Exxon's Profits: Measuring a Record Windfall

Money gushing into the oil company's coffers will be sure to reignite talk of new taxes.

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Exxon Mobil's staggering $40.6 billion earnings for 2007 drive the truth home: There's no business on the planet that gushes forth more profit than selling oil—nothing even close.

But just because it's more money than any other corporation has ever made in history, is it a windfall?

Some, notably the oil companies themselves, spurn the implication that the astronomical earnings are an instance of good market fortune that has blown their way. They don't like the term windfall, especially since it is so frequently followed by an even more despised term, tax. So don't be surprised if you hear a lot of talk about how oil profitability is not out of line with that of other industries. What's the real story when it comes to Big Oil profits?

Let's talk records. Exxon beat its own one-year-old record for the biggest corporate profits ever by 3 percent. Put together with the announcement by the No. 2 U.S. oil company, Chevron, of an $18.7 billion year, up 9 percent over 2006, plus the earlier results of Shell and ConocoPhillips, and that's more than $100 billion in profits from four companies. It's all thanks to the historic 35 percent climb in worldwide crude oil prices in the second half of 2007, ending the first week of this year when oil briefly touched $100 per barrel.

Exxon nation. If Exxon Mobil were a country, its 2007 profit would exceed the gross domestic product of nearly two thirds of the 183 nations in the World Bank's economic rankings. It would be right in there behind the likes of Angola and Qatar—two oil-producing nations, incidentally, where Exxon has major operations.

Ahead of the pack. Exxon Mobil's profits are 80 percent higher than those of General Electric, which used to be the largest U.S. company by market capitalization before Exxon left it in the dust in 2005. The new economy? Microsoft earns about a third as much money. And next to Exxon, the world's largest retailer, Wal-Mart, looks like a quaint boutique, with annual profits of about $11 billion.

On the margin. The oil industry urges people to look beyond its profits to its profit margin: about 7.6 percent of revenues late last year. That's not much higher than the 5.8 percent profit margin for all U.S. manufacturing, and if you exclude the financially troubled auto industry from that analysis, the oil industry actually appears less profitable than most manufacturers, which were earning 9.2 cents on every dollar of sales.

But unrivaled returns on equity. However, profit margins across industries vary greatly based not on how well each business is doing but how capital- or labor-intensive it is. Oil is among the most capital-intensive. But look at the oil industry's profits compared with shareholder equity it has available for investment. The U.S. Energy Information Administration's most recent analysis of the oil industry's performance, released just last month, showed oil industry return on equity of 27 percent—about 10 points higher than that of other manufacturers. And it has been higher throughout this recent era of high world oil prices, just as it was back during the oil shock that hit in 1980.

Enough windfall to tax? That year was the last time a windfall profits tax was enacted, and there's no question that the oil industry's results will focus political attention on the idea again, especially with economic concerns at the forefront and the expensive challenge of addressing climate change on the horizon. (Hillary Clinton talks windfall profits tax; Barack Obama says repeal the tax breaks oil already enjoys.)

The Congressional Research Service found the last oil windfall tax generated only $80 billion in revenue before it was repealed in 1988, far less than the $393 billion projected. That may have been, of course, because of numerous loopholes in the way Congress wrote, and then later amended, the law. Domestic oil production fell and foreign oil dependence grew during the windfall tax years, but—given the hard reality that the United States doesn't have as much oil as the Middle East—those trends have continued unabated since then without any help of a windfall profits tax. That's why new ideas are floating for structuring a tax, such as exempting investments that the oil industry makes in non-fossil-fuel alternatives.