Those "Large" Oil Profits

Whatever the merits of the President's windfall tax proposal, his jabs at the "already large profits" of the petroleum industry were designed to appeal to the public's deep suspicions that oil earnings are particularly bloated. The grumbling is sure to increase over the next few weeks as the companies begin announcing their first-quarter earnings. They will probably show increases on the order of 20% to 40% or more over the first quarter of 1978. Reason: oil inventories acquired months ago are becoming more valuable as OPEC continues to push up prices.

The numbers on oil industry balance sheets are always bogglingly big. In 1978, according to Data Resources Inc., the research firm headed by Democratic Economist Otto Eckstein, the revenues of U.S. domestic and international oil firms totaled a staggering $346 billion; the after-tax profits totaled $15.6 billion, which was more than three times the earnings of all U.S. auto manufacturers. Still, by any yardstick, oil company profits are not out of line with those in other U.S. industries:

> In terms of profits as a percentage of revenues, the oil firms' average margin was 4.5% in 1978, according to Data Resources. While this was somewhat fatter than the automakers' margin (3.97%), it was below the average for U.S. industry (5.25%) and far under some truly high-profit businesses, such as soft drink companies (7.8%), cosmetics makers (8.11%) and drug firms (10.1%).

> In terms of return on invested capital, the oil firms have been slightly below the par for U.S. industry. In 1978, according to a Chase Manhattan Bank study of 27 oil companies, they had an average return of 13.2%, compared with nearly 15% for all firms.

> In terms of earnings growth, oil companies have fared marginally better than industry as a whole. From 1977 to 1978, according to Data Resources, the earnings of all U.S. companies expanded by 15.9%, while those of domestic oil firms rose by 16.4%. For the international oil firms, however, the growth was much less, about 1%, as a result of the dollar's decline and price controls in foreign markets.

In his speech, the President chided the oil companies for spending too much of their profits on buying "department stores and hotels" and in other nonenergy investments. Actually, the amount of such spending is not large: of the $29.4 billion invested in all areas in 1978 by the 27 firms in the Chase study, about $2.8 billion, or some 10%, was spent on nonenergy projects. The remainder, or nearly $27 billion, was plowed back into the energy business. About 63% of those funds, or some $17 billion, was devoted to oil exploration and the development of new wells; a bit more than half of that $17 billion was invested in the U.S.

In any given year, the expenditures by the big oil companies in search of increased energy supplies may match or exceed profits. For example, the amount that Mobil spent last year to look for and develop new sources of gas and oil, $1.1 billion, was exactly equal to its after-tax earnings. The $3.5 billion that Exxon spent on developing new energy sources was well above its after-tax profits, which came to $2.7 billion. Of that sum, Exxon paid out about 55% in dividends to its 695,000 stockholders. They include not only a great number of small investors (no single stockholder owns more than 0.1% of the shares), but also pension funds, banks, universities and other institutions. In effect, these institutions manage the money of millions of ordinary wage earners--the very people, in fact, whom Carter now urges to rise up and keep the oil firms from having an excuse "to cheat the public and to damage the nation."

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