Exxon’s Profits and the Lack of Renewable Investment

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...

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