Update: ExxonMobil posted its second-quarter 2011 earnings on July 28. Take a look at “ExxonMobil’s earnings, and America’s bottom line” for the latest information and discussion about ExxonMobil’s earnings.
Big numbers make headlines – like our announcement of $10.7 billion in earnings for the first quarter of 2011. What may not make the headlines is the context surrounding that number, so I thought I would share with you what I told reporters following the announcement:
When crude oil prices increase it means higher earnings for oil companies, and more importantly for most Americans – higher gasoline prices. Rising crude and gasoline prices have a very real impact on household budgets across the nation. Gasoline is an essential product, and price rises are felt by families and businesses alike.
Let me start by putting our earnings into context for U.S. motorists.
ExxonMobil’s earnings are from operations in more than 100 countries around the world. During the first quarter, more than three-quarters of our operating earnings came from outside of the United States.
The part of ExxonMobil’s business that refines and sells gasoline, diesel and other products in the United States represents less than 6 percent – or 6 cents on the dollar – of our earnings.
Why so little? Because we actually buy more crude oil to refine into gasoline and diesel in the U.S. than we produce ourselves. And these purchases are made on the open market at the prevailing rates.
During the first three months of this year, for every gallon of gasoline and other products we refined and sold in the United States, we earned about 7 cents. Compare that to the 40 to 60 cents per gallon that went from gasoline consumers to the government (state and federal) in gasoline taxes.
The underlying question people are asking is: Why are oil prices so high at the present time? The answer to this question is important because the price of crude oil accounts for most of the price of gasoline.
There are several factors involved in the rise in oil prices.
First, as a result of the global economy strengthening – particularly in countries like China, India and Brazil – demand for crude oil is on the rise.
Second, political instability in some oil-producing regions is contributing to uncertainty about future oil supplies. Oil markets are well-supplied today, but the issue is this: What will it cost to replace this supply if it is lost in the future? This uncertainty about tomorrow is reflected in prices today.
Finally, another factor behind higher oil prices is unique to the United States. And that’s the weak U.S. dollar. Oil and most other food and industrial commodities are invoiced in dollars. Accordingly, when the dollar goes “down” the price of primary commodities tend to go “up,” and vice versa.
The dollar is at a three-year low against other currencies and is approaching the record low which occurred in 2008, when oil prices were at historically high levels.
The dollar’s decline accelerated last week after a warning by Standard & Poor’s about the country’s $14.3 trillion debt and economic weakness compared to other countries.
So these factors all combine to drive oil prices up.
What is our government doing about it? Unfortunately, they’re reaching for the political playbook rather than seeking real solutions.
We understand that it’s simply too irresistible for many politicians in times of high oil prices and high earnings – they feel they have to demonize our industry.
Predictably last week the Administration established a task force to investigate oil and gas markets, now a time-honored tradition when prices increase.
And we’re seeing a return to the now-familiar misinformation about the oil industry’s taxes.
Over the last week as earnings season has approached, the Democratic Party leadership again talked about removing what they call $4 billion in oil industry subsidies. But what they really mean is that they want to increase our taxes by taking away long-standing deductions for our industry while leaving these same deductions in place for other sectors of the economy. The simple truth is that these are legitimate tax provisions to keep U.S. industry internationally competitive – to keep jobs from being exported to other countries.
Unfortunately, this false discussion about oil industry subsidies also reinforces another falsehood making the rounds: that ExxonMobil doesn’t pay its fair share of income taxes in the United States.
Let me state it unequivocally. Last year, our total taxes and duties to the U.S. government were $9.8 billion, which includes an income tax expense of $1.6 billion. Over the past five years, we incurred a total U.S. tax expense of almost $59 billion, which is $18 billion more than we earned in the United States during the same period.
And during the first quarter of this year, we incurred tax expenses in the United States of more than $3.1 billion on U.S. earnings of $2.6 billion.
So we have seen the predictable political positioning but no action to actually help bring down energy prices. In fact the government has chosen not to help increase supply by refusing to open up the vast energy resources in this country that are off limits to our industry.
We have seen exploration and development in the U.S. Gulf of Mexico – which accounts for 30 percent of all U.S. crude oil production – effectively banned for the past year by the Obama Administration.
In addition, legislation was enacted targeted at restricting the supply of oil from Canada – a country whose oil reserves are second only to Saudi Arabia’s.
Unfortunately, irresistible sound-bite politics rather than sound public policy is dominating the energy agenda in Washington – but there is one reason for optimism about America’s economic and energy security.
That optimism lies in America’s extraordinary natural gas endowment. This resource is providing the United States with an enormous economic advantage as a result of American ingenuity and innovation.
It’s nothing short of revolutionary that our industry has recently unlocked more than a 100 years’ worth of natural gas right here in the United States. And at some of the world’s lowest prices – last month natural gas was selling for 40 percent less in the U.S. than in Europe.
Think of the advantages this is already providing – in the form of power generation and fuel for manufacturing and other industries, not to mention the jobs and taxes natural gas production creates.
But there are concerns that political overreaction to a small number of isolated environmental issues could jeopardize this emerging industry and the benefits it provides.
Government policies did not cause the shale gas revolution in this country – but they could stop it in its tracks.
Policymakers need to look carefully at the facts and avoid a bias against natural gas and fossil fuel development in favor of far more costly energy sources that are already receiving massive subsidies.
In fact, we’ve already spent more on alternative energy subsidies than we did on the Manhattan and Apollo projects combined. And what do we have to show for it? Unreliable and uneconomic energy sources that still can’t compete – even at today’s prices.
On the other hand, natural gas is affordable, available – and doesn’t need taxpayer subsidies.
The technologies and industrial processes involved in developing shale gas are proven – the industry has successfully fracked more than a million wells over the last 60 years. There are thousands of feet of rock between the natural gas deposit where the fracking takes place and the water table.
Risk to water supplies and air quality can be and are being mitigated by using proper well design, operating with care and following industry best practices and procedures that are all subject to regulation and government oversight.
When these technologies are applied properly and the industry remains focused on operational integrity, we can protect our environment and public health and enjoy this unprecedented economic advantage.
Energy policy should enable safe and environmentally responsible development of all of America’s natural resources, which will support economic recovery and improved quality of life.
It’s time for our leaders to stop playing politics with the energy industry and to start working for solutions that will take the pressure off household budgets and enhance our energy security.