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  • Stop Demonizing Oil Profits

    Last week, Members of Congress called big oil executives to the stand to defend the high profits their companies are making. Some in Congress are using high oil profits as a reason to propose eliminating what they label “oil subsidies,” despite the fact that what they call subsidies are broadly available tax breaks. You can get a breakdown in this paper: “What’s an Oil Subsidy?”

    President Obama did the same in his weekly address. Even actor Leonardo DiCaprio is getting into the action, recently tweeting, “Big oil is making huge profits & getting billions in US taxpayer subsidies. End #oilsubsidies.”

    The irony of course is that DiCaprio, a successful beneficiary of our system of free enterprise, ignores its strengths and virtues by demonizing profit. These attacks are misinformed and off-base. Demonizing profits ignores why profits matter and the ways free enterprise benefits all Americans. It also ignores the fact that oil and natural gas industry earnings, against their sales, are in line with other manufacturers and are in fact below the manufacturing average.

    So while it’s easy for some politicians and outraged denizens of Hollywood to blast high profits for oil companies at a time when families are struggling, the reality is that profits are an integral part of our economy, including the oil industry.

    • Profits act as a rainy day fund. All companies have good years and bad years. High profits in one year can cushion the blow in another so a company won’t have to move through bankruptcy or ask for a government bailout. Oil profits vary from year to year with the price of oil. The price of oil is global; it goes up and down based on many factors. In 2008, oil prices were high, and companies made higher profits. The opposite holds true for 2009. According to the Energy Information Administration, “Oil and natural gas production continued to be the most profitable business segment, contributing $42 billion in net income, but this was a decline of 43 percent from 2008. Return on net investment in place (ROI) fell to 7 percent in 2009 from 13 percent in 2008.” Increased demand for oil as countries recover from the global recession is driving the price of oil—and consequently profits—back up. If and when the price falls in the future, firms can use these profits to tide them over.
    • Profits encourage new investment. In Russ Roberts’s book The Invisible Heart, Sam, an economics teacher, pulls out a dollar on the first day of class, sets it on the front desk, and tells the class that the first person who gets to the dollar gets to keep it. It takes a second before a student rushes up to claim the dollar, but when Sam does it again, half the class jumps out of their seats. The simple lesson is that profit opportunities motivate effort. In the energy industry, profits motivate oil companies to take risks and make new investments in newer and more efficient equipment. Companies invest so they can extract oil and gas from the ground in ways that are safer and more cost-effective. Profits reward good investments just as losses punish bad investments (unless they receive a government bailout). Profits also allow businesses to hire more workers and increase wages.
    • Profits help people. The adage “people, not profits” is a ridiculous one. When politicians attack the billions in profits that oil companies make, it’s important to remember who owns these companies and where that money goes: to the American people. According to the American Petroleum Institute, mutual funds and other firms hold almost 30 percent of oil stocks. Pension funds hold 27 percent, individual investors hold 23 percent, 14 percent is held in Individual Retirement Accounts, other institutional investments hold 5 percent, and corporate management holds just 1.5 percent. Increasing the supply of oil not only helps lower prices and produce jobs—it also helps boost stocks, mutual funds, IRAs, and pension funds owned by millions of Americans.

    Profits play a critical role in our economy and reward producers for creating value for consumers. In a new video entitled “The Morality of Profit,” the Atlas Network’s Vice President for International Programs Tom Palmer asks, “Did Bill Gates violate anyone’s rights when he organized Microsoft and brought computer programs to billions of people? No, he offered customers value and free exchange.”

    The same is true for oil. Consumers value oil and will move away from it when a better alternative exists. Politicians who demonize profits are missing the nature and the importance of the profit–loss system.

    Posted in Energy [slideshow_deploy]

    11 Responses to Stop Demonizing Oil Profits

    1. chris says:

      I wish all the hollywood types would offer up their enormous salaries to subsidize all those "green" energy companies. They could put their money where their mouth is. All the hype right now against the big oil companies is a smoke screen for the real problem which is this administration energy policies and all the regulations which are holing our country back from its energy potential.

    2. Anabelle says:

      It's not about the profits. Oil companies make enough of it without subsidies. It's government help to the oil companies that's ridiculous, not profits themselves.

    3. Joe Ruffino, Merrick says:

      DiCaprio, should not make as much money as he does. If Boeing cannot make a better return on their investment and actually pay better dividents to share holders then he should pay higher personal income taxes. Just what does he do with his profits. Does he pay dividents to anyone; how many people does his earning employ, especially compared to Boeing's The average American should boycott his movies, talented though he is, until such time as he drops his amature play in politics and grows up real world wise.

    4. Bob Fender, Miss. says:

      Politicians are either economic morons or dishonest, self-serving power seekers who know their constituents are economic morons, thanks to a public school system that intentionally mis-educates our children about our history, founding principles, and basic economic facts.

    5. VC Geezer, Nevada says:

      Everyone seems to ignore the fact that oil companies have both good AND bad years and only focus on their good years …..

    6. Lloyd Scallan (New O says:

      Since when are politicians "missing" anything! They know exactly what they are saying. Look at Harry Reid crucifixion of oil companies for the tax reductions they receive while paying 18.6% royalties on offshore and 12.5% on inshore production. Yet the mining industry pays"no royalties" for mining gold, silver, and uranium on public lands. Now, just guess in who's state the mining industries dig for their products and guess which campaign they contributited $750,000.00. That's right, Harry Reid.

      This is what we face. Obama and his lackeys will continue to show no shame at lying and distorting their hypocrisy, while the main stream media will continue to cover. Wake up America. It's time to stop this madness.

    7. Judy, Washington says:

      Oil companies "profits" pay billions in taxes and millions in charitable giving and the money left over goes to fund expenses for the next year. Ask any business owner and he will tell you the same formula.

    8. Pingback: NLRB Comes to Big Labor's Defense | The Foundry

    9. George Colgrove, VA says:

      Federal Workers Take Note:

      Profits pay for your huge paychecks! What part of that do you not understand?

      Are you so hooked on deficit spending to even understand that basic principal?

      The larger the profits, the larger the tax returns, the more REAL money there is to support your lush lifestyles in DC!

      Without huge profits, your system of extreme deficit spending is unsustainable?

      Would you rather loose your jobs or let companies profit? Your are in control of the capital.

    10. Norma in Nebraska says:

      I thank the President for bringing it up . . . . I think we should do away with ALL subsidies because private enterprise should succeed and fail on their own without the government being able to pick winners and losers through financial support. The federal government has made a practice of letting the "good old boy's club" do favors for their buddies by awarding subsidies, giving preferential tax breaks, and many other perks we don't even know about. The bottom line is, they discriminate against all those who do not fit into the criteria assigned.

      This explains EXACTLY why GE was able to make $14.5 billions dollars last year and not pay a single dine of taxes in this country. And to add insult to injury, Jeffery Emelt, GE's CEO, is in charge of creating new jobs in this country! The oil companies made a lot of money this year as well. The main difference is that they will pay about 40% of their profits in taxes. GE = no taxes and receives millions of dollars in "green energy" subsidies; oil companies pay 40% taxes and receives subsidies. Why should we give either of these two entities tax dollars? They don't need our money!

      And if you don't think this kind of cronism is alive and well in Washington, ask yourself why nearly 1,400 waivers have been awarded in regard to the new health care law: many are rich businesses, lots of unions, awarded as special favors like to Queen Nancy's district in CA, and paybacks to progressive supporters. Don't know anyone in Washington who can get you a waiver? Gee, that is just too bad because you are on the line as of January 1, 2011 right on schedule!!!

    11. gretchen, shasta lak says:

      Demonizing profits? People have to decide whether to feed the car or feed their children, and never ever see anything even close to resembling 'profit' from the oil companies, and those who are opposed to such business practices — as oil company shareholders are the only ones to get the benefits financially whereas people who cannot put food on their table due to high gas prices are called 'demonizers'?

      Please consider the poor and struggling who aren't like the American aristocracy who can invest their pocket change in corporations. When shareholders, and CEOs (and other corporate officers) start donating their gas price profits to non-profit corporations who struggle to help the poor, then we'll have some balance. Until then, aristocracy isn't just financially separate, but their mindsets and cold hearts keep them from reality.

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