In 2005, the combined profits for the three largest integrated U.S. oil companies rose to more than 63 billion dollars. Exxon Mobil's profits set a new American record at $36.13 billion. Its annual revenue also broke new ground as it jumped from $298 to $371 billion. This surpasses both Indonesia's and Saudi Arabia's gross domestic product.
This dramatic rise in earnings and profits was driven by uncertainty in the Middle East and China's growing appetite for oil. This led to dramatic increases in the price of crude oil and natural gas. Exxon reported that its average sale price for crude oil in the U.S. during the fourth quarter of 2005 was $52.23 a barrel, up from $38.85 a year earlier, while natural gas sold for $11.34 per 1,000 cubic feet, compared with $6.61 during the same period a year ago.
While most companies would seek to advertise such record earnings, the oil industry, and Exxon in particular, has done everything possible to downplay the news. Anxious about criticism over record profits, Exxon executives have been trying to prevent a strong political and public reaction against its results. Exxon paid for advertisements in leading newspapers arguing that profit margins in the oil industry lagged behind those of other industries, like pharmaceuticals and banking. This is true. Pharmaceutical companies earned 18.6 cents for each dollar of sales in the third quarter of 2005, and banks 18 cents, compared with 8.2 cents at oil and natural gas companies. However, these numbers by themselves do not mean much. Unlike pharmaceutical firms and banks which compete against each other and produce competing goods, oil companies do not. There is no clear substitute for oil, and as a result, it is much easier for the oil industry to control the price of crude oil and natural gas. Because of the lack of cheap alternative energy sources, the oil industry has a stranglehold on energy.
It is acceptable for oil companies to make profits, but it is the excessive nature of these profits that are being called into question. One would expect some self-regulation. Keeping oil prices high might result in higher profits, but it does so at an enormous social cost, as the families which are the most affected are the ones that are already struggling. It is true that the American oil industry is not responsible for the currently high prices. Exxon only controls three percent of the world supply, and OPEC controls enough of the world's oil to dictate its own price.
So perhaps it does not make sense to blame the American oil industry for high oil prices. What is inexcusable, however, is the amount of subsidies that the oil industry receives from the federal government.
While Exxon's overall profits rose by more than 40 percent in 2005, its tax bill only rose by 14 percent. This is incomprehensible, especially in light of the massive cuts in social programs that the current administration is seeking in order to balance the budget. Why not review the current tax code rather than cut student loans, Medicare and welfare?
It is true that last fall the Republican-controlled senate did vote to impose a one-year tax increase of $5 billion on the largest American oil companies as part of its plan to cut taxes by $60 billion over the next five years. However, the measure is unlikely to survive for two reasons. President Bush has already threatened to veto the tax bill if it includes the tax on oil companies, and House Republicans have refused to include a comparable measure in their own tax bill.
This refusal to tax oil companies is similar to giving them subsidies. If oil companies are allowed to profit from inflated gas prices, then the government is justified in profiting from their good fortunes. This is why it is ridiculous that the oil industry successfully lobbied both houses of Congress to insert more than two billion dollars of tax breaks in the energy bill that Congress passed last November.
In addition, it could be argued that the oil industry does not pay for any of the negative externalities which it generates. This is another form of subsidizing. The government should not have to bear the full cost of health complications related to oil pollution.
The three largest integrated America oil companies made more than $63 billion in 2005. It is quite evident that they do not need any subsidies from the federal government, whether it is in the form of tax cuts, direct subsidies, or shirking the costs of pollution. These subsidies must end. It is unethical for the oil companies to continue lobbying for these benefits when millions of people in the United States are struggling economically and depend on social programs which face inevitable cuts due to our massive budget deficit. Before we cut these programs we should cut our subsidies to the oil industry.
