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Exxon’s Profits and the Lack of Renewable Investment
July 31, 2008 10:18 AM
ABC News’s Bianna Golodryga reports: As the rest of the nation's economy grapples with record oil and gas prices, deep in the heart of Texas, things look pretty good -- and Texans can thank ExxonMobil for that. This morning, the world's largest oil company reported revenues of $138 billion for the second quarter of 2008. Believe it or not, the record profits of $11.6 billion, or $2.27 a share, were smaller than the $2.52 a share Wall Street had expected. Still, the company's profit topped its previous record of $10.9 billion during the first three months of the year.
For big oil, 2008 has been a very good year. How good? Well, it's even better than last year, when the combined sales of the top five oil companies added up to $1.5 trillion -- that's greater than the GDP of Canada.
Since then, the price of crude has soared by as much as 50 percent while the price of natural gas has also taken off. And though oil has had a significant drop from its high of above $140 a barrel for the second quarter, the benefits of high oil are clearly noted in balance sheets of the world's largest oil companies.
Exxon's earnings come on the heels of stellar earnings from ConocoPhillips, which reported a $5.4 billion net income for the quarter; BP, which posted net profits of $9.47 billion for the quarter; and Shell, which reported $11.6 billion earlier this morning.
Those kind of figures have sparked calls for alternatives to foreign oil now more than ever.
The calls for change are coming from big players from former oilmen like T. Boone Pickens to the oil companies themselves, which have invested in a media blitz highlighting their support for alternative energy sources.
But are they putting their money where their mouth is?
We crunched the numbers with Bernie Picchi, oil analyst at Wall Street Access, who said "They are probably spending more on their advertising than the actual research itself."
To be fair, Exxon has publicly said that it is not in the renewable energy business, but rather focused on oil and gas. So it should be no surprise that out of the five largest oil companies, Exxon spent just 1 percent of its $41 billion in profits last year on alternative energy sources.
But none of the others fared much better.
For its part, Shell also invested just 1 percent of its $32 billion in profits last year on alternative energy exploration.
While both Chevron and ConocoPhilips invested only 1.3 percent of their profits on research, the company that invested the most in alternatives -- BP -- after profiting $21 billion, just $600 million or 2.9 percent was spent on research.
All in all, between the five companies, $2 billion was set aside for alternative energy research.
Picchi goes thru the numbers.
"This is the largest industry in the world with the exclusion of the financial service industry. It’s a very large amount of money. The after-tax earnings of these companies was around $125 billion. You get the idea that $2 billion, although an enormous amount of money to you and me, is truly just several drops in the bucket for the industry."
But don’t let the numbers fool you: all is not so great for big oil either. Contrary to popular belief, Exxon is also feeling the heat of record high oil prices. The company, which only produces 3 percent of the world's oil, doesn't produce enough to meet its own refining demands. And because of that, it too has to shell out big dough to pay for crude at present-day prices.
And as the run-up in gas prices at the pump has led to a decline in demand for gas the past few months, Exxon and the rest of the industry are facing an uphill battle to raise wholesale and retail prices fast enough to break even with record oil prices and refining costs.
Which leads to the bigger question: why is oil so expensive today? Supply/demand, manipulation, or policy?
According to one of the country's most prominent oil analysts, Oppenheimer's Fadel Gheit, the later two explanations are the main factors. According to a new book “The Oil Card” by Jim Norman, by allowing financial players to dominate oil trading without regulations while keeping margin requirement at a low of 5 percent, compared with 50 percent on stocks, the U.S. government is engineering the rise in oil prices to slow down China's economic growth, which is the most formidable global challenge, not Iran, or terrorism. It is modern economic warfare.
In fact, many industry experts are expecting the sharp increase in demand for oil from China to decline after the Olympics. China, like other emerging markets, subsidizes its oil, thus making it more affordable for citizens to buy gas. And with an estimated 1,000 new drivers hitting the road in China every day, one can imagine how much money China's government shells out for subsidies. As global economic growth slows, many don't expect China will be able to support those subsidies for long.
Gheit also believes that the current price of oil is just not sustainable for the long term. “Oil companies are making record profits because of the inflated oil and gas prices, which I believe are not supported by market fundamentals. After all there are no shortages despite all predictions of potential disruptions, which have not materialized. The oil markets are rigged since government actions, or inaction, affect supply and demand. Access to resources, taxes, subsidies, product specifications, and other regulation allow other participants to push oil price up or down.”
As for exploration in alternative energy sources, politicians have been hammering Exxon for what they say is too much emphasis on stock buyback policies, but Exxon and industry experts note that the company's main obligation is to it's shareholders, many of which are large pension and mutual funds.
Picchi adds that the oil companies "Have a responsibility to the owners to split the balance between growth and profitability. And growth without profits its a hard bargain for the owners of the company. What they have really done is respond to the owners requirement for the best possible return on their investment as owners."
Common belief within the industry is that oil companies won't have incentive to change their policies until Washington changes its policies. "In fairness to the industry, there really is no policy right now in the U.S. or for that matter Western Europe that would really help the companies to direct them to spend their money in these non-carbon fuels," Picchi goes on to say.
As for current solutions coming out of Washington, most oil experts believe it would take many years before any substantial relief from ANWAR drilling (which presidential hopeful John McCain supports) would be felt, while a windfall profits tax (supported by Senator Obama) would be more of a hindrance to further exploration and research than it would be a solution to the problem. Exxon claims that it is spending more of its capital on exploration, and notes that its tax rate has gone up from 44 percent to 49 percent.
Make no mistake about it, oil companies are gushing in dough. But when you look that their profit margins, they are actually lower than Microsoft’s, Google’s or IBM. And no one is suggesting a windfall tax for them.
So what does Picchi see as legitimate criticism for big oil? "Think a fair criticism is this industry has not been spending enough over the years on exploration an production. Total cash flow, only about half of it is going into traditional capital spending and roughly another 20 percent or so is going into share repurchases, the rest in dividends to the owners of the companies”
Politicians have been hammering Exxon for what they say is too much emphasis on stock buyback policies, but Exxon and industry experts note that the company's main obligation is to its shareholders, many of which are large pension and mutual funds a wide spectrum of Americans depend on.
And so the debate continues...
July 31, 2008 | Permalink | User Comments (45)
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we need to say...
start drilling where you have permission to already (where there IS oil no matter what everyone wants to spin otherwise...just not the golden carrot of profit margins from the lands they are drooling for )
or we are going to slap you with a windfall profits tax that we will give to US auto makers to work on r&d to get us off your product.
Posted by: dl | Jul 31, 2008 10:28:58 AM
What a BS Article. The largest Oil Companies in the world are "State Owned" oil companies owned by people like Hugo Chavez and the Saudi Royal Family. The Saudi Family "Oil Company" is four times the size of Exxon. Why do Liberals hate capitalism so much? Why do Liberals despise "Profit" so much? Exxon shareholders are happy.
Posted by: L.B. | Jul 31, 2008 10:46:56 AM
You really think that oil is just everywhere they leased? How would you know this?? I work for Fluor and Valero just had to cancel a refineray because it was not cost effective in the long run due to US restrictions. Oil companies are businesses, they took a risk early on when oil was not a hot commidity and are now reaping the rewards for that risk. Hyper-regulation will NOT work, no matter how much you want it too and no matter how much you think you are entitled to cheap gasoline just because you consume it.
Posted by: Blerg | Jul 31, 2008 10:47:59 AM
We don't need to go overseas to search for Weapons of Mass Destruction... THEY are right here - protected by our own government!
If there's a war involving oil... it ought to be waged against these thieves...
Posted by: HeyYou | Jul 31, 2008 10:51:16 AM
We don't need to go overseas to search for Weapons of Mass Destruction... THEY are right here - protected by our own government!
If there's a war involving oil... it ought to be waged against these thieves...
Posted by: HeyYou | Jul 31, 2008 10:52:14 AM
Let me make sure I understand this: Big oil is charging us consumers higher-than-ever prices for their products, while at the same time breaking their own records for corporate profits. Seems to me that maybe the high priced products by which they gouge the consumer results in the record-breaking profits. Am I right? Does this say something about the greed and usurial practices of big oil? What would happen to their executive bonuses and perks if they charged us consumers five cents less per gallon?
Posted by: J. Phred Muggs | Jul 31, 2008 10:52:28 AM
exxon says death to all americans,we will keep screwing you till the oil runs out.
Posted by: ray | Jul 31, 2008 10:53:10 AM
"Why do liberals despise profit so much? Exxon shareholders are happy."
Well, gee, I suppose we should all be happy then. What a callous and ignorant statement. Typical Republican. These oil companies make record profits while regular Americans suffer at the pump.
Posted by: otis | Jul 31, 2008 11:02:46 AM
"What a BS Article. The largest Oil Companies in the world are "State Owned" oil companies owned by people like Hugo Chavez and the Saudi Royal Family. The Saudi Family "Oil Company" is four times the size of Exxon. Why do Liberals hate capitalism so much? Why do Liberals despise "Profit" so much? Exxon shareholders are happy."
What a BS dittohead statement. So you're saying capitalists aspire to be Hugo Chavez and the Saudi Royal Family or at least their equivalent. This is a Democracy, not a Greedocracy. Of course the shareholders are happy, but don't expect kudos from those that aren't, the great majority of this democracy. Your profits came at our expense and the expense of our economy.
Posted by: yomama | Jul 31, 2008 11:03:37 AM
Evil Big Oil! How dare they insist on seeking oil to pump out of the ground instead of harnessing the wind? Remember "we can't drill our way out of this crisis", but we can we can equal all gas obtainable by drilling in the US by just fully inflating our tires! Barack Obama says so, so it must be true! Who needs gas when we have air?
Posted by: Karen | Jul 31, 2008 11:05:13 AM
Bush and/or Cheney will be on the Board of Directors to get their kick backs! Those 2 should go to jail for srealing from all of us!
Posted by: TheLincolnParty | Jul 31, 2008 11:19:05 AM
Did some of you even read the entire article? Do you know the difference between profit and profit margins?
I think some of you are only reading what you want to see and glazing over the rest.
Posted by: Tom | Jul 31, 2008 11:25:23 AM
the ocuntry is hurting desperately an dthe people of this country want to see investment in alternative enrgies, and yet these big oil companies are doing nothing about it.
I'm not agianst profits, but year after year of record profits when the price of gas / oil is killin ght economy the majority of Ameircans well being...
Where is th ePatritotism of these countries, do they not want ot help Americans through this tough time. Why do they have ot make record profits during this depserate time...
I don;'t understand how anyone would accept this... Our country is being held hostage and big oil refuses to give anything back....
We are screwed as a nation if these companies with their record profits won't help guide us out of our addicition to oil.
Seriously... who cares if the stockholders are happy. they represent a very small portion of the entire country.
Posted by: Daryl | Jul 31, 2008 11:27:03 AM
Well, well, Can't wait to see what McSame has to say about this! Poor oil companies are barely scratching out a living...and look how much of their small profits they are spending on alternative energy research! You don't really expect a company or for that matter McSame and Gang (make that GOP) to really invest in something which is going to damage their business of BIG OIL? Get your head out of the clouds! Boot Bush, McSame and the Gang then threaten to nationalize the oil fields in the US. I guarantee you the price of oil would drop like a rock. Or alternatively we can go on believing the McSame and Gang really, really, care about us and our wallets and let them go on robbing us! Your choice America. More of the same or a new direction where "WE" the people take back our country from these crooks!
Posted by: Let's Drill Everywhere | Jul 31, 2008 11:28:22 AM
To all you "big oil" critics: did you not read the part of the story that says Exxon's profit margin is lower than Microsoft, Google, and IBM? Yes, profits are very high, but can't you see Exxon had to spend a lot of money to realize those earnings? To criticize Exxon for its large profits is tantamount to criticizing someone who bets $5,000 at the blackjack table and wins, while congratulating the guy who only bets $5 and wins, even though the guy who bet $5,000 took a much higher risk than the guy who bet $5. Go tell the owners of Exxon (shareholders such as your grandparents and other retirees whose life savings are invested in mutual funds) that they are too greedy and they should pay additional taxes on their income just because some of it comes from "big oil."
Posted by: Walt_Tx | Jul 31, 2008 11:30:11 AM
Anyone wanting to slap the oil companies with windfall taxes are either socialists or communists. Quit being jeolous you don't own their stock.
Companies are in business to make money. I work my ass off 80+ hour weeks to make money and the government doesn't deserve a dime of it.
Posted by: Byron | Jul 31, 2008 11:31:31 AM
Did anyone read that the profit margins from some of our tech companies are higher than exxon's? (google, MS, etc) That means that other companies are receiveing a high percentage return on their investments. Exxon is taking in record amounts of money while spending record amounts. I don't really see the problem. They are a business right? Look at the bright side, with these high oil prices China can't afford to buy more T bills.
Posted by: KG | Jul 31, 2008 11:33:51 AM
Just for the record, the U.S. government cannot nationalize the oil industry, nor can it threaten to do so. And even if it did, it certainly would not cause the price of oil to drop. Just check with Hugo Chavez on that one. If you love the postal service, you'd really love nationalized oil! And one more basic principle of capitalism: only the company owners (i.e., shareholders) can tell the company whether or not to invest in alternative energy.
Posted by: Walt_Tx | Jul 31, 2008 11:36:40 AM
Newsflash: Federal government has collected billions of dollars of Social Security taxes and placed it in a trust fund to pay future obligations. The balance in the fund: $0.00.
Posted by: bubba | Jul 31, 2008 11:43:04 AM
The problem has always been the lack of consumer choice. When we buy a car or truck we have only once choice of fuel type: gasoline created from oil. We are just now in 2008 starting to see Flex Fuel (TM) vehicles that can use domestic ethanol E85 fuel. There needs to be more than two choices. There should be electric cars that I can charge with solar panels on the roof of my house. After 5-10 years the fuel would essentially be free after saving the money I would be spending on gasoline and power from the grid. I say let the oil companies do whatever they want to do to help their shareholders, but they need to let go of their semi-monopoly on our transportation. There wouldn't be so many grassroots electric vehicle conversions going on if automakers in the US like General Motors would just have kept their EV1 going instead of recalling and shredding them to pieces. Anyone who reads this needs to watch the documentary "Who Killed the Electric Car?" just to have the information out there. If GM would have kept the EV1 going, and put more out there on the road then the invisible hand would have put incentive out there for the battery companies to make better batteries, etc. Since the EV1 came out in the 90's then by now we would have the EV2 or EV3 with better range and a lower price just from economies of scale.
Posted by: Josh P | Jul 31, 2008 11:45:21 AM
This article is incorrect, John McCain does not support drilling in ANWAR. He has been supporting the off shore drilling.
Posted by: Steve | Jul 31, 2008 11:48:44 AM
I see the Liberal bridge and tunnel crowd have got their batteries on their laptops charged today.
What the Libs don't seem to understand is that it is a WORLD oil market... not just a US Oil Market. Exxon is a speck compared to Hugo and the Saudi Oil Family. Those are the guys holding us hostage.
At least when you buy Exxon some of the money is staying here.... Buy from Hugo and it all goes back to the DickTater.
Posted by: L.B. | Jul 31, 2008 11:56:27 AM
Like I'm really tired of the double-talk here. The article said Exxon-Mobile made a *profit*, a very huge profit. Yet the article make it sound like the company is loosing money. Say what? Profit means the amount of money a company made after expenses are taken off.
So if a company made 2 million in a month and spent a million in costs (which includes everything), then the company made a million in profit.
So I think the newsmedia and everyone should stop using the word 'profit' because if Exxon-Mobile didn't made a 11 billion dollar profit, then why say it was a profit?! It doesn't make any sense!
Posted by: GWP, Franklin Boro, NJ | Jul 31, 2008 11:58:01 AM
GWP, the article points out that while Exxon overall turned a large profit, its profit margin was less than that of Microsoft, Google, and IBM. Think of profit margin as a ratio of profit to expenses. So, if you spend $10 to make $15, then your profit margin is 5/15, or 33%. The gist of the article is that Exxon had to spend billions to earn their 11 billion, and the ratio of their profit to their expenses was less than that of Microsoft, Google, and IBM. I hope this helps!
Posted by: Walt_Tx | Jul 31, 2008 12:12:11 PM
What did you expect? We elected Texas oil men for President and Vice President. They established their energy policy (and selected the Cabinet) in secret with the helpful advice of other Texas oil men. The VP is a former corporate officer in Halliburton, one of the worlds largest oil exploration businesses, and the company that just so happens to have the exclusive contract to provide logistical support to our armed forces. Then we sent those armed forces to a place that the President knew didn't have ties to 9/11 but does have a lot of oil. Who are some of the first people to go in? The fine folks from Halliburton. Now the oil companies are making record profits (and have been for years). Of course none of these facts are related, it's all just a coincidence. Look, I know you can't pin our current problems on one administration - we've been getting set up for this for a long time. But we've got to wake up! We've got to get away from our dependence on foreign oil - we need to build more nuclear power plants, recycle nuclear waste, promote renewable energy, and not let big oil buy another election! By the way, offshore drilling won't produce fuel for the US until 2030. Can you guess who will profit when we start drilling?
Posted by: Eric S | Jul 31, 2008 12:15:28 PM
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