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Oil Industry Profits Are...Good!

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May 17, 2013 | 1,968 views | Post a comment

By Robert L. Bradley, Jr.

The world's largest energy companies just released their first-quarter 2013 earnings. The eye-popping numbers? Chevron, $6.2 billion. Shell, $7.5 billion. ExxonMobil, the biggest, $9.5 billion.

On cue, left-leaning pundits and activists are rising to condemn the industry for excess. How dare Big Oil earn so much, while so many people are hurting?

But these accusations and insinuations are hardly accurate.

When compared to other industries, big oil doesn't actually pocket that much. In 2010, for every dollar of sales, the oil and gas industry earned 6 cents. By comparison, across America's manufacturing sector, the average profit earned was 8 cents per dollar. Among pharmaceutical companies and technology firms, profit margins are typically around 20 percent.

And despite what the Occupy Wall Street crowd would have you believe, the benefits from oil revenues aren't confined to a ruling elite. They flow to millions of everyday Americans as workers in and owners of energy.

Too often, in discussions about business and public policy, a vital question goes unasked: What exactly do profits represent?

To grasp the answer, think about an everyday transaction for an oil company where the customer exchanges money for fuel to get to work or school-or just get back home.

Drivers aren't purchasing gasoline or diesel because they've been coerced. They don't buy from a government monopoly. Customers choose driving patterns and select a service station based on relative price, convenience, and quality.

And from a broader perspective, inputs profitably transformed into outputs create economic value and thus economic progression.

Where do profits go? A sliver goes to executive compensation versus energy reserves replacement, infrastructure maintenance and upgrades, and research and development. Company owners get rewarded too since profits drive stock prices and support dividend payments for more than 100 million Americans owning such stock.

The oil and natural gas industry supports 9.2 million American jobs and accounts for 8 percent of GDP. Cash flow from earnings funds new projects, which in turn will expand domestic energy production and create new jobs and GDP growth at a time of great need.

Strong profits also mean greater tax revenues. Currently, the average oil producer pays 41 percent of its net income in taxes -- a percentage that's much higher than virtually every other industry. All told, the oil and gas industry pays about $85 million per day, to the U.S. Treasury.

When policymakers demonize oil industry growth, they're actually encouraging the industry to sit on its cash and not invest in new projects. After all, if their antagonistic rhetoric becomes policy, for example punitive tax increases or stricter exploration regulations, new projects could turn unprofitable. Firms are understandably hesitant to start new ventures when the policy environment could quickly turn sour.

The oil industry might make for an easy target for political demagoguery. But their profits really represent good news in a struggling economy - and should not become a pretext for deprecating entrepreneurship that is playing a bright, vital role in the American economy.

Robert L. Bradley Jr. is the CEO & Founder of the Institute for Energy Research and author of Edison to Enron: Energy Markets and Political Strategies (Scrivener Publishing and John Wiley & Sons).
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