Oil and Natural Gas Industry Earnings in Perspective
Rayola Dougher
Posted January 31, 2011
Over the next couple of weeks, oil and natural gas companies will be releasing their fourth quarter and 2010 year-end performance reports. While a lot of attention will be focused on the numbers, some perspective is needed to better understand the size of the industry, how the industry's earnings compare to other industries, where the money is going, and who benefits.
The oil and natural gas industry is one of America's largest industries. It has to be to effectively compete for global energy resources. The industry's earnings make possible the huge investment necessary to help ensure America has the energy we need to heat our homes, get to work, transport our goods and make all our lives better. The earnings allow companies to reinvest in the facilities, infrastructure and new technologies that keep America going strong well into the future while generating more than 9 million jobs and supporting more than $1 trillion in annual contributions to the U.S. economy - 7.5 percent of GDP.
Oil and natural gas earnings are typically in line with the average of other major U.S. manufacturing industries. This fact may seem surprising to some, in part because reports usually focus on only half the story - profits. While profits reflect the size of an industry, they are not necessarily a good reflection of financial performance. Profit margins, or earnings per dollar of sales, provide a more useful way to compare financial performance among industries of all sizes. Between 2005 and 2009, the oil and natural gas industry earned about 7.3 cents for every dollar of sales, compared to 6.5 cents on the dollar for all U.S. manufacturing. By the third quarter of 2010 that average fell to 6 cents on the dollar, compared to 8.6 cents on the dollar for all US manufacturing.
Oil and natural gas companies pay considerably more in taxes than the average manufacturing company. In 2009, the industry's income tax expenses averaged 48.4 percent, compared to 28.1 percent for other S&P Industrial companies. In fact, the oil and natural gas industry provides the U.S. government with nearly $100 million a day in taxes, royalties, and fees.
If you are wondering who owns "Big Oil," chances are the answer is, "You." America's oil and natural gas companies are broadly owned by tens of millions of Americans, many of them retirees, through their investments made in company stocks (23 percent the of total shares), through mutual funds and institutional investments (34.5 percent), IRAs (14 percent) and pension funds (27 percent). Corporate management of oil companies own just 1.5 percent of this stock.
The oil and natural gas industry is hard at work meeting today's energy needs and developing next-generation forms of energy. More than $1.7 trillion dollars has been invested in U.S. capital projects to meet the growing demand for oil and natural gas since the year 2000. Not only that, but between 2000 and 2008 the industry invested more than $58 billion in low- and zero-carbon emissions technologies - more than either the federal government or all other U.S.-based private industries combined.
Today's earnings are reinvested for tomorrow's energy needs and supplies. But planning and investment cannot be turned on and off like a spigot, without entailing huge, potentially non-recoverable costs and delaying urgently needed projects. That is why the government must provide an energy policy and tax framework that encourages investment rather than discourages it. With the right policies in place, we can help meet future demand, put more Americans to work, lower our federal deficit, and deliver substantial government revenue to benefit all Americans.