In my travels around the globe, I have never been to another country that regards their oil companies as we do here in the U.S. I have actually been in countries where people view their domestic oil companies as a source of national pride. Here in the U.S., the average person on the street views our oil companies as vile, greedy parasites on taxpayers that should be tarred, feathered, and run right out of the country. While this belief is commonly held among Democrats, even staunch Conservatives like Bill O’Reilly have gone on anti-oil company rants, while offering suggestions like “American oil companies must supply the federal government with a written explanation every time they raise the price of gas and oil.”

Why It Matters to Me

But why should I care? Well, I care because ignorance is the basis of bad energy policy decisions. Bad energy policy decisions are likely to lead to higher levels of oil imports, which will hasten the demise of the U.S. as a superpower. (Lots of bad decisions are contributing to our slide toward mediocrity, but record trade deficits brought on by record flows of money to oil exporting nations are a contributor).

But I also care because I used to work for an oil company, and therefore I take misinformation directed at the oil industry somewhat personally. As I learned how oil companies really worked, I felt compelled to explain to people why their perceptions were wrong. It pained me to see so many hard-working people — people who provide the energy that most people use every day to move around the world — treated with such revulsion. As someone once said to me “It isn’t the oil company employees that we are angry with. It is the oil companies themselves.” The problem with that explanation is that the oil companies are the employees that work there and the shareholders that own stock (which is probably you if you have an interest in a pension fund – see Who Owns Big Oil).

Don’t Marginalize if You Have No Replacement

Let me be clear that I want to see the world reduce dependency on oil. In fact developing replacements for oil is the basis of my job. But my fear is that before that day comes, we will simply marginalize our domestic oil companies, and while we are still heavily dependent on oil, that dependence is shifted to an even greater degree to foreign oil companies like Saudi Aramco. So I think it is a bad idea to put policies in place that will give foreign oil companies an advantage over domestic oil companies — and many of the proposals that are frequently floated would do just that.

HuffPo: A Fountain of Misinformation

Last week earnings were announced for several major oil companies. Any time oil prices are high, earnings for integrated oil companies are likely to be high. And that is going to lead to consumer anger, which is often fueled by a steady dose of misinformation. Huffington Post just published a story on ExxonMobil’s earnings, and the comments following the story demonstrate a stunning level of ignorance about oil companies. And it wasn’t just a few people; the article had 3,500 comments in just a couple of days and the majority were happily spreading the sort of misinformation I highlight below:

Big Oil Companies Post Huge Profits On High Gas Prices

Even the title is somewhat misleading. High oil prices are driving the bulk of the profits; pure refiners like Valero also saw earnings increase, but not like those of oil producers. Some of the article is correct, some of it is most certainly incorrect, and much of it is misleading. It is definitely intended to be inflammatory. Taken as a whole, the article and the comments following the article provide ample evidence for my recent claim that Democrats are really misinformed about energy (the readers and writers of Huffington Post are overwhelmingly Democrats).

What is correct is that oil companies are making big profits, and those profits are coming out of consumers’ pockets. But numerous issues that the article raised around those points are wrong, and it is that sort of misinformation that helps keep the public so angry over this issue. So what I would like to do here is take 10 points from the article itself or the comments following the article and either provide accurate information, or at least context for the claims.

1. Taxes

The article implies that oil companies don’t pay a fair share in taxes, quoting Congressman Ed Markey as saying “it’s time for the oil companies to do their part and contribute to solving our debt crisis.” But this issue really took on a life of its own in the comments, where numerous people claimed that oil companies don’t pay any taxes to the U.S. government. For example They pay taxes to foreign nations and they pay state and local taxes…to the Federal coffers…­not a dime and Exon Mobil did not pay any nit-wit.”

I suppose I would be pretty angry too if I thought that not only are we subsidizing oil companies with tax dollars, and not only are they reaping profits at our expense — but they don’t pay any federal income taxes while the country struggles with a budget crisis. Yes, that would be shocking and cause for anger if it was true. But it isn’t.

This claim seems to have originated with a 2010 article in Forbes called Big Oil’s Tax Bill. In that article, the writer stated that in 2009, ExxonMobil (XOM) paid no U.S. income taxes. In a follow-up article, the writer had to back-peddle as the context became clear:

“My mistake was in thinking that these figures somehow reflected actual tax benefits and liabilities. So what we should have written was that ExxonMobil “recorded” no U.S. income taxes for 2009 instead of “paid.” All you re-bloggers out there, please note the clarification. Mea culpa.”

For the “re-bloggers”, this didn’t matter much, as the original claim had a life of its own and soon became conventional wisdom: ExxonMobil doesn’t pay federal income taxes. Senator Bernie Sanders repeated this claim on the Senate floor: “Last year, ExxonMobil made $19 billion in profit. Guess what. They paid zero in taxes. They got a $156 million refund from the IRS.” (Politifacts investigated and said Senator Sanders was misleading “at best” and rated the claim false).

It is simple enough to address this claim. I merely linked to ExxonMobil’s SEC filings that show the breakdown of the taxes they paid in 2008, 2009, and 2010. Those SEC filings give an interesting picture of ExxonMobil’s operations. First, they show that ExxonMobil’s global income tax bill is very high: $36.5 billion in 2008, $25.9 billion in 2009, and $28.5 billion in 2010. Their foreign tax bill is much higher than their U.S. tax bill, but they do the majority of their operations outside the U.S. and are taxed on their earnings wherever they earned the money.

But then it does show their 2009 U.S. federal tax obligation to be negative $156 million. Their 2008 federal obligation was $3.4 billion and their 2010 federal obligation was $1.3 billion. ExxonMobil has stated that the reason for the 2009 obligation is that they make estimated payments on taxes due, and they had overpaid for the previous year (or years). Therefore, it wasn’t that they didn’t have a tax obligation, it was that it had already been (over)paid. It is similar to why people get tax refunds. The government isn’t giving you money, you overpaid your tax bill during the year. And if you made a lot of money in 2008 and then a lot less in 2009 (XOM’s 2009 profit was less than half their 2008 profit), you could find that the refund from your 2008 taxes was greater than your 2009 obligation. That doesn’t mean you didn’t pay taxes. It is just a reflection of when you paid them.

A related claim is that ExxonMobil only pays a few percent of their income in taxes. Some who make this claim take their worldwide earnings and only apply their U.S. tax obligation to those earnings. That is disingenuous because it doesn’t capture the fact that the U.S. is a minor part of their global operations (XOM recently put U.S. earnings at under 6% of their total earnings), and that they earn most of their money and pay most of their taxes in foreign countries. Thus presenting U.S. taxes against overall earnings paints a false picture.

One article floating around from the Center for American Progress quotes a Center for Tax Justice report that claims XOM only paid 0.4% in federal income taxes and their U.S. tax bill the past two years was only $39 million. A look at their SEC filings shows that this is blatantly false. With fictional reporting like this, it is no wonder people feel the way they do about oil companies. But people with an agenda aren’t interested in the truth if it conflicts with their agenda.

2. Subsidies

The article claims that oil companies receive “$4 billion to $8 billion a year in deficit-increasing tax subsidies.” People got really carried away with this in the comments. Not only are the oil companies not paying any taxes, but they are being supported entirely by the subsidies taxpayers are providing them. A typical comment following the essay: “Folks, listen up! This is our tax money that we pay that is subsidizin­g these greedy no good SOB’s! They have the gall to be charging close to $4 a gallon!”

Several problems with this one. First, people’s responses indicated that they seem to believe these “subsidies” are cash payments to oil companies. In fact, as I documented previously, the subsidies are tax deductions that in most cases are identical to the tax deductions that other companies — including companies with far higher profit margins — receive. In the case of oil companies, they would amount to about 1.8 cents a gallon — a drop in the bucket relative to both oil company profits and the taxes they paid.

The question nobody seemed to be interested in was “What are these subsidies, and what is their intended purpose?” If you learn that the subsidies are mostly standard tax deductions or that their purpose is to keep manufacturing in the U.S. (and thus increase tax revenues), the narrative is much less interesting.

3. Oil companies control oil prices

  For example: “There is no way that anyone can deny that the BIG 5 oil companies collude to drive gas prices and profits higher.”

It seems to be hard for people to understand that the profits of oil companies in the U.S. are not a result of them raising oil and gas prices. Their profits went up because oil and gas prices went up. They have cause and effect mixed up. It’s the same reason corn farmers make more money when corn prices go up. The truth is that ExxonMobil — with 3% of the world’s oil production capacity — can do very little to impact global oil and gas prices.

But aren’t the oil companies profitable enough that they could give everyone a break on their gasoline prices? There are two flaws in that line of thinking. First is that even though there is speculation in the market, oil prices are a reflection of supply and demand. The growth in the economies of India and China ensure that high oil prices are here to stay, even if there are some short-term corrections. So high prices are a signal to consumers to use less and a signal to producers to produce more. Low prices and high demand are a recipe for shortages caused by over-consumption.

But to illustrate the other problem with that line of thinking, consider this analogy. You buy a $100,000 home in a neighborhood and then the price of the average home quadruples over the next 10 years. You decide that you aren’t greedy, and you are satisfied with selling your home for $200,000, even though comparable homes are selling for $400,000. This would be like ExxonMobil deciding to sell gasoline for $1 a gallon below their competitors. What happens in this case? In cases like this, some other person is going to snap that home up for $200,000 and resell it for $400,000, capturing the profit that would have been yours. Prices aren’t set in a vacuum. Most people don’t just decide to sell a $100,000 home for $400,000 or $50,000, they sell it based on what the market is paying.

The same is true for oil prices. Even though they benefit from high prices, there isn’t too much an ExxonMobil can do to influence the global price of oil, and that has the biggest influence on the price you pay at the pump. OPEC on the other hand is a different story; they could drive oil to $200 overnight by withholding enough from the market. But no U.S. oil company controls enough oil to have much influence.

4. Apple versus the oil companies

There were a number of comments comparing Apple to the various oil companies. Apple indisputably has much higher profit margins than the oil companies, but people admire them because as one person said “they produce something useful.” Of course Apple’s products are largely made from oil, but that’s another story (a 3G phone requires 1.7 gallons of oil to produce and distribute). Here are some of the comments on Apple: One person claimed that Apple has a higher effective tax rate than do oil companies: “The oil companies are given tax breaks at virtually every stage of production­, paying an affective tax rate of 9%. Apple effective tax rate 24.4%.”

This person’s mistake was in comparing one type of tax — the tax on capital equipment — to an overall tax rate. Looking back to ExxonMobil’s SEC filings, their effective tax rates in 2008, 2009, and 2010 were 46%, 45%, and 47% — almost double that of Apple. The reason for this is that they simply have to pay taxes that Apple does not have to pay, and in some cases they don’t receive the same tax deductions that Apple does receive (see Point 6 below).

5. Apple employs more people

  Another person claimed that Apple employs more people than the oil companies: “Apple employs a lot more people than any oil company. The insane thing about oil companies is how much money they make relative to the comparativ­ely miniscule amount of labor force required to operate.”

It is amazing how often people just make things up. Apple employs “46,600 full time employees and 2,800 temporary full time employees worldwide.” Exxonmobil employs “over 82,000 people worldwide.” In 2010 Apple earned $14 billion on sales of $65 billion (21.5% profit margin by that metric, and profits of $300,000 per full time employee). In 2010 ExxonMobil earned $30.5 billion on sales of $370 billion (8.2% profit margin, and profits of $372,000 per full time employee).

6. Apple doesn’t receive subsidies

Several people claimed that the difference between Apple or Google and XOM is that the former don’t receive subsidies: “Apple isn’t subsidized with tax money, that is the difference­.”

In fact, Apple receives a 9% tax deduction from Section 199 of the tax code. Oil companies are limited to a 6% deduction from Section 199, which has been called the single biggest oil company subsidy. So Apple not only receives some of the exact same “subsidies” (although I don’t really consider a tax deduction a subsidy), they get a bigger deduction despite having much higher profit margins (which again is reflected in the relative effective tax rates).

7. Oil companies aren’t investing in their business

  The article claimed: “Rather than invest their profits in such things as product development, new facilities, hot talent or research — things that could create jobs, improve consumer offerings and accelerate alternative energy production — three of the five big oil companies are spending large amounts of that money buying back shares of their own stock.”

ExxonMobil invests $25-$30 billion a year back into their business. This from a company that earned $30 billion in 2010. Other oil companies have similar investment profiles. The oil business is very expensive, and those big profits are made possible by big investments in capital, R&D, and even into renewable energy. You may have read of ExxonMobil’s $600 million algae bet. (That’s really not quite accurate to call it $600 million, but it is one example of many in which oil companies are investing in renewables). So Dan Froomkin — the author of the article — is either grossly misinformed or simply spreading half-truths. (It is true that they are buying back stock, which is why it is a half truth instead of a full lie).

8. Oil companies spent over $1 billion in lobbying

The article claims that “the oil and gas industry is enormously powerful on Capitol Hill, spending over $1 billion in lobbying since 1998.”

Per the linked source in the article, the oil company did spend $1.15 billion in lobbying over the span of 14 years. So a trillion dollar plus industry spent an average of $82 million a year on lobbying. A couple of things. First, all you have to do is read the article and the comments to see that oil companies will have to do at least some lobbying to combat the sort of misinformation people like Froomkin spread. But of course they lobby for things in their own self-interest, just like other companies. At the same linked source, you find that the pharmaceutical industry spent twice as much money as the oil industry on lobbying, and the insurance industry, electric utilities, business associations, and computer and Internet industry all spent more money on lobbying than did the oil industry.

During various ethanol debates, I always maintained that the agriculture lobby is bigger than the oil lobby. But for some reason, the link does not list the ag lobby in their Top Industries list for lobbying. But if you look at their detailed statistics, agriculture spent more money over the past 14 years than did the oil industry: $1.4 billion for agriculture versus $1.15 billion for oil companies. That would rank agriculture #4 on the list over the past 14 years. In 2010, the agriculture industry spent $121 million, had 473 clients, and employed 1,151 lobbyists. By contrast, the oil industry spent $145 million (their spending was higher than agriculture’s in 2010, but was lower in most years), had 200 clients, and employed 798 lobbyists. So, by most measures (historical spending, number of lobbyists, number of clients) the ag lobby is bigger than the oil lobby.

So the claim is true, but misleading: Oil companies did spend over $1 billion in lobbying over that 14-year time frame. But without context the claim is grossly misleading by not showing that oil companies were pretty average relative to other industries with respect to their lobbying efforts. This, despite being larger than many of these other industries, but more importantly despite facing much more open hostility from one of the political parties that would seemingly be happy to legislate them out of existence.

9. Oil companies should be nationalized

This one was pretty popular in the comments following the article. But as Ed Markey was quoted in the article “America is swimming in debt while oil companies are swimming in profits.” Now that’s a strong endorsement for the government to run the oil companies, isn’t it? Our government has shown themselves to be such good stewards of managing our tax dollars. Perhaps after a few years of government administration, the oil companies will also be swimming in debt and teetering on default and everyone will be happy.

10. Renewable energy creates more jobs

  Actually, this one is true, but most people likely never stop to consider why that is. With fossil fuels, nature already grew the biomass, harvested it, and used the temperature and pressure of the earth to chemically convert it into an energy dense form of energy like oil. Humans are left to collect that energy dense material and convert it into usable energy.

With renewable energy, humans must do the planting, growing, harvesting, and then ultimately process it into usable energy. Because humans are engaged in more steps of the process than in fossil fuels, it necessarily takes more people to produce one energy unit of renewable energy against an equivalent unit of fossil fuels. This is a big reason why renewable energy has long been more expensive than fossil energy. It probably won’t be that way forever, and it isn’t true in every single case. As fossil fuels become ever harder to reach, I believe that more renewables will compete on a level playing field. And maybe some day when oil is much more difficult to extract it will take just as many people to produce a barrel of oil as it does to produce a barrel of renewable fuel.

Conclusions

The biggest takeaway from all of this is that people are grossly, horribly misinformed about oil companies. But another big lesson here is that they don’t seem to care. Often, when I would engage someone to correct them on one point or another, they would simply ignore the correction and toss out another bit of misinformation. People just weren’t really interested in getting to the truth of the matter. They “know” oil companies are bad, and they won’t hear anything to the contrary.

Most of these people likely can’t imagine what their life would be like without the oil that is produced, refined, and turned into fuel, plastics, and medicines. In the U.S, the idea that oil companies are parasites with few redeeming qualities is so embedded in many people that it would likely take a serious oil shortage — and a realization of just what life will be like without ample supplies of oil — before attitudes change. This is doubly-true since one of our major political parties has long considered the demonization of the oil companies to be a great way to win votes. But they should be careful what they wish for, because life won’t be as pleasant as they think if they drive our domestic oil companies out of business or out of the country.