< The Spoils of Oil


Friday, March 03, 2006

BOB GARFIELD: 2005 was a good year for the American oil industry, and that's putting it lightly. Exxon Mobil, the country's biggest oil company, announced year-end profits of 36.1 billion dollars. That's 31 percent more than the previous year's record take, and it set the record for the most money earned in a year by an American company ever. Chevron was second, with a piddling 14.5 billion dollars for the year. How they're spending their earnings is a somewhat contentious subject, but we do know that some of it is being funneled back into a major PR campaign designed to play down the size of the profits and play up the industry's goodwill. [COMMERCIAL CLIP] [MUSIC UP AND UNDER]

NARRATOR: While America's oil and natural gas industry earns less than many others, we've reinvested more than one trillion dollars since 1992, part of an ongoing commitment, using advanced technology to find new sources of energy and [AUDIO TRAILS OFF]

BOB GARFIELD: The basic message of the ads is this. If you consider the profits as a percentage of the company's sales figures rather than as a lump sum, you'll see that the oil industry is actually far less profitable than many other industries, like banking or real estate. It's a message partly aimed at federal lawmakers currently debating the creation of a new windfall profits tax. Red Cavaney is the President of the American Petroleum Institute, the group behind the ad campaign. He says such huge profits simply reflect the huge scale of an industry that has to be huge in order to compete with the state-run oil companies of foreign governments.

RED CAVANEY: We control, as publicly-held companies, only about 6 percent of the world reserves, and the national oil companies belonging to foreign governments control 77 percent. And so, our companies have to be huge in scale in order to try and compete on somewhat of a level playing field. So our return, if you looked at the earnings per dollar of sales, have pretty much over the last five, ten, fifteen, twenty years been right about at the all-industry average.

BOB GARFIELD: Tell me what exactly you and your members are doing to get the message out.

RED CAVANEY: Well, it's multifaceted. What we're trying to do is to create opportunities where we can have discussion with opinion leaders, where we can have discussions with the media, where we can have discussions in community forums and the like to try and explain to people what the industry's all about and the risks that are inherent in trying to go to some of the most difficult places on the face of the earth and explore and produce oil and natural gas. We're doing it in advertising in newspapers, on some television. We do a lot of work with editorial boards.

BOB GARFIELD: Now, the campaign has been going on in the wake of these just eye-popping profit numbers coming out. Is that what it's all about, trying to fend off a new version of the windfall profits tax before that kind of initiative can get any steam going in Congress?

RED CAVANEY: No, it's not. First of all, the advertising and getting the word out on the industry began on a huge scale immediately following the two hurricanes, specifically, initially Hurricane Katrina in early September. There had also been more modest scales of that before that period of time. Obviously, every quarter companies report their earnings. So within a month of when we began our first full-scale effort here - yes, earnings reports started to come out, but this program was underway long before that, and the advertising component was related specifically to the immediate post-Katrina period and then continued from there.

BOB GARFIELD: Well, this has been going on now for some months, the campaign has, and I'm curious how you're regarding its success. Do you believe that the understanding of the dynamics of the oil industry is greater now? Have the editorials been less strident, say, in the last few months than they had been in the preceding few?

RED CAVANEY: Well, I think what I can certainly say is that a number of editorial boards better understand the industry and what makes it work and what kind of policies are beneficial to trying to create a better environment. There's no question about that. In some cases, you see editorials that reflect some of the things that we've had to say, but whether those would have occurred or not, it's hard to connect the dots.

BOB GARFIELD: Let me share the experience of one consumer - me. When I juxtaposed the profits that Exxon Mobil reported with what's going on at, you know, my local gas pump, my reaction was to kind of take one of your newspaper ads and roll it up in a ball and throw it across the room and say, "hey, you want to impress me? Charge less." The profits would still be substantial, but the consumer wouldn't get the sense of being gouged. Am I missing something?

RED CAVANEY: Yes, you are. What's important to understand is that 60 percent of the price of most of the fuels - gasoline - is a result of the price of crude oil which is sold on the world market. And most crude oil is not produced in the United States, so our companies can't determine what that price is. So 60 percent of it is attributable to crude oil. Another 20 percent, on average, is attributable to federal and state taxes. And only 20 percent of that is attributable to the exploration, the production, the distribution, the refining, the blending and the actual retailing of gasoline. So the price is not something that the oil companies have huge latitude over, which is why our earnings per dollar of sales are relatively small, compared to what they're characterized as.

TYSON SLOCUM: First of all, it's probably the first time in corporate history that an industry is trying to tell the American people that you can make more [LAUGHS] money investing in other industries.

BOB GARFIELD: That last voice was Tyson Slocum of the consumer advocacy group Public Citizen. He says that Red Cavaney and the rest of the oil industry are trying to pull a fast one on the America public.

TYSON SLOCUM: It's disingenuous for them to claim that their record profits are actually far lower than other industries, because the methodology that they're using to calculate profits, when they're doing this PR campaign, is a much different methodology than the one that they use to calculate profitability when they're talking to Wall Street and they're talking to their shareholders.

BOB GARFIELD: What are they saying to Wall Street? What different metric are they using to impress that crowd?

TYSON SLOCUM: Well, when they're talking to the general public, they are taking their income and measuring it as a share of sales. But to shareholders, they don't talk about profits as a share of revenues. In fact, they say directly in their annual report, they say Exxon Mobil believes that return on average capital employed is the most relevant metric for measuring financial performance in a capital-intensive industry such as petroleum. So what return on average capital employed is measuring is what is the profit margin, what is the rate of return on our capital investment in our operations. And there we have a much different number. In 2005, they had 30 percent profit margin, when you compared net income to average capital employed. And that's for their global operations. Exxon Mobil's profit margin for their U.S. operations, when measuring profits as a share of capital investment, was 46 percent rate of return on their U.S. oil production activities and a 59 percent profit margin on their US oil refining operations. Those are clearly windfall profit figures.

BOB GARFIELD: In the oil industry's PR offensive, there have been basically three prongs. One is the argument that our profit margins aren't that high to begin with. The second is that we're all in this together and we must conserve, and to the extent that we can conserve on energy consumption, it will put less price pressure due to supply and demand. And the third is that these windfalls will give the oil companies the cash they need to find new sources of oil, both here and abroad. What do you make of the argument that this cash is all going to be siphoned into R&D?

TYSON SLOCUM: I don't see that these record profits are being poured back into research and development. I mean, first of all, profits are after investments are made into research and development. Profits are going to payments to shareholders in the form of dividends and bigger bonuses to top executives. And also, we've got to remember that the President himself said in his most recent State of the Union Address that America is addicted to oil. So why should Americans be paying record high prices for energy products only to see the oil industry only invest in feeding our addiction?

BOB GARFIELD: Now, when Exxon Mobil came out with its gatrillion-dollar profit report, there was some spike in interest in the press. But the story has, as far as I can tell, pretty much petered out. To what to you attribute that?

TYSON SLOCUM: The PR campaign has definitely helped. The fact that the oil industry's, you know, 55 million dollars in campaign contributions to members of Congress and the White House since 2001 has purchased the industry a certain amount of immunity. I mean, we can remember that when the five oil executives were finally brought before Congress back in November to defend their record profits, the Congress did not force them to testify under oath. That is just one small example of the kind of special treatment that the industry gets. And so if Congress isn't making a whole lot of noise about having to hold the oil companies accountable, then the media isn't going to be generating a lot of stories on the subject.

BOB GARFIELD: Okay, Tyson. Well, thank you very much.

TYSON SLOCUM: It was my pleasure, Bob.

BOB GARFIELD: Tyson Slocum is the director of the energy program at the Washington consumer advocacy group, Public Citizen. [MUSIC UP AND UNDER]

BROOKE GLADSTONE: Up next, why there's so much mud wrestling in the White House briefing room, and 20 years of amusing ourselves to death.

BOB GARFIELD: This is On the Media from NPR. [MUSIC UP AND UNDER]