Posted by: bmeverett | August 23, 2008

Myth #3: Consumers can get relief from high oil prices by confiscating oil company profits

Senator Obama tells us in his Lansing speech:

I believe we should immediately give every working family in America a $1,000 energy rebate, and we should pay for it with part of the record profits that the oil companies are making right now.

Let’s start with the facts.

According to the Census Bureau, there are roughly 75 million family households in the US today plus another 35 million single people living on their own. Obama’s proposal ($1,000 energy rebate per family or $500 per individual) would therefore cost just about $92 billion.

The six major oil companies (ExxonMobil, Shell, BP, ChevronTexaco, Total and ConocoPhillips), known contemptuously in Washington as “Big Oil,” earned a total of about $85 billion in the first half of 2008. Their earnings for the full year of 2008 will probably be somewhere between $150 billion and $175 billion depending on what happens to oil prices.

About 25% of Big Oil’s first half profits were earned in the United States and 75% overseas. US earnings in refining and marketing averaged 2¢ per gallon of oil sold and accounted for less than 2% of their total earnings. ChevronTexaco and BP lost money in US refining and marketing during the second quarter. Most of Big Oil’s earnings came from producing oil and natural gas overseas.

ExxonMobil and ChevronTexaco are Big Oil’s representatives in the Dow Jones Industrial Average of 30 major companies. Although their net earnings ranked first and second respectively in absolute magnitude, their returns on shareholder equity ranked 5th and 12th respectively. Four companies (Boeing, Microsoft, IBM and Caterpillar) earned higher rates of return than ExxonMobil, and another six companies (3M, American Express, McDonalds, Dupont, Coca Cola and Johnson & Johnson) earned higher rates of return than ChevronTexaco.

With this background, a few questions for Senator Obama.

Why exactly do you believe that the shareholders of the oil companies are not entitled to the companies’ profits? Do you believe that the companies are engaging in criminal manipulation of the market, although decades of FTC investigations say otherwise?

What distinguishes the profits of oil companies from other corporations? Why is it unacceptable for ExxonMobil to earn $12 billion in the second quarter on shareholder equity of $125 billion, while it is perfectly alright for Microsoft to book $6 billion on only $36 billion of shareholder equity? As President, will you be prepared to tell every US company what their permitted rates of return will be? How will you make that determination?

GE has nearly the same amount of shareholder equity as ExxonMobil ($118 billion versus $125 billion), yet GE earned only $5 billion in the second quarter. Does that mean that GE is less efficient or just less greedy?

Shell, BP and Total are European companies. Will you attempt to confiscate some of the profits European companies made doing business outside the US?

Are American consumers entitled to a refund of the profits ExxonMobil made doing business in Europe, Japan or Australia?

Do you expect that Big Oil will continue to operate their global oil and gas production, transportation, refining, distribution and marketing systems if investment returns are regulated at a below-market level? Do you expect that these companies will be able to attract capital for future oil and gas exploration, a highly risky enterprise, with a regulated, below-market return? Would American consumers be better off if Big Oil stops competing for access to overseas resources, leaving the field to European, Russian, Chinese and other companies?

Would American consumers be better off if less oil were discovered and produced in the world because Big Oil, the most technologically and financially capable oil companies, are no longer competitive players?

The current value of all the shares in Big Oil is about $1.3 trillion, most of it owned by middle class shareholders in their IRAs, retirement plans and mutual funds. What do you think would happen to the value of these assets if you prohibit market returns on this investment? Would the destruction of $1.3 trillion in middle class assets be an acceptable price to pay for your one-time rebate?

One final question. Did any analysis go into this proposal other than focus groups?


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