Are Big Oil's Big Profits Good for You?

April 27, 2006 — -- On the same day it announced earnings of more than $8 billion for the first quarter of 2006, ExxonMobil placed advertisements in several newspapers claiming that its massive profits would not just benefit the company but would also be good for millions of Americans.

It was a preemptive strike against a public backlash from consumers who have grown frustrated paying high gasoline prices while big oil companies prosper. Exxon said its second consecutive fiscal quarter of massive earnings would not only benefit more than 2.5 million American shareholders but would also help the company expand refining capacity, explore the globe for new supplies and research new environmentally-sound technologies.

Sounds pretty good. But is it true?

Last year only 30 percent of ExxonMobil's $36 billion in profits went to investment and exploration, according to the company's own financial statement. Fifteen percent went directly to shareholders in the form of cash dividends, and the biggest chunk -- 40 percent -- was used to repurchase its own stock. Less than 2 percent of the company's profits were spent on research and development.

"In these days of incredible shortage of energy, I would expect the largest energy company in the world to spend more on research and development," said Baruch Lev, professor of finance at New York University's Stern School of Business

It seems most consumers aren't buying the idea that oil profits might show them some benefit. They want cheaper gas. A recent ABC News/Washington Post poll indicated that 70 percent of respondents believed that the price of gas was causing financial hardship to their families, and 44 percent said it was causing "serious" hardship.

Political pressure is also mounting. House Speaker Dennis Hastert, R-Ill., and Senate Majority Leader Bill Frist, R-Tenn., have sent President Bush a letter, asking him to direct the Justice Department and the Federal Trade Commission to "investigate any potential collusion, price fixing or gouging in the sale or distribution of gasoline, petroleum distillates or ethanol in wholesale or retail markets."

And many critics, including environmental groups, scoff at the notion that big oil companies are committed to finding renewable fuel sources.

Some analysts agree that the massive influx of cash will allow the major U.S. oil companies to begin financing expensive long-term projects. These could range from finding and refining more U.S. oil sources to collaborating to develop oil in other countries like Russia.