Earnings Myths Distract from American Energy’s Path Forward
Posted July 28, 2022
It’s second-quarter earnings time for U.S. oil and natural gas companies and well-worn myths are surfacing that distract from America’s path forward on sound energy and climate policy.
Here’s what you need to know: Reported earnings by America’s natural gas and oil industry indicate a sector that is a large, robust driver of the U.S. economy – benefiting millions of American households through individually owned stocks, mutual funds, retirement accounts and other financial instruments. Earnings allow American companies to help strengthen the broader economy by investing in facilities, infrastructure, new technologies and new production that supports millions of American jobs.
So, let’s dispel the myths:
MYTH: Oil companies are to blame for higher prices at the pump.
Fact: Oil companies don’t set the cost of crude oil, which accounts for nearly 60% of the price of a gallon of gasoline, according to the U.S. Energy Information Administration. Crude oil is traded globally, not just in the U.S., so the cost of crude is set globally.
Fact: Crude oil prices this year reflect demand growth that has outpaced supply growth in the aftermath of the pandemic.
- The imbalance between demand and supply is the main driver of crude prices -- not the bottom lines of oil companies.
- API Vice President of Federal Relations Lem Smith made this point earlier this year:
“Oil prices remain high amid a persistent global supply crunch, workforce constraints, increasing geopolitical instability in Eastern Europe, the economic rebound following the initial stages of the pandemic and policy uncertainty from Washington.”
Fact: Changes in gasoline prices were based on market factors and not illegal behavior. Several rigorous federal investigations have proven that our system is built on some basic principles, such as the economic laws of supply and demand, which ultimately determine prices paid in the marketplace.
- Don’t take our word for it. Former U.S. Treasury Secretary Larry Summers recently noted:
“The price gouging at the pump stuff … is dangerous nonsense. There is no material prospect that in any enduring way gouging legislation can have any substantial effect on inflationary pressure, but it can cause and contrive all kinds of shortages. It can distort a complex network of flows between crude and refined product. It can inhibit the supply responses that are what’s ultimately the best way to overcome inflation. This gouging talk is a diversionary confusion. … All of this gouging talk is a pandering diversion from all of that.”
MYTH: Oil companies have exploited current conditions to unfairly reap excessive earnings.
Fact: Oil company earnings – in the red bars in the chart below – are in line with those of all other S&P 500 sectors (blue bars) when viewed quarterly. Since 2018, oil and natural gas earnings per dollar of revenue (percent) track with those of all other S&P 500 sectors:
Fact: Oil companies, which do not control the cost of crude oil that is the most significant factor in the price of their gasoline, have reported earnings lower than those of many other companies.
- “Exxon made more money than God this year,” President Biden said last month. Yet, as energy analyst Robert Rapier pointed out in Forbes, Exxon’s reported $5.5 billion in first-quarter net income was about one-fifth the size of Apple’s $25 billion. Over the past 12 months ExxonMobil has reported $25.8 billion in net income versus Apple’s $101.9 billion, Rapier wrote, adding:
ExxonMobil is selling a product whose price is set in the global commodity markets. They earn a fraction of Apple’s profits. Apple has full control over the price of its products and trounces ExxonMobil’s earnings in every quarter. Apple could slash the price of its products and still make a huge profit. But ExxonMobil can’t slash the price of its products because it doesn’t set the price.
- For further context, some other first-quarter earnings: Microsoft $16.7 billion, Google (Alphabet) $16.44 billion, JPMorgan Chase $8.3 billion.
- Unlike most other sectors, during the pandemic the oil and natural gas sector reported significant losses in 2020. Think back to Myth #1: If oil companies were responsible for the cost of crude oil and therefore pump prices, why would they ever lose money?
It’s important to highlight this isn’t about other companies’ reported profits. Corporate earnings generally reflect economic growth, job creation and value to consumers. Rather, it’s about the falsehood that oil and natural gas companies’ earnings are unbalanced or disingenuous. What’s disingenuous is that oil and natural gas earnings are singled out to score political points.
MYTH: Oil companies control gasoline prices coming down slower than they go up.
This is an oft-repeated claim from the White House and industry opponents, which API’s Frank Macchiarola debunked in a March blog post. Yet, it’s trotted out on a regular basis anyway. Axios’ Hans Nichols wrote this week:
While energy analysts and economists can patiently explain the "rockets & feathers" phenomenon — where crude oil prices rise like a rocket, while gas prices fall like a feather — Democrats remain outraged that the two prices don't move in more synchronized ways.
Fact: 95% of U.S. fueling stations are independently owned and those owners – not major oil company executives – set retail prices for their local retail outlets.
Fact: Prices of many commodities, like gasoline, tend to decline slower than they rise.
- Dr. Dean Foreman, API chief economist, wrote earlier this year that, in general, replacement costs for a commodity, based on current market prices, tend to drive daily prices. Often it takes more time for competition among retailers to bring prices back down.
- GasBuddy’s Nicole Petersen:
“Often, gas prices go up much faster than they come down. This is because when oil prices increase rapidly, gas stations are not able to reflect that right away at the pump due to local competition. Gas stations often take losses when oil prices rise quickly, and need a little bit of time to recoup those losses when prices are lowered again.”
- Rapidan Energy Group’s Bob McNally, responded to President Biden’s March tweet that said gasoline prices should fall as quickly as crude oil prices:
There's always a multi-week lag between global crude oil and domestic pump price changes, Mr. President. If these recently lowered crude prices stick, pump prices should follow. Recommend asking @EIA to explain these realities to you & your staff. Gouging is not an issue, sir.
These myths about oil and natural gas company earnings are largely a distraction from long-term solutions to the current energy crisis, as well as workable paths for American energy going forward.
Instead of rhetorical attacks on a vital sector of the economy, one that supports more than 11 million American jobs, we need a realistic approach on energy from Washington that recognizes and supports the leading role U.S. oil and natural gas play in our energy mix today and that they are projected to play for decades to come. API’s 10 in 22 released last month does just that – calling on Congress and the administration to enact 10 simple – but significant – policy reforms that will boost American energy potential, ease inflation and supply chain woes, and bolster our allies in Europe that are most impacted by the war in Ukraine.
This week, the New York Times’ Thomas Friedman encouraged President Biden to take such a path in a column, urging the president to engage substantively with America’s oil and natural gas producers. Friedman wrote:
… instead of going to Saudi Arabia, Biden should have put America’s biggest domestic oil producers in a room with his top environment and energy experts and not have let them leave until they agreed on a strategy for maximizing the cleanest possible production of U.S. oil and gas, with the smartest carbon tax, with the smartest energy conservation measures, with the most realistic plans for carbon sequestration, and with the most credible plan to massively and rapidly expand our renewable energy portfolio. Then Biden could fly off to Saudi Arabia — or look Vladimir Putin in the eye — as an energy price maker, not just a price taker. … There has got to be a way to strike a deal here, but it will happen only by the president going to Houston and not Riyadh.
That’s pretty similar to what we said in our recent invitation to Mr. Biden to come visit American producers, pipeliners and refiners – so he can better understand what our industry can do to help advance shared goals of economic growth, energy security, and climate and environmental progress.
API President and CEO Mike Sommers, in a letter to President Biden last month:
To overcome the obstacles we are facing, it is time for an energy awakening – for the oil and natural gas industry and government to come together to unlock America’s energy resources, encourage investment opportunities, accelerate infrastructure, and strengthen global energy security. … API’s 10 in 2022 Plan outlined above offers this new direction. The plan has the potential to lead to an era of collaboration between the government and the private sector to meet our growing energy needs and to provide a measure of relief for the American people.
We’re ready for that conversation, Mr. President.
About The Author
Megan Barnett Bloomgren is API's senior vice president for communications. She came to API in 2017 after serving as acting deputy chief of staff for the U.S. Department of the Interior, where she directed communications and policy-related actions for the secretary. Before joining the administration, Meg was a partner at DCI Group, a public affairs consulting firm in Washington, D.C. Prior to DCI, she led strategy and operations for the Institute for 21st Century Energy at the U.S. Chamber of Commerce, which followed positions at the U.S. Energy Department, the White House Council on Environmental Quality and the Environmental Protection Agency. Meg is a graduate of La Salle University in Philadelphia.