Cut oil subsidies, but don't decry profitsMarch 30, 2012: 10:01 AM ET
Total oil profits look huge because the companies that generate them are gigantic. Proportional to their size, they're not so outrageous.
FORTUNE -- The fate of Obamacare notwithstanding, the rebounding economy has greatly improved the president's re-election chances. One major economic problem looms, however: rising gas prices. His tactic seems to be to unfairly redirect the blame toward the oil companies to escape having it unfairly directed toward himself.
The main reason for the price hikes is geopolitical fear, but that doesn't make for an easily digestible campaign sound bite, for either party. So the Democrats blame the Republicans and the oil companies, and the Republicans blame the Democrats and Obama.
The Senate on Thursday rejected a measure to end special tax breaks for Big Oil. The shortfall in votes was expected. Obama and Senate Democrats knew it was a loser, but the vote gives them an issue to use against the Republicans, who they can paint as serving the interests of the oil industry.
Yanking subsidies from the oil industry is a good idea, and it would be even if gas prices weren't soaring. The bill called for redirecting tax subsidies toward clean energy and deficit reduction, both of which need the funds and are more deserving of them. But before the vote on Thursday, Obama said the tax breaks should end in part because of the enormous profits the oil companies earn. "It's not like these are companies that can't stand on their own," he said.
That's true. The industry is doing just fine and doesn't need special help. But oil profits are enormous, when expressed as a total, mainly because oil companies and their sales volumes are enormous. As a proportion of their size, profits are actually relatively modest, in terms of margins. Total profits for the Big Five oil companies BP (BP), Chevron (CVX), Exxon (XOM), Shell (RDS.A), and ConocoPhilips (COP) were about $140 billion in 2011. But the average net profit margin was just 5.4%, based on numbers reported by Google Finance. On the high end, Chevron's margin was 10.65%. On the low end, ConocoPhillips' was 4.98%.
Investors have different expectations for margins in different industries, largely because cost structures vary widely. Technology historically has drawn higher than average margins. Yahoo's margin is as wide as it is thanks mainly to huge cost cuts that were made in response to falling sales and market share.
Another important caveat: critics often say that a better measure of oil-company profitability is return on equity, which shows how efficient a company is at generating profits, particularly for a capital-intensive industry like oil. And those critics have a point: the average return on equity for the Big Five is 23.59%. That's high. But so is Wal-Mart's (WMT) 22.55 percent and Apple's 41.67% General Electric's (GE) is 11.56% and Yahoo's is 8.36%.
Nobody can reasonably argue that the oil companies are hurting. They clearly have no need for special tax breaks, especially with the deficit ballooning and the dire need to move toward cleaner, renewable sources of energy. But while there are plenty of evils committed by the oil industry, many of them on the environmental front, the mere presence of healthy profits isn't one of them.