Big oil's bumper subsidies
General economic theory holds that companies will produce more of a good if its price is higher, or if it receives subsidies. Funny that these rules didn’t seem to apply to Big Oil in 2011, when the highest oil price since 1864 and $2 billion in subsidies to the five largest oil companies – BP, Chevron, ConocoPhillips, ExxonMobil, and Royal Dutch Shell – yielded lower oil production than in 2010. But these five oil companies combined made a record-high $137 billion in profits in 2011 – up 75 per cent from 2010 – and have made more than $1 trillion in profits from 2001 through 2011.[1] This exceeds the previous record of $136 billion in profits in 2008.
Here are some more highlights from the big five’s activities in 2011:
- They produced 4 percent less oil and “oil equivalent” in 2011 compared to 2010.
- They spent a total of $38 billion, or 28 percent, of their profits to repurchase their own stock.
- They are sitting on more than $58 billion in cash reserves as of the end of 2011.
- They spent $1.6 million on campaign contributions and $65.7 million on lobbying efforts.
- For every $1 spent on lobbying in Washington, the big five received $30 worth of tax breaks.
Let’s dig a little deeper into this mystery to see why these companies are making more money while Americans see less oil and pay more at the pump.
Where the money goes
In spite of these high profits and oil prices, oil-equivalent production fell from 2010 levels for four of the big five oil companies. Shell’s profit, for example, increased by 54 percent from 2010 to 2011 while its oil and natural gas production decreased by 3 percent during the same time period.
So if the big five companies are not using their additional earnings to increase production, what are they spending their money on? The answer: They’re buying shares of their own stocks and investing in politicians to maintain the policies that led to their enormous profits over the past decade.
Instead of heavily investing in job creation or production, the big five used $38 billion, or 28 percent of annual net income, to repurchase their own stocks. This practice enriches shareholders but it doesn’t add to oil supplies or investments in alternative fuels or other new technologies.
These companies also cling to tax breaks while maintaining $58 billion in cash reserves. This is nearly 30 times more than the estimated $2 billion in annual special tax breaks that these companies receive.
Tax breaks, but not more jobs
ExxonMobil, the most profitable of the big five, paid an effective tax rate of 17.6 percent (from 2008–2010 data), which is 3 percent less than what the average American family paid. But Exxon and other oil companies that receive these tax breaks do not pass benefits on to consumers. Instead, their board members, executives, and shareholders are the ones that profit.
These companies, along with the American Petroleum Institute – their political arm – fight relentlessly to keep their tax breaks intact by threatening economic and energy damage. API claims that eliminating tax loopholes for the oil and gas industry would “lose jobs … and energy production.” Yet higher oil prices and profits, combined with huge reserves and tax breaks, yielded lower, not higher, employment and oil production.
Last year, the Democrats on the House Natural Resources Committee released “Profits and Pink Slips: How Big Oil and Gas Companies are Not Creating U.S. Jobs or Paying Their Fair Share.” This report revealed:
Despite generating $546 billion in profits between 2005 and 2010, ExxonMobil, Chevron, Shell, and BP combined to reduce their U.S. workforce by 11,200 employees over that time.
Nor are many of these net revenues used for oil production. The report found that “among the Big 5 oil companies, less than 10 percent of profits are reinvested into exploration of new oil deposits.”
The report also concluded that:
The oil and gas industry is a mature and highly profitable sector that is no longer in need of generous tax breaks or royalty free drilling. The $43.6 billion in tax subsidies that the industry is set to receive over the next decade will not help consumers with rising energy costs.
One place where oil companies have no trouble spending money, however, is in Congress. Last year the big five spent $65.7 million on lobbying efforts, successfully persuading their congressional friends to retain tax breaks. Both the House and Senate had votes to scale back these tax breaks, and both proposals were defeated.[2]
And Big Oil’s lobbying expenditures were quite a bargain. For every $1 the big five spent on lobbying in D.C. last year, they effectively received $30 in subsidies disguised as tax breaks. This is equivalent to a 3,000 percent return on every dollar they invested in strong-arming Congress.
More than $1.6 million was spent on campaign contributions in 2011 from just four of the top five oil companies. And more than 90 percent of these campaign contributions were made to Republican candidates or committees. But that doesn’t even include their undisclosed contributions to the U.S. Chamber of Commerce, the American Petroleum Institute, or other organizations that also support tax breaks for Big Oil.
In the spirit of giving, three of the five Big Oil CEOs – Rex Tillerson of ExxonMobil, John Watson of Chevron, and Jim Mulva of ConocoPhillips – contributed an additional $75,000 to GOP candidates and committees.
Enough is enough
Two days after his State of the Union address last month, President Obama spoke in Aurora, Colorado, about American-made energy. He reiterated his call to eliminate tax breaks for Big Oil:
We subsidized oil for a very long time, long enough. It’s time to stop giving taxpayer giveaways to an industry that’s never been more profitable.
Seventy-four percent of Americans agree with the president’s desire to eliminate tax breaks for the oil and gas industry.
Instead of benefiting oil companies that reward senior executives, board members, and stockholders, these taxpayer funds should be invested in projects that benefit all Americans. A University of Massachusetts study found that investment in clean energy creates anywhere from two to four times more direct and indirect jobs compared to the same investment in oil and gas production.
But let’s put these tax breaks in context. Ending the $2 billion in annual tax breaks for the big five oil companies could pay for:
- The salaries of 36,000 high school teachers earning an average of $55,000 per year
- Pell Grants for more than 500,000 aspiring college students
- Sixty-seven thousand home solar energy systems costing an average of $15,000, which would reduce carbon dioxide pollution by 175,000 metric tons annually
Last September while addressing economic growth and deficit reduction, President Obama noted that as we cut federal program funding to reduce the budget deficit, “Either we gut education and medical research, or we’ve got to reform the tax code so that the most profitable corporations have to give up tax loopholes that other companies don’t get. We can’t afford to do both.”
After a year of near-record profits and a decade of more than $1 trillion in total profits, the least the five huge oil companies can do to help our nation is to relinquish their unnecessary and ineffective tax breaks.
Comments on this article
"subsidies"
Gordon, your information source is probably in danger of being less than completely impartial. And reading Exxon's rhetoric did nothing to reassure me that what is happening is a good thing.
The key point is that subsidies need to be paid to renewable industries to allow them to achieve viability. Anyone conscious of the climate change risk will see this as urgent and essential.
For a big oil company with profits of $40B in a single year to complain about the need for a level playing field on subsidies (as per your first link) is just ludicrous. We should tax such companies into oblivion, at the correct rate that allows renewables to replace them.
Unless the oil industry can demonstrate a net positive triple-bottom-line benefit to the country as a whole for any tax break, credit, subsidy or loan, NONE should be given.
Big Oil's "subsidies"
What a pity that the Climate Spectator continues to published long discredited stories such as this one. Your readers expect research not rehash. Follow these links for the facts missing from this story:
http://www.exxonmobilperspectives.com/2011/01/20/clearing-up-confusion-about-subsidies/
http://www.exxonmobilperspectives.com/2012/01/31/the-facts-behind-exxonmobils-earnings/
http://www.exxonmobilperspectives.com/2011/10/26/10-little-known-or-often-ignored-facts-about-gas-prices-and-exxonmobil-earnings/
http://www.exxonmobilperspectives.com/2011/10/12/the-oil-and-gas-industry-creating-real-jobs-for-real-people/
What $750m?
Peter, what $750m do you mean? Regardless, oil and gas industries, in the US, in Australia and globally, receive 10-12 times the subsidies, grants, tax concessions etc that renewables do. Globally, about $5-600 billion compared to $50 billion. Everything else is hair-splitting. Let's not talk about leaving it to "the market", there's no such thing.
I think everyone is missing the point of the article: production declined despite high prices. Why? Could we be running out of economic reserves? Or are we going to blame the unstable Middle East again? In either case, and even if you don't believe in climate change and you love oil because it's the only thing to fuel your G5 and your fleets of Maseratis, surely it makes sense to explore renewable alternatives. And that might involve government support.
Given that budgets are finite, which industry should governments support? One which benefits dodgy regimes in unstable parts of the world or one that can lead to a renewable future?
Don't talk to me about shale gas and tar sands: even without the potential damage to farmland, the fugitive emissions are excessive. But to think that way, I guess you need to believe in AGW.
DOE BIOMASS PROGRAM, CHU AND ALGAE RESEARCHERS ARE BEING INVESTI
Solydra story is opening a huge can of worms at the DOE LOAN GURANTEE LOAN PROGRAM. Its not just about the Solar loan guarantee program. Look at all the millions in fees collected by the DOE LOAN GUARANTEE PROGRAM with projects 20% completed. Also, I reckon an audit needs to be done on DOE GRANTS to individuals from the DOE that are now working in private industry.
The US taxpayer has spent over $2.5 billion dollars over the last 50 years on algae research. To date, nothing has been commercialized by any algae researcher.
The REAL question is: Does the DOE BIOMASS PROGRAM really want the US off of foreign oil or do they want to continue funding more grants for algae research to keep algae researchers employed at universities for another 50 years?
In business, you are not given 50 years to research anything. The problem is in the Congressional Mandate that says the DOE can only use taxpayer monies on algae research, NOT algae production in the US. So far, research has not got the US off of foreign oil for the last 50 years!
A Concerned Taxpayer
Big Oil's Bumper Profits....
Thank goodness there are some companies earning huge profits , employing thousands of people , rewarding lots of shareholders whilst still paying vast sums of money in taxation at all levels of government !
If they were all to go broke ( which is the alternative ) then think of the unemployment, the loss to the superannuation funds, the loss of employees and shareholder's spending power on the retailers.......and so on.
If you want to share in the profits then put your money where your mouth is & buy some shares !
Where do you think that the "subsidies" for "green projects" comes from ?
It comes from successful businesses !!!
Whilst we have the employment of a huge , unproductive , government sector ( consuming vast amounts of personal & business tax ) we will always need to rely on all the successful businesses we can muster.
If some people resent the profits that companies make then they need to re-think their ideas. Without those hugely succesful companies we (in Australia) would be well & truly up the proverbial creek without a paddle !
Big oil, big coal
What's the Esperanto for 'cojones'?
This could be Good News
If Big Oil is more profitable despite producing less oil, imagine how profitable they'd be with NO oil production.
Big oil, big coal
Not a big surprise to read this sort of information, but definitely some powerful knowledge. Now to untrench the entrenched vested interests that influence who gets what kind of subsidies.
A similar debate has been infolding in Australia as well, but with big coal in the place of big oil (although big oil has more power globally). Here, where there's always plenty of sun, <a href="http://www.100percent.org.au/">advocates of renewable energy</a> say that <a href="http://www.solarchoice.net.au/blog/benefits-of-solar-power-to-electricity-grid/">solar power offers great potential advantages to the electricity grid</a>, but the vested interests of the extremely powerful (and wealthy) coal industry still have most of the state and federal governments by the cojones, as it were. It should be interesting to see what happens when the carbon tax comes into effect this April, although I personally don't expect that its impact will be big.
How generous
Ray,
That's because it is capital in nature and is thus found on the Balance Sheet and not on the P&L.
How generous
So you would compare tax breaks for some of the most profitable companies in the world with tax breaks for the poor or needy?
Thank God for the Salvos, then.
Why is it that the money invested in a company share buy back scheme is not in the first instance considered by the taxation law as company profit?
You could cast a bigger net..
Subsidies for business
Assistance in many forms from rent, transport etc for pensioners, handicapped, disadvantaged
Tax breaks for the poor.
Rebates for health care to everyone,.. ooops nearly everyone, perhaps some, in the future.
Who is the poor sap missing out...and who is the poor sap or business paying for all this?
The claims from all these groups about how renewables are badly done by becuase they can't stand in the feeding trough like everyone else is a joke. Solar projects can't even get off the ground even when the Govt gives them $750m = 50% of their costs. $750 m is not a subsidy...its much, much more pristine and worthy..its a grant. Thats alright then.
Question
Does any company in the USA or Australia pay the full corporate tax rate (i.e. 30% of profits in OZ) ? NO, so in that case every company is being "subsidised". Homeowners are being subsidised to the tune of $50 billion in avoided CGT and because there is no GST on fresh food then everyone is being subsidised ! Words like Subsidy and Sustainability will eventually pass their use by date just like a "Paradigm".