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
Consumers, Politicians Suspicious
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.
Extra Cash Could Boost Spending
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.
Typically, these types of ventures can take three to five years to plan and cost billions of dollars. Such long-term planning was difficult when profits were weaker during the past decade.
"Because they've become more liquid, they feel they can take the risk to plan ahead," said John Parry, an analyst with John S. Herold.
Industry leaders have also noted that many companies invested millions and even billions to comply with new environmental standards in the past decade. Parry said the oil industry has spent millions to make infrastructure improvements -- things like removing excess lead and sulfur from gasoline, and removing MTBE -- that bring facilities and products in line with government-mandated standards
"Since 2000, capital investment has predominantly been directed by environmental legislation, so much of the industry's capital went toward meeting congressional mandates," he said. "Now, more of the cash flow can be invested in things like expansion and research."
What Are Their Motives?
Tom Kloza, an analyst with the Oil Price Information Service, said that some in the oil industry have moved forward with renewable fuel research. But some have been less willing to invest their profits. That could change as more and more companies see their bottom lines improve.
"Some companies have embraced the concept of alternative energy, and others really haven't," Kloza said.
Kloza said oil companies seeing huge profits are likely to increase their refining capacity during the next several years, which could increase supply and help bring prices down. And it's likely most will make investment in research and environmentally-friendly technology but not necessarily with the consumer in mind.
"The oil companies are not necessarily being disingenuous saying they're going to do some new exploring and new research and bring more supply on line. We are going to see cleaner-burning fuel, and we'll be breathing less particulates," he said. "But it's not for philanthropic reasons or altruistic reasons, it's pure economics."
Regardless of the motives, the big oil companies are likely to continue feeling the heat from a public that is fed up with high gas prices and from politicians looking to curry favor with their constituents.
So could the Exxon ad be the first in an industrywide blitz to sway public opinion? Kloza said it might be difficult for the oil industry to influence consumers who are angry about prices at the pump.
"They could have the advertising budget of Nike, Coke and Pepsi combined, and they're still going to have a hard time making people feel all warm and fuzzy about oil companies," he said. "But they get a lot of criticism, and I guess sometimes you have to try to stop the bleeding."