Inconvenient Truths About Big Oil

Nothing spurs political demagoguery quite like consumer anger over surging gasoline prices.  For confirmation, you have to look no further than President Obama and the Democrats' recent attacks on the oil industry, especially after some of the largest firms posted record profits.

Wary of voter backlash, the president has led a chorus of criticism on everything from the industry's pricing policy to its tax breaks.  His party stepped into the breech launching a bill aimed at ending the so-called tax subsidies.  Appropriately, the effort was defeated last week in the Senate by Republicans and a handful of Democrats.

Like many issues bubbling to the surface, the facts have been lost in a tide of rhetoric that goes unchecked by the mainstream media.  The public is left to assume that most of the information it is getting from the president and his sycophant allies represent a fair and balanced assessment of the situation.

Unfortunately, the one-sided distortions repeated over and over have convinced too many Americans that the real villain is the very industry that supplies the oil, instead of the politicians who erect barriers to production, refining and distribution of this precious commodity.

Some record-setting is in order.  Here are just a few facts designed to blunt the misinformation that passes as truth:

1.  Most of America's oil does not come from Saudi Arabia or the Middle East.  About 40 percent of the oil Americans use is produced in our own country or offshore.  The U.S. imports 32.5 percent of its oil from two countries, Canada and Mexico.  Only 17 percent of U.S. oil is imported from the Persian Gulf, including Saudi Arabia, according to the U.S. Energy Information Administration (USEIA).  However, because of skyrocketing demand, whatever happens in the Middle East impacts the cost of crude oil.  In fact, any disruption in oil production anywhere in the world causes prices to spike.  Globally, oil demand hit a record 88.3 million barrels a day in late 2010.  Gasoline demand is rising 11 percent annually in India and eight percent in China.  A report by energy consultant Wood MacKenzie predicts 85 percent of the world's future demand for oil will come from developing countries.

2.  Big oil does not set the price of a gallon of gas at the retail pump.    The American Petroleum Industry (API) calculates that only five percent of the retail gas stations in the country are owned and operated by the world's largest oil companies.  That means most of the outlets for gasoline are operated by independent retailers with no connection to so-called big oil.  Those retailers set their own fuel prices, even if the signage on the pump sports a logo for an oil company.  The USEIA estimates that 24 percent of the cost of a gallon of gasoline is made up of taxes, refining costs, distribution and marketing.  The remaining 76 percent of the cost is for the crude oil.  Of course, those are nationwide averages.  For example, taxes are a larger share of the cost in California, which tacks on 63.9 cents on every gallon at the pump.  Blaming big oil for sticker shock at the pump is like fingering the farmer for the cost of popcorn at the movie theatre.

3.  Oil company profits are not only reasonable, but lower that most industries.   Profit margins for the oil industry average 8.2 percent.  That means for every $1 in revenue the big oil companies receive, they keep a little more than 8 cents in profit.  For comparison's sake, General Electric 's profit margin is 11 percent.  Coca Cola has a 21 percent margin.  Procter and Gamble weighs in at 14 percent.  Microsoft pockets 32 percent of every dollar it takes in.  Meanwhile, America's oil companies are among the country's largest taxpayers, contributing an estimated $100 million per day to the U.S. Treasury, according to API. In fact, the industry's income taxes average 48.4 percent of its revenues, compared to 28.1 percent for the Standard and Poor's industrial firms.

4.  Oil companies do not receive tax subsidies.   During the debate over the Senate bill to eliminate tax benefits for the industry, Democrats kept characterizing oil companies' breaks as a subsidy.  Although it may seem trivial, the distinction is important.  Farmers receives subsidies, which guarantee a price floor for their crops.  Oil companies, like most businesses, receive offsets to the taxes they owe.  These concessions allow the companies to write off some exploration costs against their tax bill.  Although some may argue the breaks are unfair, the nation's tax code is replete with examples of similar concessions for virtually every industry that operates in the United States.  Even with these so-called breaks, the oil companies have paid a total of $59 billion in taxes over the past five years. Oil companies pay their fair share of business taxes, based on credible evidence.

5.  Oil companies invest heavily in exploration with no guarantee of success.   A 2006 study found that the five major oil companies invested $765 billion in technology, production and exploration during a 15-year period and generated net income of $662 billion.  In that same study by Ernst and Young, the overall industry, consisting of 57 of the world's largest oil firms, sunk $1.2 trillion into finding and bringing oil to market, which generated $900 billion in net income.  All those billions and trillions of dollars are weapons to politicians who use them to bludgeon  the industry over its "bigness."  Yet, if you strip away the zeroes, it means that for every $1 dollar the industry invests it returns 90 cents in net profit.  Bloomberg News recently reported that six out of ten times that oil companies drill, they come up empty handed.  Most investors would run from odds of that kind.

Of course, politicians never let the facts get in the way of finding a convenient scapegoat for whatever ails Americans.  It is always easier to assign blame than to deal with complex issues that can't be discussed in a 10-second soundbite for the evening news.

Instead of political grandstanding, President Obama and the Democrats need to come to grips with the certainty of increasing global demand for oil.  America needs leadership that gives our country every advantage in the race to secure the fuel that drives our economic engine. 

The president would do well to remember that pointed fingers don't drill oil wells.  Oil companies do.