Big Oil, Big Profits, Big Green Lies
As prices at the pump spiked over recent months I received a networked e-mail urging me to sign up to a UK “war on Big Oil”. The green activist clearly had a genuine concern for his fellow man. But he was no economics or business major. In truth, he was just a victim of Big Green leftist rhetoric.
This should have been brought home when Chancellor George Osborne imposed yet another fuel duty rise in his March 2012 Budget. Osborne badly underestimated the backlash from a nation already paying the world’s third highest prices at the petrol pump. With road hauliers threatening to bring the country to its knees the focus of anger in the UK, currently at least, is squarely on the real villain in the oil profits ‘war’ – and it’s not Big Oil; a situation underscored by a recent U.S. report into “excessive” oil profits.
In the States, President Obama is already in election campaigning mode. Playing to an audience of U.S. drivers shocked at paying $4 per gallon for the first time ever, Obama told Congress it would be justified in ending $4 billion in annual oil and natural gas tax credits shifting the “savings” made to clean-energy research. In true leftist anti-capitalist double-whammy tradition, house democrats chipped in to propose a ‘Reasonable Profits Board’ – a windfall tax by another name – to regulate oil and gas profits. Good thinking, Team Barack. Here then is the proposed energy policy. Let’s make life harder for the companies extracting fuels long proven to efficiently do the job of running a modern society and give that ‘help’ to speculative research that, as the failing renewables revolution is showing, could barely generate enough to keep the lights on at the White House.
But while banging the well-beaten anti-Big Oil drum chimes with the populist green theories of the Left, it only further obfuscates the stark economic reality that it is government, not Big Oil, pulling the energy policy strings that spike prices at the pump. A short article cannot possibly hope to adequately sum up the economic case, but let’s have a stab at it.
The global price of crude oil – the critical factor that many things collude to affect – translates directly into higher gasoline prices at the pump. We all know this. But, contrary to popular belief, the major oil companies have little control over the price, high or low. Nobody complains about low prices and low profits, the economic knock-on effect of high oil profits. But high oil profits, which mean new exploration, cheaper domestic shale production, not to mention the economic ripple effect (often forgotten) of high profits on pensions, stocks etc, almost always means the proverbial hits the media fan every time there’s even a whiff of large oil profits in the air. But honing in with venom on Big Oil or Big Gas, a much-beloved pastime of politicians, simply helps skew Joe Public’s opinion as to how the economics and the markets work.
A telling table correlating crude oil prices and the combined first quarter profits of the five oil majors 2009-2011 ought to be instructive.
The fact is that energy industry profit margins are cyclical. According to Robert Bradley Jr., CEO for the Institute for Energy Research, between 2006 and 2010, the largest oil companies averaged a profit margin of around 6.5 percent. As Bradley states, “This pales in comparison to profit margins in just about every other industry” the “pharmaceutical industry, for example, routinely averages a profit margin of about 16 percent. The soft drinks market is even more lucrative.” In short, oil companies in the States make around 7 cents per gallon, while the U.S. Government “extracts more than 48 cents, on average, per gallon…nearly seven times more out of the drivers’ wallets via taxation than Big Oil” (italics added). As an Investors Business Daily editorial reported, in the second half of 2011 the “U.S. oil industry earned around 6.7 cents per dollar of revenue, less than the average for all manufacturing of 9.2 cents”.
Put another way, oil company profits in the U.S. turn out to be fairly pedantic when viewed on a broader canvas. Indeed, it is U.S. government anti-fossil fuel policies that are the hugely influential factor when it comes to driving up the cost of crude; not least by putting every conceivable obstacle in the way of deepwater offshore, shale oil and gas drilling and, more long-term, the importation of cheaper Canadian oil via Keystone. And we can add to that the impact from a raft of green taxes and anti-carbon emission regulations that actually are actually having a zero impact on global CO2 emissions, thanks to the industrialization of the Asian giants, India, Brazil etc.
In the UK, the hand of government is equally blatant. A BBC report in October 2011 showed that the cost of oil represented just over 45p of the price of a litre of petrol costing then lb1.34p (about 10p less than today). The report found that the UK Government takes just under two-thirds of the cost at the pump with 58p of every litre being fuel duty and a further 23p is paid to the government on both petrol and diesel in the form of VAT (Value Added Tax). In short, over 80p out of every pound spent at the pump finds its way into government coffers.
The BBC report went on to cite a report by energy industry consultants Wood MacKenzie that showed how “a good chunk of government revenue comes from taxing the profits of oil companies’. Bottom line: when oil company profits rise, so does the massive government tax rake off. As the online watchdog agency CarTaxBand.org concludes from the BBC and Wood MacKenzie studies, “Whilst the oil price may have something to do with the price you pay at the pump, fuel duty, VAT and other taxes on oil company profits are the main drivers of the cost of fuel in the UK”.
When it comes to understanding how the energy markets work, focusing on times of larger profits may light a fire under the anti-capitalist left and green activists. But that should not sway Joe Public to go to war against their imaginary pantomime villain. The sheer fact of the matter is that the real Mr Big behind the oil profiteering racket is Big Government, not Big Oil. But it’s just not in the interest of the anti-capitalist Big Green to target high-taxing, good-cause, Big Government oil profiteers; that’s the goose able to lay their leftist social engineering ‘eggs’.