Published April 29, 2006
| Associated Press
The oil industry's massive first-quarter profits this week triggered another round of election-year outrage from President Bush and members of Congress, who spoke up on behalf of angry constituents feeling pinched at the pump.
There's little that either lawmakers or the industry can do in the short-term about the high oil prices that yielded those profits, however, as long as energy markets stay tense and the global economy is expanding. Instead, it would take a decision by consumers and businesses to consume less fuel, a choice they have yet to make, analysts said.
The country's three largest petroleum companies — Exxon Mobil (XOM) Corp., Chevron (CVX) Corp. and ConocoPhillips (COP) — posted combined first-quarter income of almost $16 billion, an increase of 17 percent from the year before.
In a bit of an understatement, Exxon Mobil's vice president of investor relations Henry Hubble said "industry conditions remain robust."
Crude-oil futures are trading near $72 a barrel. U.S. gasoline prices are above $3 a gallon in many places, and even have climbed above $4 in southern California. Yet demand continues to rise.
The trends have convinced Wall Street the 2006 earnings of the nation's three largest oil companies will surpass last year's combined record of nearly $64 billion.
"It is hard to find any reason to be sympathetic toward the oil companies today, but that doesn't make them evil," said Robert Ebel, director of the energy program at the Center for Strategic and International Studies in Washington.
For their part, the oil companies have been emphasizing that they make far less money on each dollar of sales than many other industries that aren't being excoriated for their capitalism.
Taken together, Exxon, Chevron and ConocoPhillips made a profit of $8.19 on every $100 in sales. In contrast, Internet bellwethers Google Inc. (GOOG), Yahoo Inc. (YHOO) and eBay (EBAY) Inc. collectively turned a $19.20 profit on every $100 of their combined revenue.
Still, as important as the Internet has become, energy remains more vital.
The combined first-quarter revenue of Exxon, Chevron and ConocoPhillips totaled $191.5 billion — more than the individual gross domestic products of 189 different countries, including the likes of Chile, Denmark, Peru and Venezuela, according to statistics compiled by the Central Intelligence Agency.
Even as politicians snipe at the oil industry's profits, the government has been sharing in the windfall from high gas prices. In the first quarter, Exxon, Chevron and ConocoPhillips turned over a combined $13.8 billion in sales taxes — about 7 percent of their total revenue.
Chevron also is receiving a financial lift from a deal that Congress helped make last year. The San Ramon, Calif.-based company bought rival Unocal Corp. for $18 billion eight months ago, prevailing over a higher offer from a bidder backed by China's government. The Chinese bidder, CNOOC Ltd., withdrew after Congress threatened to block a Unocal sale to a company outside the United States.
The Unocal acquisition is paying off even better than Chevron envisioned, executives said.
"Our company is in an excellent position to continue adding value for our stockholders and helping to satisfy the energy needs of the world economies," Chevron Chairman David O'Reilly said.
Expanding on that theme, President Bush, a former oil man, said Friday that he expects the industry to invest its huge profits in more oil production, refining and transportation capacity to help alleviate supply congestion down the road.
But oil companies already are spending more to search for oil even as they ramp up current production. Exxon, for instance, poured $4.8 billion into exploration and other other capital spending, a 53 percent increase from last year — but still less than the company spent on share repurchases.
"There's capital flowing into the sector unlike anything we've seen in recent years," said Art Smith, chief executive of energy consultant John S. Herold. Nevertheless, it will take time to reverse two decades of cautious spending, he said.
Republicans and Democrats floated a wide range of proposals this week to punish the industry and soothe consumers.
Senate GOP leaders unveiled a 10-point plan that included a $100 fuel-cost rebate for millions of taxpayers, rescinding oil industry tax breaks and opening an Alaska wildlife refuge to oil drilling — a longtime goal of several large oil companies.
On the other side of the aisle, Sen. Charles Schumer, D-N.Y., is asking the Federal Trade Commission to monitor refiners this summer, while Sen. Ron Wyden, D-Ore., offered a bill that would require energy companies to pay a federal royalty on all oil pumped from the Gulf of Mexico if oil prices exceed $55 a barrel. Some oil now is exempt from royalties, costing the government billions of dollars.
Outspoken oil industry critic Doug Heller is hopeful the latest news about oil industry profits will finally persuade lawmakers to impose a windfall tax — a notion President Bush rejected on Friday.
"The only thing more shocking than these profits is the prices that motorists are being forced to pay at the pump," said Heller, executive director of the Foundation For Taxpayer and Consumer Rights in Santa Monica, Calif. "It's hard to imagine that these numbers won't rattle the cages pretty severely."
While a serious discussion of U.S. energy policy is long overdue, analysts said they are leery of knee-jerk government intervention, insisting elected officials are doing a public disservice by not doing a better job of explaining how the global oil market works.
"It's late in the game," said Antoine Halff, director of global oil at Fimat USA in New York. "The only policy changes that would have an immediate effect would be demand restraints, such as increases in gasoline taxes, alternate driving days or enforcement of speed limits." Halff does not consider any of these will be suggested in Congress, especially during an election year.
Economists are perhaps most troubled by the possibility that lawmakers will consider suspending the federal 18.4-cent-per-gallon gasoline tax. All that would do is raise demand and worsen the government deficit — a lose-lose proposition, they said.
Art Smith, chief executive of energy consultant John S. Herold, said $75 oil is "the best thing that could happen to the alternative energy business" and is the greatest force for change in the market. He and other analysts said SUV sales are already declining, and they expect Americans to think more critically about the energy efficiency of their homes and the lengths of their commutes in the years ahead.
But it may take years before changes in consumer behavior affect the market.
"In the meantime, you as a consumer have three options," said Ebel of CSIS. "You have car keys, light switches and a thermostat. Use them judiciously."