Until recently, attacks on oil-company profits were standard fare among anti-fossil-fuel activists. Back in 2013 the Center for American Progress' Daniel Weiss complained: "Big Oil is swimming in an endless river of profits." Such sentiment was behind a House Democrat proposal to create a Reasonable Profits Board to tax "excess" profits at up to 100%.
House Democratic leader Nancy Pelosi, too, has fussed about how "profits for the biggest oil companies were at record-breaking levels in the last few years."
It was the same song, different verse several years before. "Big Oil is once again riding high oil prices to large profits," began a 2010 story in Grist magazine. "Are You Kidding Me?," screamed a Huffington Post headline with the clincher: Exxon Mobil "pulling in $104 million. Per day."
But if higher quarter-over-quarter, or year-over-year, profits, were cause for such disapproval, why isn't the Left celebrating the recent earnings declines among energy companies? Major oil firms from Exxon Mobil to ConocoPhillips to Chevron all reported significant earnings declines in 2014 due to supply-side technology breakthroughs responsible for falling oil and gas prices.
Specifically, Exxon's net income fell by $1.78 billion in 2014. ConocoPhillips posted a $39 million loss in the fourth quarter of 2014 -- its first such deficit since 2008. The oil division of Europe's largest energy firm, Royal Dutch Shell, made next to no money in the final quarter of last year.
Chevron Corp. has seen its stock plummet 25% from a high of $135 last July to just over $100 this month. The California-based company also announced that it would sell $15 billion in assets to make up for lost cash.
No Tears
Among most Americans, no tears will be shed over these disappointing earnings reports -- nor should they be. Paying less to heat homes and fill gas tanks is a good thing. That's how economic freedom works: consumers determine prices and production and, consequently, the performance of firms. Short of special government favor (crony capitalism, as in ethanol, wind, and solar), the free market is hard on firms but easy on consumers.
Profits are down because prices are down; lower prices reflect a spectacular increase in oil and gas supply, thanks to new technology.
The United States is now producing 9.3 million barrels of crude oil per day -- levels not seen since 1978. (This has occurred despite the best efforts of the Obama Administration to reduce production on federal lands.) Oil prices have fallen from last year's peak of more than $100 a barrel to around $50 a barrel today.
Increased natural-gas production has dramatically reduced prices. According to the Energy Information Agency, the United States produced 21.6 trillion cubic feet of natural gas in 2009. Last year, that number shot up to 27.3 trillion cubic feet, a 26% rise. Wellhead prices that averaged $4.66/MMBtu in 2009 are currently under $3.00/MMBtu despite the hard winter in most of the country.
No Cheers?
But if high, growing oil-industry profits are some sort of atrocity, as green activists tirelessly preach, shouldn't environmentalists be popping some organic bubbly?
Instead, there is deafening silence except to say that very large companies still make a large profit over the course of any year. That says little. Major integrated oil and gas companies have a return on equity and net profit margin of around 12% and 5%, respectively, well in the middle of the range of U.S. industries.
In the third quarter of 2014, for every dollar of sales, the oil and gas industry earned 8.9 cents versus the manufacturing sector's 9.5 cents as a whole. Pharmaceutical companies and technology firms, in contrast, registered profit margins of around 21 cents per dollar. And oil and gas companies might well sink further in 2015.
The silence of the activist community is evidence that their anti-profit fixation was (and is) little more than a rhetorical gambit. The recent earnings plunge demonstrates how little control oil firms have over their own bottom lines. This crucial fact is part of the intellectual debate that the sound-bite, hit-and-run critics don't want to acknowledge.
Profit hypocrisy is code for an animus for the oil and gas industry itself. Yet the fossil-fuel industry generates millions of jobs and hundreds of billions of dollars annually in wages and economic activity -- and without consumer or taxpayer sacrifice. The same can't be said of the government-dependent renewable-energy industry, which continues to receive disproportionately large, and ever-increasing, public subsidies. Might the environmentalists report on the profitability of these companies and tie it to the public trough?
The fossil-fuel industry is the third largest in the United States, and gas and oil companies rank as the second-, third- and fourth-largest companies in the Fortune 500. Middle America is well staked in oil and gas too. Nearly half of all traditional energy stocks are held in retirement accounts. Another 21% are held in mutual funds, with their broad bases of ownership. There is no reason to complain about one half of the price cycle.
Conclusion
Oil-industry earnings might have made for good rhetoric back when profits were larger. But they were never a legitimate target for environmentalist outrage. The fact that green activists have quietly abandoned their anti-profit rallying cry is proof that they knew this all along. If this were not true, the Greens would opine favorably about Big Oil in this phase of the price/profit cycle.
Still, don't hold your breath. If quarter-over-quarter, year-over-year profits resume in 2016 or beyond, the same tired complaints will emerge. Environmentalists, alas, can recycle too much.
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Robert L. Bradley Jr. is the founder and CEO of the Institute for Energy Research and author, most recently, of Edison to Enron: Energy Markets and Political Strategies. He blogs at MasterResource.
