Oil Industry Profits and Windfall Taxes

Tabloid headlines are obsessed with the notion that big oil equals big profits. Type “Shell” into online media search engines and up pop the following examples: “Shell’s ‘obscene’ £13.9billion profit is biggest ever by British company” (Daily Mail); “Shell records almost £8bn profits” (The Independent), “Shell announces £2m an hour profits” (The Guardian).
This creates an atmosphere of distrust, where politicians can demand a windfall tax on these big bad oil and gas companies. Senator Obama has made it part of his election platform. And last month at least 80 British MPs signed a petition for a one-off tax on energy company profits. This is great winning territory for the left: tax the oil fat-cats, to provide “relief to low-income folks”, as Barrack himself so eloquently put it.
But headline profit figures mean nothing unless related to the scale of industry. Even those who realise the importance of the large earnings of the oil industry seem unwilling to admit this, refusing to abandon the tired image of the oil oligarchy and its “gazillion-dollar profits”. “Hurrah”, wrote Carl Mortished in The Times in April, “Without the inflated earnings of multinationals, we’d be even worse off than we are now!”.
But Mortished undermines his own call to celebrate oil, relying as his does upon the age-old vocabulary of distain for its “grotesquely inflated earnings “. Because actually — and here’s the real irony — oil company profits are not “grotesquely inflated” at all.
Sure, big oil earns big. But as a ratio of profit to sales revenue, oil and natural gas are actually bang in the middle of a table of major industries — 6.8 cents per dollar of sales according to figures from the 2nd quarter of 2008, compared to a trans-industry average of 7.[1] The highest-profit industries were pharmaceuticals and medicines (at 26.3%, nearly 4 times the average industry earnings for oil and gas), chemicals and electrical equipment, appliances and components. The lowest-profit industries were paper (at 2.1%), and motor vehicles and parts (at -18.6%).
Oil companies invest massive sums in exploration, extraction and infrastructure. And these days we also expect them to invest in research and development, and in new technologies.
They are also heavily taxed — between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax earnings by more than $19 billion — and thus fund our pensions and our health services. Their dividends support our pension funds, and they provide employment on a large scale. In the current climate of economic turmoil, they provide job stability.
So shouldn’t we be more grateful to these industries; isn’t their gain, our gain?
It is about time for us to support, not undermine, our oil and gas industries. Not only are their company profits rather more modest than would at first appear, but they also boost growth and prosperity. What’s more, in an age of energy insecurity, we should not be discouraging oil companies from offering us dependable energy. This is the most important thing to remember. Because unless we wish to be increasingly beholden to the Middle-East for our energy, we need to start supporting, rather than subverting the oil industry.
[1] Figures based on U.S. company filings with the federal government as reported by the U.S. Census Bureau and Oil Daily.

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