So whenever these companies are doing well, the public is doing worse. And that, inevitably, leads to talk about punitive taxes (or at least a loss of tax breaks) for the oil industry.
That time has come once again. A few weeks ago, the world’s biggest oil companies reported massive profits just as petrol moved up and beyond, in some cases, $4 a gallon. That is a big deal in the US, where people often commute long distances to work, particularly in sprawling cities like Houston, Chicago, Los Angelos, and other highly populated areas. And it is particularly important now when the economy has not fully recovered, unemployment remains high and the public at large is still having economic difficulties.
In defence of the oil companies, their costs are extremely high. And they put a large part of these profits back into finding new resources for the world.
Chevron says that between 1996 and 2007 the US oil and gas industry invested more than $1,200bn in a range of long-term energy initiatives, compared to net income or earnings of $974bn.
And these companies do pay taxes, despite the reports to the contrary that every so often make their way around the internet.
Jim Mulva, chief executive of ConocoPhillips, explains:
Our industry and company are already taxed heavily compared to other industries in the United States. For example, ConocoPhillips’ effective global income tax rate from 2006 through 2010 was 46 per cent. If you look at non-financial companies in the Fortune 500, the 20 largest by market value had an effective tax rate of 27 per cent. That tax rate already limits the company’s ability to invest in finding and recovering energy reserves. In 2010, the company’s payout was equal to its income: After paying $8.3bn in income taxes – as well as $3.1bn in other non-income taxes – ConocoPhillips earned $11.4bn in income.’
And yet the focus in Washington has become how to raise the tax burden on the industry to help pay down the deficit. A proposal by Senate Democrats unveiled this week would cut $2bn in annual tax breaks benefiting oil and gas companies.
Instead of directing the funds to renewable energy investments, as had been the case in previous energy tax subsidy bills, the latest one would move the money straight to deficit reduction, achieving $21bn in savings over 10 years.
Here is what some of the majors told the Senate Finance Committee hearing on the tax issue today.
First from Marvin Odum, president of Shell Oil:
Because fuels are refined from crude oil, the biggest impact on the price of fuel is the price of crude oil. Everything from the weather to politics and the global economy determines the price of oil and the fuels made from it. No one person, organisation or industry can set the price for crude oil.
Weak economic conditions in 2008 and 2009 lowered demand, which helped push prices down. Now, with worldwide conomic recovery underway, demand is on the rise, sending prices upward.
John Watson, chief executive of Chevron, added:
Tax increases on the oil and gas industry, which will result if you change longstanding provision in the US tax code, will hinder development of energy supplies needed to moderate rising energy prices. It will also mean fewer dollars to state and federal treasuries and fewer jobs – all at a time when our economic recovery remains fragile and America needs all three.
Rex Tillerson, chief executive of ExxonMobil, said:
There is a more effective way to take steps to reduce prices and raise revenues but, unfortunatley, it is a way Congress and the Administration has so far rejected.
If the US oil and gas industry was permitted to develop our nation’s enormous untapped energy supplies, it could put downward pressure on energy prices and increase revenues for government budgets.’
While the industry’s arguments do make sense, the question is whether anyone is in the mood to listen to them. The bottom line is that the US already is moving into pre-election mode, and this is the time when those in or running for office must begin making themselves look good to the public. Hitting out at oil companies always strikes a chord – particularly when the public is seeing those companies bring in massive profits as their own costs are rising at the pump.
KPMG’s 9th annual energy survey of 550 energy executives, just out today, implies the industry may be dealing with this issue for some time. The survey found that 64 per cent of energy executives predict WTI crude prices will exceed $121 per barrel this year. Of those, 15 per cent think it will approach the historic levels of July 2008 – predicting crude will reach $141 per barrel or more.
John Kunasek, national sector leader for KPMG US energy practice, says:
While we have seen some very recent declines in crude prices, these fluctuations reflect persistent volatility. Volatility, up or down, will be driven by underlying issues such as regulation, geopolitical concerns, energy supplies and escalating energy demand.
Those issues are never going to go away. The cyclical move in oil – and petrol – prices will continue, and Big Oil will be forced back in the hot seat to defend itself again.
The silver lining is that regularly being called to such hearings to defend itself in Washington means industry is getting better at refining its arguments. The trick remains finding a way to get anyone to listen.