Big Oil Must Reverse Course and Work With the US Government
Everyone’s very familiar with how BP, Transocean and Halliburton have all acted so irresponsibly in the recent disastrous oil spill in the Gulf of Mexico. But I’m not sure that everyone is as familiar with many of the financial specifics of just what was going on with Big Oil during the Bush/Cheney years (2001-2008).
Globally, in Fortune’s ranking of the world’s largest companies, the top six earners in 2008 were all oil companies:
1. Exxon Mobil (US)…….$45.2 bil
2. Gazprom (Russia)……$29.9 bil
3. Royal Dutch Shell…….$26.3 bil
4. Chevron (US)………….$23.9 bil
5. BP (UK)………………….$21.2 bil
6. Petrobras (Brazil)…….$18.9 bil
And then, US-owned ConocoPhillips registered core 2008 earnings, exclusive of one-time asset write-downs, of $16.5 bil, which would have placed them 10th on the above list.
So just who were the companies ranked 7th through 9th? Would you believe Microsoft ($17.7 bil), GE ($17.4 bil) and foreign-owned Nestle ($16.9 bil)? This just reveals the extent to which Big Oil dominated the world economically by the end of the Bush/Cheney presidency.
How has this changed from 2000, before the Bush/Cheney years? Well, dramatically.
In Fortune’s 2000 ranking for US largest companies in 1999, Exxon Mobil had $7.9 bil of earnings (ranked just 4th only in the US) and Chevron $2.1 bil of earnings (ranked just 48th in only the US). Neither Conoco nor Phillips Petroleum was in the top 100.
On the other hand, in this Fortune 2000 ranking, GE (ranked 1st just in the US) had earnings of $10.7 bil in 1999 and Microsoft had earnings of $7.8 bil.
Thus during predominately the Bush/Cheney years, GE’s annual earnings increased 63% ($17.4 bil in 2008 over $10.7 bil in 1999) and Microsoft’s earnings increased 127%. But get ready for this….BP’s earnings increased by 324% ($21.2 bil in 2008 over $5.0 bil in 1999), Exxon Mobil’s earnings increased by 472% ($45.2 bil in 2008 over $7.9 bil in 1999), Chevron’s earnings increased by 1,038% ($23.9 bil in 2008 over $2.1 bil in 1999), and ConocoPhillips comparable earnings increased by 1,120% ($16.5 bil core earnings in 2008 over $1.35 bil combined Conoco and Phillips Petroleum earnings in 1999).
The 2000s were the Lost Decade to the US, to domestic businesses, and to the middle class…..but clearly not the Lost Decade to Big Oil, which flourished while the US economy collapsed during the 2000s decade. This is the Presidential legacy of ex-oil men Bush and his Houston Halliburton sidekick Cheney. And the Obama Administration is now left with cleaning up this massive devastating oil gushing mess, along with the financial markets mess, the housing mess, and the worst mess of all….the disastrous and continuing long-term financial aftershocks on the US deficit and on US unemployment of the widespread multinational corps’ offshoring of US jobs to low wage and low tax havens.
There are five global oil companies that dominate US oil. Here are the Worldwide Revenues, US Revenues and US Revenue Mix of these five companies in 2008:
………………………………2008 Revenues
…………………………Worldwide…….US…….US Mix
Exxon Mobil (US)…….$460 bil…..$138 bil…..30%
Royal Dutch Shell…….$458 bil…..$101 bil…..22%
BP (UK)………………….$361 bil…..$123 bil…..34%
Chevron (US)………….$306 bil…..$134 bil…..44%
ConocoPhillips (US)….$241 bil…..$166 bil…..69%
Royal Dutch Shell doesn’t disclose its US profits, but the other four had 2008 US Pretax Profits Mix, which were dramatically lower than their respective US Revenue mix, as follows:
Exxon Mobil………..12% US Profit Mix……….30% US Revenue Mix
BP…………………….26% US Profit Mix……….34% US Revenue Mix
Chevron…………….25% US Profit Mix……….44% US Revenue Mix
ConocoPhillips…….46% US Profit Mix……….69% US Revenue Mix
And then the momentum of this trend carried over, and even significantly widened, in the first Obama presidential year of 2009, as follows:
Exxon Mobil………. 7% US Profit Mix……….30% US Revenue Mix
BP……………………12% US Profit Mix……….35% US Revenue Mix
Chevron……………. 7% US Profit Mix……….43% US Revenue Mix
ConcocoPhillips…..24% US Profit Mix……….65% US Revenue Mix
Whoa, what’s going on here with the paltry US Pretax Income Mix? This makes no economic sense.
It’s bad enough for Big Oil to economically flourish in the 2000s, with windfall earnings generated on the backs of US domestic businesses and US individuals, who both paid sky-high gas prices at the pump. But for Big Oil to pile on by being able to also have an unusually high profit mix shifted to outside of the US, and thus not taxed in the US….that’s being clever by half and certainly not fair to either the US, with its massive federal deficit, to US businesses, which suffered severely from very high energy costs, and to individuals, who lost jobs, whose wages were cut substantially in real terms, and who were forced to pay a much higher percentage of their take-home pay in gas prices.
Anyway, the link at the end of this posting shows a proposal for levying a one-time, pretty healthy, fair US windfall profits tax on Big Oil related to the 2000s Lost Decade and to use it to finance desperately needed real, very healthy US private sector job creation and also to finance US technological innovations, through a permanent robust business research tax credit, with a clearly green emphasis. Also, this Big Oil income tax proposal, for 2010 going forward, includes an additional US income tax each year for situations where a Big Oil company has a US Pretax Income Percentage Mix that is unreasonably low in comparison with its US Revenue Percentage Mix. Further, this income tax proposal on Big Oil also includes the closing of US tax loopholes that Big Oil has derived massive economic benefits from.
And for Big Oil, with the US FASB’s blessing, to dramatically overstate the taxes it is now paying by very prominently asserting in its annual report income statement as well as in its tax footnote that the taxes it collects from customers are taxes that it pays, when all Big Oil is doing is turning over these taxes paid by the customer to the government…..what incredible deception!
In the 2000s Lost Decade, Big Oil, while it was getting filthy RICH, played a major role in putting the US, its domestic businesses, and its individuals in a very deep DITCH, and thus it is only fair that Big Oil now PITCH in big time and help the US get out of its deep economic crater.
Now let me focus a little more on the very powerful Exxon Mobil, which dominates both US Big Oil and the US Congress.
For the last four years of the Clinton Administration combined (1997-2000), Exxon Mobil’s earnings totaled $44 bil, whereas for the last four years of the Bush-Cheney Administration combined (2005-2008), its earnings totaled $161 bil, an increase of $117 bil. And Exxon Mobil’s earnings for 2008 of $45 bil, were more than 4 times as large as the $11 bil average annual earnings for the last four years of the Clinton Administration. I call that a windfall profit increase, particularly since the US economy was weak during much of the Bush-Cheney years, but US Big Oil was still able to generate those kinds of massive earnings.
During the last four Clinton years combined, Exxon Mobil’s cash earnings (cash flow from operations) totaled $76 bil, as compared with its cash earnings of $209 bil for the last four Bush-Cheney years combined, an increase of $133 bil. I call that a windfall cash earnings increase.
And just what did Exxon Mobil decide to do with its massive cash earnings? Its cash flow statements tell the story here.
In the last four Clinton years, Exxon Mobil positively spent 58% of its cash earnings on investment-type capital expenditures, and only 13% of its cash earnings in buying back its own common stock. But in the last four Bush-Cheney years, there has been a complete reversal in spending, with Exxon Mobil allocating a paltry 31% of its cash earnings to investment-type capital expenditures, but a whopping 55% to buying back its own common stock ($115 bil).
A corporation buys back its own stock to increase its reported Earnings Per Share (EPS) by spreading its earnings over fewer shares outstanding. To illustrate this point, Exxon Mobil’s earnings increased 11% in 2008, but its EPS increased by a much higher 19% in the same year. This higher EPS and EPS growth favorably impact the stock price of Exxon Mobil, whose share price was down only 4% in the financially depressed Bush-Cheney years, whereas the S&P 500 Stock Index was down nearly 10 times as much over the same period.
I call Exxon Mobil’s financial actions, described in the two previous paragraphs, in essence a huge wealth transfer of cash flow from its customers, both individuals and businesses, in substantially increased gas prices at the pump, to the pockets of Exxon Mobil’s stockholders through stock buybacks….a bit of “Robin Hood in Reverse”. And at the same time, Exxon Mobil decided to spend frugally on capital expenditures desperately needed to help solve the energy crisis.
Now let me spend some time on Big Oil tax loopholes.
My understanding is that the Obama Administration would like to eliminate LIFO (last-in, first-out) inventory for tax purposes for Big Oil and for the Big Oil related industries. Companies experiencing increasing prices of their inventories over the years have been the major beneficiaries of LIFO. Thus, with the dramatic increase in oil prices, US Big Oil has been a huge winner with LIFO. But LIFO is an unrealistic financial boondoggle and has resulted in US Big Oil companies having their inventory costed on their balance sheets at prices of decades ago. And then on the flipside of the coin, this LIFO approach results in US Big Oil receiving substantial Cost of Goods Sold tax deductions based on the most recent, usually very steep oil prices prevailing when the goods are sold.
Just how large is this LIFO inventory tax loophole for Oil companies? Well, Exxon Mobil stated its Oil Inventories on its 2009 year-end balance sheet at $8.7 bil. If instead, these Oil Inventories were stated at the more realistic current cost, the amount reported would have been $25.8 bil…yeah, that’s triple the amount actually recorded. And the US FASB, unlike most of the rest of the world, even permits this. Also, the IRS LIFO conformity rule permits US companies to use LIFO for tax purposes only if they also use it for financial statement purposes….what an absolute mess.
And then a second tax loophole that US Big Oil has benefited from over the years is Percentage Depletion on the amounts spent on natural resources, such as oil under the ground. In a non-lose financial situation, each year the oil company computes depletion under both the cost method, similar to how units-of-production depreciation is computed, and also under the percentage method, based on a percentage of gross income from the property. Then the oil company is able to deduct each year the higher of the two numbers. End result, over the life of the natural resource, the total tax depletion deduction can and has far exceeded the total cost of the natural resource. That’s incredible…..they are able to deduct much more than they have actually spent.
Intangible drilling costs (Ouch! that reminds me of BP and Transocean) are the exploration and development costs related to oil wells. A third tax loophole for US Big Oil is that all of these costs can be immediately deducted, instead of more realistically being written off over the useful life of the property.
Thus by closing oil company tax loopholes, like these three, Big Oil is not being penalized. Instead, all that is happening is that a financial boondoggle is being eliminated that shouldn’t have been there in the first place.
Further, I don’t think Big Oil has any business being eligible for the very lucrative Domestic Production Activity Deduction for federal income tax purposes. With its severely high energy costs placed on other domestic businesses, Big Oil was able to reduce its US income taxes by maximizing its own Domestic Production Activity Deduction. At the same time, such Big Oil high energy pricing action reduced the tax benefit other domestic businesses received from the Domestic Production Activity Deduction.
Concluding, the US government and its citizens are now in desperate financial straits. I think it is now absolutely essential for the excessively greedy Big Oil and its extremely obstinate Congressional supporters to reverse their destructive obstructionist course and to work with the Obama Administration to do what they can to get the US and its citizenry out of this just horrible economic morass. The country is clearly shouting out for this cooperation.
