsidies (tax breaks) then by all means let’s.  But to single out one industry because its product happens to be in demand and as such it had the temerity to make a profit, is ludicrous and irresponsible.  It is targeting people who are in the wrong business as far as politics is concerned because they happen to be in the right business as far as demand for their product goes.  “Big oil” is more than just CEOs in a corner office.  A company like Exxon-Mobile employs 82,000 people worldwide in all capacities from rig workers, to truckers, to geologists, surveyors, mechanics, pilots, schedulers, traders, cooks, pipeline workers, marketers, mid-level managers, etc. These are honest, hardworking people who are providing for their families while supplying world’s energy needs.  Is it a crime that they get paid for their services?  Apparently on Capitol Hill it is.

And yet, those same evil oil companies pay enormous taxes that far outweigh any tax breaks.  Exxon alone paid $8 billion in taxes in just the first quarter.  This is twice as much as the entire industry receives in annual subsidies.  Yes, say our politicians, but look at Exxon’s profits.  No company should be allowed to make $10.5 billion in profits while American drivers are getting squeezed at the pump. Oh? Who exactly decides what is enough?  Chuck Schumer?  Obama’s energy czar? Exxon provides a product that the world needs. One we cannot live without in fact.  And for every dollar they make in gross profits, they pay forty-three cents in taxes.  In fact, the oil & gas industry averages roughly a 9.5% profit margin, placing it down at number 23 in the list of profitable businesses.

In case you’re curious, breweries are number one at 26% profit margin.  Yet I have never seen Pete Coors raising his right hand before a bloviating committee and Lord knows I need beer as much as gasoline!  If big oil is “gouging” us, then other industries are positively robbing us blind.  Industries that average higher profit margins than oil & gas include: applications software (22.7%), cigarettes (17.4%), railroads (12.9%) and wireless communications (11.1%).

A company like Exxon puts up big numbers because it is a very big company valued at roughly $396 billion.  $18 billion is well within expectations of a successful enterprise of such scope and size.  And they do not sit on this cash.  Almost three-fourths of their after-tax profits are poured back into exploration and drilling.  They must constantly be seeking out and delivering more energy for the consumer whose insatiable appetite continues to grow globally.

I find it fascinating that many who rail against “greedy big oil” probably do so on their iPads.  Apple’s market cap is now an astounding $305 billion.  And its profit margin is a whopping 21%: double Exxon’s. Steve Jobs is far more wealthy than Exxon CEO Rex Tillerson.   How come?  Well, one reason is that an Apple iPad 2 currently sells for $729.  Yet its actual cost to make with Chinese workers [who take home a mere $185 per month] is $293, which means a gross margin of 54%.

So who is really the “gouger”?  Exxon or Apple?   Why is multi-billionaire Steven Jobs not in front of Congress explaining himself?  Because, like his oil counterparts, he shouldn’t have to.  He makes a product that people are willing to pay an exorbitant sum relative to its manufacturing cost to possess.  And one can argue that we need iPads a lot less than we need energy.

I notice that coffee futures have come off in the past few weeks yet Starbucks hasn’t reduced the price of a venti skim latte mocha chi-chi foo-foo cinnamon two pump steamer.  Should we have the boys in the van abduct Howard Schulze and drag him before the committee to explain his 9.7% profit margins that partly resulted from hiking prices 25 cents on some drinks when the coffee futures went up, but not giving us back that quarter when the market sold off?  Of course not...

Clearly what is happening in Congress is a shameful attempt at laying the blame for their own inability to cope with the rise of prices across the board, and energy in particular, even though Washington’s policies from a decade of loose money, to sitting idle while we grew ever more dependent on overseas fossil fuels, to cordoning off huge deposits of domestic crude in our own waters and backyards are far more to blame than any CEOs.  It may be politically expedient to finger-point at “big oil” for committing the cardinal sin of doing their jobs well and showing a profit (while ignoring the true ‘gougers’ in the higher profit sectors). But it makes for poor policy, and an astounding waste of taxpayer resources.

Clearly what is happening in Congress is a shameful attempt at laying the blame for their own inability to cope with the rise of prices across the board.

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