Why oil industry profits are good for the economy
The world's largest energy companies just released their fourth-quarter earnings. Though slightly less than the previous quarter's gains, the figures were, nonetheless, headline-grabbing. Chevron generated $5.1 billion. Shell earned $6.5 billion. ExxonMobil, the leading U.S. oil company, earned a whopping $9.4 billion. On cue, left-leaning pundits and activists rose to condemn the industry for excess. How dare oil companies earn so much while so many people are hurting! These accusations are hardly accurate. Historically, when compared to other industries, big oil doesn't actually pocket that much. In 2010, for every dollar of sales, the oil and gas industry earned just 6 cents. Across America's manufacturing sector, the average profit earned was 8 cents from every dollar. Among pharmaceutical companies and technology firms, profit margins are typically around 20 percent. But more fundamentally, profits represent progress. Despite what the Occupy Wall Street crowd would have you believe, the benefits from oil revenues aren't confined to a ruling elite. They flow to millions of everyday Americans. And when the oil industry grows, so does the overall economy. Too often, in discussions about public policy governing business, a vital question goes unasked: What exactly do profits represent? To get a hold on the answer, think about an everyday transaction for an oil company. A customer gives the company money in exchange for gasoline and maybe some items inside the store. Why? Because these are valuable to the buyer. Fuel enables drivers to get to work and school. (And snacks are tasty!) Drivers aren't purchasing fuel because they've been coerced. They don't have to buy from a government monopoly. Customers are genuinely gaining from the transaction (they value fuel more than money at that moment) and choosing the company because of price, convenience, and/or quality. So, in an open economy, profits mean a firm has transformed resources into more valuable goods and services. Profits demonstrate value creation, better known as economic growth. And, in turn, while a tiny portion of those profits go to executive bonuses, a big chunk goes toward research and development for a better future. Already, the oil and natural gas industry supports 9.2 million American jobs. It accounts for 8 percent of GDP and is responsible for a stunning 78 percent of domestic energy production. This influx of new cash – profits – will fund new projects, which in turn will expand domestic energy production and create new jobs. Strong profits also mean greater tax revenues. Currently, the average oil producer pays 41 percent of its net income to federal taxes – a percentage that's much higher than virtually every other industry. All told, the oil and gas industry pays about $100 million, per day, to the U.S. Treasury! Oil company profits drive stock prices and support dividend payments for shareholders. But it's hardly only a bunch of tycoons who profit. It's estimated that only 1.5 percent of energy stocks are owned by company executives. Most ownership is in mutual funds and IRAs owned by over 100 million Americans. When policymakers demonize oil industry growth, they're actually encouraging the industry to sit on its cash and not invest in new projects. After all, if their antagonistic rhetoric becomes policy, for example punitive tax increases or stricter exploration regulations, new projects could turn unprofitable. Firms are understandably hesitant to start new ventures when the policy environment could quickly turn sour. And fewer new projects means fewer new jobs, depressed tax revenue, less energy innovation and, ultimately, economic slowdown. This isn't what the majority of Americans want or expect. The oil industry might make for an easy target for political demagoguery. But their profits really represent good news in a struggling economy – and should not become a pretext for deprecating an industry that is playing a bright, vital role in the American economy.
Robert L. Bradley Jr. is the founder and CEO of the Institute for Energy Research and author of “Edison to Enron: Energy Markets and Political Strategies” (Scrivener Publishing and John Wiley & Sons).