It’s the Profits Stupid! Exxon's Rising Take from America: Will the Proposed Gas Tax Holiday Really Help?
by Nomi Prins
- USA -
How sad. Exxon Mobil, the universe’s largest publicly traded company, which also happens to be enjoying some of its biggest profits ever thanks to the almost doubled price of oil during the past year, didn’t quite live up to Wall Street expectations this week. In fact, its stock fell nearly 4% the day it announced its first quarter of 2008 earnings.
Unfortunately, this does not make the pain at the pump pulsing through the nation any more bearable. Apparently, Exxon could have made more profit, had it not chosen to hold back further gas price hikes. Instead, earnings in its refining business (which converts crude oil to gallons of useable gas) weren’t as strong as it had wanted. Yes, that’s right – Exxon would have made even more money had they passed more pain onto the public. They were just being “nice.” Right.
No, that Exxon didn’t quite live up to Wall Street expectations is just pre-election spin, ensuring that whichever candidate gets into the Oval Office doesn’t try to take some of their profits away by taxing them. (Not that they’d have to worry if John McCain wins the election.)
Exxon posted an almost $11 billion profit for the first quarter of 2008 on a staggering $117 billion in total revenue, which was up from $87.2 billion in revenue last year (or, more than a third of the projected 2008 $311 billion US deficit.) Part of Exxon’s windfall still came from higher gas prices, which on average, rose about 30% over the year, as oil prices rose from $60 to $100 at the end of the last quarter it reported.
Plus, Exxon’s earnings were up 17% versus the same quarter last year, pulling in the second-highest quarterly earnings in US history for any corporation. To put it in perspective, Exxon’s last earnings for all of 2007 were a record $40.6 billion, which puts them in the running, if oil prices stay where they are, to come in at about 10% above that for 2008.
So, is Exxon joining the “go-green, don’t be dependent on foreign oil” mantras popular in this election cycle? Are they spending some of that hard-earned cash on alternative energy sources? Not so much. Instead it was busy investing in itself, buying back $31.8 billion of its own stock out of that $40.6 billion profit, compared with just $3.3 billion in US capital investment. Says Tyson Slocum, Energy Director at Public Citizen, “This discrepancy certainly shows that motorists aren’t getting any bank for their buck out of it.”
And Exxon wasn’t the only one struggling to beat their previous record profits. Oil companies around the world were feeling the love from record crude oil prices. Firms like BP and Royal Dutch Shell Plc, despite flat production over the quarter, posted stellar, even better than expected first quarter earnings, up 64% and 25% in profit respectively. ConocoPhillips’ first-quarter earnings increased 17% to $4.1 billion.
On Friday, Chevron added to the oil company euphoria, posting a net income rise of 37% for the first quarter of 2008, and revenues of $65 billion, up from $33 billion, though also citing more limited refining profits (the ‘downstream’ part of their business – upstream is oil production). Like Exxon, Chevron also chose to use its profits to buy its own stock – underscoring that the best investment for oil companies is – oil companies. The firm bought back $2 billion of its own stock during the first quarter.
Presidential hopeful Hillary Clinton appropriately commented, “There is something seriously wrong with our economy when Exxon's record $11 billion in quarterly profits are seen as a disappointment by Wall Street. But on Main Street, middle-class families are facing devastating choices every day between buying groceries and filling up their gas tanks to get to work.”Unfortunately, Clinton’s understanding didn’t translate into a fully useful policy suggestion. Both Clinton and John McCain suggested helping American drivers with a “gas-tax holiday,” in which the gas price at the pump would be temporarily exempt from certain federal taxes, providing consumers with an 18.4 cent-a-gallon price break. Clinton would make up for the money the federal budget would lose by not collecting that gas tax, by taking it from the current tax breaks oil companies already enjoy. McCain didn’t really elaborate on what he’d cut money from to compensate, but suggested the tax holiday would allow families to pay for school costs – an odd attempt at cause and effect logic (which would work only if school costs were a fraction of what they really are).
The gas-tax holiday proposal would only work if gas companies were not allowed to pocket that 18.4 cent difference by increasing pump prices anyway, to somewhere just below an 18.4 cent rise – which would leave the total price almost the same. Somehow, trusting and gas companies don’t quite fit together. Indeed according to Slocum, “This is pointless pandering. There’s no guarantee prices will actually fall 18.4 cents, plus the Highway Trust Fund that the tax promotes is in need of the money, particularly for mass transit investment (which would be energy-friendly).”
Senator Barack Obama didn’t back the proposed tax holiday, nor did House Speaker Nancy Pelosi, but both Obama and Clinton (in her Economic Blueprint) have proposed a windfall-profits tax before. In Obama’s case, he would impose a tax on each barrel of oil priced over $80, which his camp says would extract three times the $50 billion, 10-year windfall-profits tax that Clinton proposes collecting from oil companies.
Both are a start, but too tame. The reality is that gas companies can and do profit disproportionately from higher oil prices, limiting their need, without any enforced regulation or tax consequences, to either find alternative energy sources or support means to reduce energy dependency.
What’s needed is a major extraction from the pocket books of the oil giants that will steer them toward alternative energy. They must be brought to participate, by limiting their profits, in funding solutions for energy conservation – like more money for mass transit, rebates for motorists to buy super fuel-efficient cars, incentives for families to install solar panels, and other means of reducing oil dependency. Meanwhile, there are many Americans who simply have to drive to work, care for their kids or parents, get food, or get educated. Some must make their living in driving and transport. Others find that rents or homes near their work are unaffordable making a commute necessary. Providing more transportation alternatives with windfall profit money would be both cost and energy effective.
All this must be taken into account when determining practical energy policy, and in order to achieve cost benefits to more Americans now, and in the future.
About the Author
Nomi Prins is a journalist and Senior Fellow at Demos, a non-partisan public policy research and advocacy organization. She is the author of Other People's Money: The Corporate Mugging of America and Jacked: How "Conservatives" are Picking your Pocket (whether you voted for them or not). Other People's Money, a devastating exposé into corporate corruption, political collusion and Wall Street deception was chosen as a Best Book of 2004 by The Economist, Barron's and The Library Journal.
Before becoming a journalist, Nomi worked on Wall Street. She has appeared internationally on BBC World and BBC Radio and nationally in the U.S. on CNN, CNBC, MSNBC, CSPAN, Bloomberg TV and other TV stations. She has been featured on dozens of radio shows across the U.S. including CNN Radio, Marketplace Radio, Air America, NPR, WNYC-AM and regional Pacifica stations. Her articles have appeared in The New York Times, Newsday, Fortune, Mother Jones, The Guardian UK, The Nation.com, The American Prospect, Frank151, The Left Business Observer, LaVanguardia, Against the Current and other publications.