Earnings and Industry

Mark Green
Posted October 28, 2011

Fuel Fix's William O'Keefe has an interesting take on oil and natural gas company earnings that have come out this week - and have been targeted by proponents of higher taxes on energy producers. O'Keefe writes:

"In the midst of several major oil companies reporting their third-quarter earnings, the Democratic Senatorial Campaign Committee is leveraging those figures to launch attacks on its opponents. The strategy behind the assault entails pointing to positive corporate earnings to justify selectively levying putative tax hikes on the oil and gas industry. However, attempts to position energy producers as outliers based on their profits fail to hold up to scrutiny.

"Misplaced scrutiny? (Reflexively, my eyebrow rises.) Tell me more:

"The oil and natural gas industry has a narrow profit margin (8%) relative to other sectors. For every dollar in sales, the industry keeps less than 8 cents as earnings. The rest goes to compensate its work force, other operational costs, and capital investments. In fact since 1981, this sector has paid more in taxes than its shareholders have earned in profits."

Here's O'Keefe's chart, prepared from net profit margin figures reported by Yahoo Finance:

O'Keefe notes that other business sectors are reporting higher profit margins but somehow manage to elude "scrutiny." Hmm. (The eyebrow rises again.) Interesting. Then it gets better. As O'Keefe points out, oil and gas earnings actually work for America -- $476 billion contributed to the economy in 2010.

"The industry is taking a lot of that capital and investing it here in the U.S. In May, The New York Times reported that oil firms were investing about $25 billion to drill 5,000 new wells in shale formations in 2011. With capital spending of that degree, it's easy to see how the industry managed to add more than 20,300 high paying opportunities to the U.S. economy since the start of the recession."

O'Keefe is spot on. A strong energy industry is good for America. And, as this study showed this week, these earnings directly benefit millions of Americans whose investments include industry stock - mutual funds, public and private pension and retirement funds, including 401(k)s and IRAs.