Oil industry battles criticism over its record profits

It tries to explain earnings, high prices

May 12, 2006|By COX NEWS SERVICE

Making money is supposed to be a foundation of American capitalism, and it's crucial to keeping investors happy. But U.S. oil companies are finding that record profits haven't helped their image, not with consumers angry about higher gas prices and politicians searching for short-term cures.

Oil businesses are trying to explain why their profits aren't a bad thing. The price of mangling that message could be steep: Some in Congress are discussing added regulations as well as a windfall profits tax that the industry fears could send it into a skid.

"It's a no-win situation," said Fadel Gheit, a stock analyst who follows the energy industry for New York-based Oppenheimer & Co. "Nobody wants to be in the public eye accused of price gouging."

Criticism has washed over the industry recently.

Last week, the Consumer Federation of America issued a report accusing oil companies of pocketing $100 billion of "excess profits" from 2000 to 2005. Sen. John McCain, an Arizona Republican, recently cited oil company profits and suggested the industry's public relations sense was worse only than that of satanic cults, according to press accounts.

The Chicago Tribune reported that the head of public relations for the Chrysler Group - part of the automaking industry that has had symbiotic ties with big oil - wrote in a company blog that the oil industry has "a history of blowing their exorbitant profits on outlandish executive salaries and stock buybacks, and hoarding their bounty rather than lowering fuel costs."

And in a recent Fox News poll, 66 percent of voters blamed the oil industry "a lot" for high gas prices.

The biggest oil company, Exxon Mobil Corp., pulled in a record $8.4 billion in the first three months of this year, after $36.1 billion in profit for 2005 - a record for a U.S. company. Chevron's first-quarter profit leaped to $4 billion - 49 percent more than the same period a year earlier. And No. 3 ConocoPhillips reported $3.29 billion as revenue rose 23 percent.

Some of that profit is related to a steep rise in crude oil prices, which has benefited U.S. petroleum companies with oil holdings. Some analysts attribute most of that rise to factors oil companies do not control: increased global demand, reduced production in some nations and nervousness about tensions with Iran.

But oil prices are only part of the story. While world prices for crude oil have increased about 21 percent since early January, average prices at U.S. gas pumps have soared nearly 30 percent, according to the U.S. Energy Information Administration.

Much of the bad vibe for oil companies began last year, after Hurricanes Katrina and Rita slammed the Gulf Coast, disrupting gasoline supplies and causing prices to spike.

The American Petroleum Institute, a Washington-based trade group, and its member companies have had public relations efforts under way for years. The industry bolstered its efforts after the storms.

The institute highlights the profit margins of various industries, showing the oil and gas industry at 8.5 percent, not far from the average of 7.7 percent for all big public industries.

Still, oil companies' profit margins have been on the rise. ExxonMobil, for example, had a profit margin of 9.7 percent last year, compared with 8.5 percent in 2004.

In October, API launched a nationwide series of TV commercials, radio spots and newspaper ads. The multimillion-dollar campaign explains gas prices, the scale of the industry and related issues. It has continued into this year, and the institute recently stepped it up in recent weeks, said Jim Craig, head of API policy and communications.

"I think the American public is frustrated by high prices. What we have been trying to help them understand is what goes into the price of gasoline."

Mark Cooper of the Consumer Federation of America said that the industry is downplaying its financial picture to consumers while showing Wall Street analysts the numbers it is really proud of - cash flows and return on equity. At the same time, Cooper said, oil companies have underinvested in expanding refinery capacity in the United States, creating a tighter market that helps them raise prices.

Oil industry representatives counter that the companies annually invest billions of dollars into expanding their infrastructure to find, pump and refine oil.

Meanwhile, Gheit, the Oppenheimer stock analyst, predicts oil prices will remain elevated.

"This is the beginning of another record year," he said.

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