Despite the fuel crisis and the fact that consumers are seeing record-high gas prices, oil companies are now enjoying record-high profits. In fact, ExxonMobil just made the most profit for any quarter for any company ever. For example, this is on the Democracy Now! web site:
ExxonMobil Sees Record $10B 2nd Quarter Profits
Oil giant ExxonMobil is expecting to report profits of over $10 billion over the past quarter -- making it the most profitable single quarter for any company ever. This means ExxonMobil averaged making over 4.5 million dollars every hour for the past three months. During that same period gas prices shot up to record highs. Meanwhile the Energy Department is warning consumers in the Northeast to expect their winter heating bills to jump over 30 percent.
Also, here is a bit from a Boston Herald news item:
Exxon's $10B fill-up: Cashing in on crunch
By Brett Arends
Wednesday, September 7, 2005 - Updated: 04:27 PM EST
Oil companies came under new fire yesterday when it emerged that ExxonMobil's profits are likely to soar above $10 billion this quarter on the back of the fuel crisis.
That's $110 million a day, and more net income than any company has ever made in a quarter. It's also a stunning 69 percent increase over the same period a year ago and a 34 percent jump from the $7.6 billion Exxon made just last quarter.
``Do you realize President Bush has just given a tax break to ExxonMobil?'' thundered Rep. Ed Markey (D-Malden). ``Of all the companies in the history of the world that needed a tax break, this month, ExxonMobil should be at the bottom of the list.''
But those defending the industry's high profits will point out that one must look at profit margins, not profits. According to them, profit margins (measured roughly as net income or profit divided by sales or total revenue) provide a more relevant and accurate measure of a company or an industry's health, and also provide a useful way of comparing financial performance between industries large and small. Profit margins tell one how much profit a company makes on a dollar of sales. So, for example, a 5% profit margin says that the company makes 5 cents in profit for every dollar in sales.
Profits reflect the size of an industry, but they're not necessarily a good reflection of financial performance. The profit margin falls when company costs go up and eat into revenue (sales). The oil industry is probably the world's largest industry. Its revenues are large, but so are its costs, both the cost of finding and producing oil and the costs of refining, distributing and marketing it. It turns out that the oil industry's profit margins are usually about average compared with all other industries. I have found that the typical profit margin for ExxonMobil is about 5%-6%. The profit margins of banks and the pharmaceutical industry, for instance, is much higher, like 20%.
The oil industry is termed a "capital intensive" industry because so much of its work requires the expenditure of millions and sometimes billions of dollars even for a single project. Here are some examples based on actual costs compiled by the American Petroleum Institute:
$1.5 billion for a deep-water offshore platform.
$2 billion for offshore and onshore natural gas project facilities.
$400 million for a refinery modernization or revamping.
$1 million for a new service station.
$2 million for a large aboveground distribution terminal storage tank.
$1.1 million per mile of new pipeline constructed on land.
For some info from the oil industry, see:
Conoco Philips site on oil profit margins
So the debate about oil profits should be put in terms of profit margins. But profit margins have about doubled for ExxonMobil. Exxon Mobil had a profit margin of about 10 percent. As I understand it, they usually make around 5%-6%. So it seems that even in terms of profit margin, the oil companies are doing outlandishly good.
In light of great profits margins, it seems that there needs to be a justification for giving oil companies billions of dollars of tax breaks for oil production. High profit margins mean that oil companies have the money to boost oil production on their own. The last thing they need are tax breaks, especially if you believe in free market capitalism. Instead, we seem to get a shining example of corporate welfare.
Lawmakers who opposed the recent tax legislation said that the oil profit reports are evidence that the subsidies are not needed. Rep. Edward Markey, D-Mass., said oil companies are asking for subsidies at the same time they're "shaking money from out of (consumers') pockets at the gas pump." "I'm sure that they are chuckling at the continued support that they receive from the Republicans on these subsidies," Markey said.
But supporters of subsidies said that oil prices eventually will fall and the energy legislation is designed to encourage production even when that happens. "Profits aren't always up," said Rep. Joe Barton, R-Texas, chairman of the Energy and Commerce Committee. "There are lots of times the oil market is different and the profits are down or non-existent."
(See A recent Washington Post article)
So the reason for the subsidies is that they are necessary for times when profits are down or non-existent. But this hardly seems like a good justification for the subsidies. The fact that profits may go down in the future is not a good reason for giving subsidies now, when profits and profit margins are soaring. Their view seems to be that no time is a good time not to give big subsidies to the oil industry.
