The Economics of Oil Company Earnings

Mark Green
Posted February 2, 2011

The U.S. oil and natural gas industry is vital to our nation's energy security and economic growth. So are its earnings. As companies announce quarterly earnings, let's clear up common misconceptions about this issue.

MYTH: Oil and natural gas industry earnings are excessive.

FACT: Average industry earnings are in line with other manufacturing industries--about 7 cents per dollar of sales in the last five years. Earnings reflect the size of these companies and the extent of their operations. They are very large entities, which enables them to invest in new projects, compete globally and provide energy for America.

MYTH: Oil company earnings go to oil company executives.

FACT: Earnings reports are good news for the 9.2 million U.S. workers supported by the industry and for the millions of Americans who own stock in these companies through pension funds, 401Ks, IRAs and direct ownership. In fact, only 1.5 percent of company shares are held by industry executives. Earnings are also good news for services provided by the government: oil and natural gas companies provide the U.S. Treasury, on average, with well over $95 million each day through taxes, royalties, rents and other fees that can then be used for such things as schools, roads and parks.

MYTH: The oil and natural gas industry receives unfair subsidies.

FACT: The industry does not receive subsidies, but is eligible for tax provisions--similar to those available to other industries--that promote domestic job creation and encourage new exploration. The industry also pays an effective tax rate of 48.4 percent, compared to 28.1 percent for all other S&P Industrials.

Those are the facts. While some see the industry's doing well as a reason to impose additional taxes, punishing success is not in America's best interest.