Are Energy Companies the Bad Guys?

Perhaps no other industry draws more consistent criticism from the liberal Democrats than "Big Energy". There is a constant subtle and not at all subtle accusation that the big energy companies manipulate oil and gasoline prices. That they are cheating the government by not paying royalties based on a "technicality". That they are making "windfall" profits that border on unethical. That they are reaping billions in tax loopholes.

The possible manipulation of oil and gas prices by big American oil companies has been investigated over and over again by Congress. This must be the most investigated topic in American history after the Kennedy assassination. There has never been a single finding of any manipulation.

Here is the Democrat's dirty little secret when it comes to this type of liberal populism: the big public oil companies like Exxon Mobile and Chevron only control about 10% of the world's known oil reserves. The other 90% is controlled by sovereign foreign governments. Russia has all but nationalized Gasprom and Lukoil. The vast oil reserves of the Middle East are all under government control. The list goes on: PetroChina (China), PetroBas (Brazil), Venezuela and Hugo Chavez's recent nationalization of the country's oil industry. It is not possible that companies controlling only 10% of the world's known reserves can set prices.

Harry Reid and Nancy Pelosi have all but accused the oil companies of stealing from the American taxpayers due to the way contracts were negotiated with the oil companies for leases during the Clinton administration. The issue is that they believe the oil companies are not paying enough royalties due to the way the lease was negotiated. The Democrats have stated that they need to pass legislation that will fix this mistake.

The government negotiated a drilling lease. This is a legal contract. Now the government is saying that they can simply pass legislation that will change the contract. This is chilling. The Democrat's position is that they don't like the deal so they are just going to unilaterally modify a binding legal contract to make it more favorable to the government. When a government with a sweep of its pen can ignore a legal contract to seize more money, without any legal due process, then our country just became less free.

Regarding the well publicized "windfall" profits. Yes, the profits in absolute terms have been quite large because these are some of the largest companies in the world. But the profit margin for Exxon Mobile is a little over 11%. This is more than grocery stores but far less than many, many industries. Apple's profit margin is a little over 14%. Should we pass windfall profit legislation to confiscate these profits from Apple?

The truth is that the oil industry is hugely capital intensive. Any retained earnings (earnings that are not paid out in dividends) net of share buybacks has been completely reinvested into exploration and maximizing production from older fields (this is what we want, right?). Even with this Exxon has not been able to replace its reserves at the same rate they are being depleted.

The so-called loophole that provided a tax benefit to the big oil companies was actually a measure passed by Congress to encourage difficult and increasingly expensive domestic exploration and production (all the easy oil has been found). In other words, it was a tax credit that made it economically viable for this difficult domestic exploration. Now that this has been repealed, the oil companies will have no choice but to pursue less expensive finds in foreign countries. This just increases the percentage of oil we have to import from other countries.

As usual the facts are not on the Democrat's side.