Entire Oil Industry Gushed Windfall Profits in the Bush/Cheney Years

Here are some key financial specifics of just what was going on with Big Oil during the Bush/Cheney years (2001-2008).

Globally, in Fortune’s ranking of the world’s largest companies, the top six earners in 2008 were all oil companies:

1. Exxon Mobil (US)…....$45.2 bil
2. Gazprom (Russia)…....$29.9 bil
3. Royal Dutch Shell…....$26.3 bil
4. Chevron (US)……….....$23.9 bil
5. BP (UK)……………........$21.2 bil
6. Petrobras (Brazil)…….$18.9 bil

And then, US-owned ConocoPhillips registered core 2008 earnings, exclusive of one-time asset write-downs, of $16.4 bil, which would have placed them 10th on the above list.

So just who were the companies ranked 7th through 9th? Would you believe Microsoft ($17.7 bil), GE ($17.4 bil) and foreign-owned Nestle ($16.9 bil)? This just reveals the extent to which Very Big Oil dominated the world economically by the end of the Bush/Cheney presidency.

How has this changed from the start of the 2000 decade, before the Bush/Cheney years? Well, dramatically.

In Fortune's 2000 ranking for largest companies just in the US in 1999, Exxon Mobil had $7.9 bil of earnings (ranked just 4th) and Chevron ranked just 48th. Also, neither Conoco nor Phillips Petroleum was in the top 100.

On the other hand, in this Fortune 2000 ranking, GE (ranked 1st in the US) had earnings of $10.7 bil in 1999 and Microsoft had earnings of $7.8 bil.

Now let me get really specific here. I’m focusing here on profit improvement from the last two Clinton/Gore Presidential years (1999 and 2000) to the last two Bush/Cheney Presidential years (2007 and 2008).

As a point of reference, I’ll start with the largest, very best Dow Industrial non-energy companies, which generated total earnings in the last two Bush/Cheney years of in excess of $10 bil. As you can see, these 16 superb companies performed very well in the financially depressed Bush/Cheney years.

Largest Growth Dow Industrials (16)
..........................Net Income from Continuing Operations
.....................................................................2007-2008
..........................................................................Over
.............................Two Years....Two Years....1999-2000
............................2007-2008...1999-2000...% Increase
.............................(in millions of dollars).......(Decrease)
Intel.........................12,268........17,849............-31%
Merck.......................11,083........12,713............-13%
Verizon Comm..........23,146........19,106.............21%
Bank of America.......18,990........15,399.............23%
IBM.........................22,752........15,805.............44%
JP Morgan Chase.....19,064........13,228.............44%
ATT (SBC)................24,818........14,540.............71%
GE...........................42,103........23,452.............80%
Microsoft................31,746........17,206..............85%
Pfizer......................16,248..........8,690..............87%
Walmart..................27,022........12,169.............122%
Hewlett Packard......15,593..........6,665.............134%
JNJ.........................23,525..........9,226.............155%
Coca Cola................11,788..........4,608.............156%
Procter & Gamble....21,861..........7,305.............199%
Cisco Systems.........15,385..........4,691.............228%
Total.....................337,392......202,652............66%

In comparison, below here are the comparable profit numbers for US Very Big Oil plus BP, which has huge operations in the US. Clearly, in the Bush/Cheney years, US Very Big Oil substantially outperformed the above very best large non-energy Dow companies (total earnings growth of an incredible 289% vs. 66%). Whoa, did Big Oil ever dominate economically by the end of the Bush/Cheney term. Instead of being Too Big to Fail, they are now Too Big to Listen to Anyone.

Very Big Oil Companies (4)
........................Net Income from Continuing Operations
...................................................................2007-2008
........................................................................Over
...........................Two Years....Two Years....1999-2000
..........................2007-2008...1999-2000...% Increase
...........................(in millions of dollars)......(Decrease)......HQs
BP.........................42,835........14,779..........190%.....London
Exxon Mobil..........85,830........23,900........259%.....Houston
Chevron................42,619.........10,974.........288%...San Francisco
ConocoPhillips.......31,584*.........2,452.......1,188%....Houston
Total....................202,868.........52,105.........289%

* exclusive of one-time asset writedowns

But the above earnings growth numbers are just a drop in the bucket as compared to the nosebleed earnings growth during the Bush/Cheney years of the 20 Other Big Oil companies, which each had total earnings for 2007 and 2008 combined of greater than $2 bil. The total earnings growth of these 20 Other Big Oil companies was an off-the-charts 733% in the Bush/Cheney years, as compared with 289% for the 4 Very Big Oil companies and with 66% for the best very large non-energy Dow Industrial companies.

As you review these incredible numbers below, it is quite clear that something obscene happened here that had no business of happening. While the country, US businesses and US citizens suffered severely during the Bush/Cheney years, the entire Big Oil industry rocked, dancing the Houston Hustle, and clearly at the expense of everyone else. This just wasn't right and, in all fairness, needs to be both immediately and dramatically corrected.

Other Big Oil Companies (20)
..........................Net Income from Continuing Operations
...................................................................2007-2008
........................................................................Over
.............................Two Years..Two Years...1999-2000
.............................2007-08...1999-2000...% Increase
..............................(in millions of dollars)...(Decrease)...HQs
Hess...........................4,192.......1,461.........187%....New York
EOG Resources...........3,527.........966..........265%....Houston
Apache.......................3,524.........922..........282%....Houston
Occidental Petroleum12,108......2,137.........467%....Los Angeles
Murphy Oil..................2,484.........426..........483%....Arkansas
Marathon Oil...............7,150.......1,066..........571%....Houston
Anadarko Petroleum...6,987.........867...........706%....Houston
Diamond Offshore........2,155.........228..........845%....Houston
Noble Energy..............2,294.........241...........852%....Houston
Valero Energy.............3,365.........353...........853%....San Antonio
Schlumberger........10,599......1,064..........896%....Houston*
Noble Corp.................2,767.........250..........1,007%....Houston**
Halliburton.............5,178.........362.........1,330%....Houston
XTO Energy................3,603..........164..........2,097%....Fort Worth
Baker Hughes.............3,149..........135..........2,233%....Houston
Ensco Intl...................2,130...........85.........2,406%Dallas/London
Transocean.............7,333.........165.........4,344%.Houston**
Weatherford................2,552.........(23).......11,196%....Houston***
Chesapeake Energy.....2,059.........(11)........18,818%Oklahoma City
Natl Oilwell Varco........3,289............4.........82,125%....Houston
Total.........................90,445....10,862.............733%

* also The Netherlands
** also Cayman Islands and Switzerland
*** also Switzerland

Yeah, that is correct…..these above 20 Other Big Oil companies had total earnings growth in the last two Bush/Cheney years over the last two Clinton/Gore years which was more than tenfold the growth of the very best non-energy Dow Industrial companies over the same period. Further, the four very Big Oil companies earnings growth in 2007 and 2008 over 1999 and 2000 was 4.4 times larger than the earnings growth of the very best non-energy Dow Industrial companies over the same period.

And all of this Big Oil windfall profit gushing in the Bush/Cheney Presidential years occurred while these same Big Oil companies were granted incredibly lucrative tax loopholes by the US government. Further, the US government, instead of regulating these Big Oil companies, decided to grease the skids for these Big Oil companies, with the result being that they all generated windfall profits during the Bush/Cheney Presidential years.

I think this is the Presidential legacy of the Bush/Cheney years. All of Big Oil rocked, proudly dancing the Houston Hustle in the 2000s Lost Decade, while the country, so many domestic businesses, and so many US citizens severely suffered. And I also think the above very robust Big Oil numbers reveal why most of Big Oil, and its many US Congressional supporters, are not willing to help the current Obama Administration in its intense effort to get the country out of its massive economic hole. In fact, many of them are doing everything in their power to see to it that the Obama Administration fails. What an absolutely disgusting strategy.

The Houston Hustle started in the 2000s Lost Decade with Enron, continued unabated throughout the entire span of the Bush/Cheney Presidential years with the nosebleed, windfall profits of the entire Big Oil Industry, and still continues today in the Halls of the US Congress....it's time to vote all of these US Congressional shills of Big Oil out of office in November 2010. They are wrecking the country economically.

Now let me spend some time on these Big Oil tax loopholes.

My understanding is that the Obama Administration would like to eliminate LIFO (last-in, first-out) inventory for tax purposes for Big Oil and for the Big Oil related industries. Companies experiencing increasing prices of their inventories over the years have been the major beneficiaries of LIFO. Thus, with the dramatic increase in oil prices, US Big Oil has been a huge winner with LIFO. But LIFO is an unrealistic financial boondoggle and has resulted in US Big Oil companies having their inventory costed on their balance sheets at prices of decades ago. And then on the flipside of the coin, this LIFO approach results in US Big Oil receiving substantial Cost of Goods Sold tax deductions based on the most recent, usually very steep oil prices prevailing when the goods are sold.

Just how large is this LIFO inventory tax loophole for Oil companies? Well, Exxon Mobil stated its Oil Inventories on its 2009 year-end balance sheet at $8.7 bil. If instead, these Oil Inventories were stated at the more realistic current cost, the amount reported would have been $25.8 bil…yeah, that’s triple the amount actually recorded. And the US FASB, unlike most of the rest of the world, even permits this. Also, the IRS LIFO conformity rule permits US companies to use LIFO for tax purposes only if they also use it for financial statement purposes….what an absolute mess.

And then a second tax loophole that US Big Oil has benefited from over the years is Percentage Depletion on the amounts spent on natural resources, such as oil under the ground. In a non-lose financial situation, each year the oil company computes depletion under both the cost method, similar to how units-of-production depreciation is computed, and also under the percentage method, based on a percentage of gross income from the property. Then the oil company is able to deduct each year the higher of the two numbers. End result, over the life of the natural resource, the total tax depletion deduction can and has far exceeded the total cost of the natural resource. That's incredible.....they are able to deduct much more than they have actually spent.

Intangible drilling costs (Ouch! that reminds me of BP and Transocean) are the exploration and development costs related to oil wells. A third tax loophole for US Big Oil is that all of these costs can be immediately deducted, instead of more realistically being written off over the useful life of the property.

Thus by closing oil company tax loopholes, like these three, Big Oil is not being penalized. Instead, all that is happening is that a financial boondoggle is being eliminated that shouldn’t have been there in the first place.

Further, I don’t think Big Oil has any business being eligible for the very lucrative Domestic Production Activity Deduction for federal income tax purposes. With its severely high energy costs placed on other domestic businesses, Big Oil was able to reduce its US income taxes by maximizing its own Domestic Production Activity Deduction. At the same time, such Big Oil high energy pricing action reduced the tax benefit other domestic businesses received from the Domestic Production Activity Deduction.

The responsible thing to do would be to close all of Big Oil’s tax loopholes and use the proceeds to fund desperately needed real US long-term private sector job creation and to also help fund a very robust permanent business research tax credit, with a clearly green emphasis. US citizens are shouting out for the Big Oil supporters in the US Congress to stop their obstructionist behavior and work with the Obama Administration to help get the country out of its deep economic hole.

US Got Income Tax Slicked by Both US Big Oil and BP in the Lost 2000s Decade

When I do the math from segment and income tax footnotes for US Big Oil (Exxon Mobil, Chevron and ConocoPhillips), here are my results in total for the 2000s Lost Decade.

US Revenues of these three US Big Oil companies of $2.7 trillion for the 2000s decade, represented 43% of their Worldwide Revenues of $6.2 trillion. However, US Pretax Income for the same ten years was $224 billion, or an incredibly smaller 28% of Worldwide Pretax Income of $807 billion.

Then testing foreign-owned Big Oil, BP had US Revenues of $922 billion for the 2000s decade, which represented a huge 40% of BP’s Worldwide Revenues of $2.3 trillion. However, BP’s US Pretax Income before Interest for the 2000s decade was $76 billion, or also an incredibly smaller 30% of BP’s Worldwide Pretax Income before Interest of $250 billion.

Just looking at the most recent three years, these four Big Oil Companies had US Pretax Profits Mix, which were dramatically lower than their respective US Revenue mix, as follows:

2007 Second Last Bush/Cheney Year

Exxon Mobil………..19% US Profit Mix..........31% US Revenue Mix
BP…………………......19% US Profit Mix..........36% US Revenue Mix
Chevron……………..24% US Profit Mix..........44% US Revenue Mix
ConocoPhillips……60% US Profit Mix..........70% US Revenue Mix

2008 Last Bush/Cheney Year

Exxon Mobil………..12% US Profit Mix..........30% US Revenue Mix
BP…………………......26% US Profit Mix..........34% US Revenue Mix
Chevron……………..25% US Profit Mix..........44% US Revenue Mix
ConocoPhillips……46% US Profit Mix..........69% US Revenue Mix

The momentum of this trend carried over, and even significantly widened, in the first Obama presidential year of 2009:

Exxon Mobil………. 7% US Profit Mix..........30% US Revenue Mix
BP………………….....12% US Profit Mix..........35% US Revenue Mix
Chevron…………….. 7% US Profit Mix..........43% US Revenue Mix
ConcocoPhillips….24% US Profit Mix..........65% US Revenue Mix

And then for the entire 2000s Lost Decade

Exxon Mobil………. 22% US Profit Mix..........30% US Revenue Mix
BP…………………......30% US Profit Mix..........40% US Revenue Mix
Chevron……………..26% US Profit Mix..........45% US Revenue Mix
ConcocoPhillips…..49% US Profit Mix..........71% US Revenue Mix

I think these above numbers reveal that the US government did not get its fair share of income taxes from not only the three US Big Oil companies, but also from BP. And these are just Financial Statement Income numbers, which do include the effect of the LIFO Inventory tax loophole, since to use LIFO for tax, it also must be used for books. However, it doesn’t include the effect of the additional Big Oil very lucrative tax loopholes like percentage depletion, expensing intangible drilling costs and the benefit of the domestic production activity deduction.

Ignoring the effect of the latter three tax loopholes, which should be closed, if these four Big Oil companies generated US taxable income in total for the 2000s decade at the same percentage as their US Revenues represented of their Worldwide Revenues, then here are the related additional US taxable income computations for the Lost 2000s Decade:

Co.WW Pretax Income.X.(US Rev Mix–US Pretax Inc Mix)=Addtl US Taxable Income

Exxon Mobil…...$457 bil X (30% - 22%) = $36.6 bil
Chevron………....$211 bil X (45% - 26%) = $40.1 bil
ConocoPhillips..$139 bil X (71% - 49%) = $30.6 bil
BP…………….......$250 bil X (40% - 30%) = $25.0 bil
Total………......$1,057 bil……………….... = $132.3 bil

In addition, I think Royal Dutch Shell should follow a similar pattern. It didn’t disclose its segment profits by country, thus I can’t compute a similar impact. However, for just the last six years in total, its US Revenues were $535 bil, or 27% of its Worldwide Revenues of $2.0 trillion.

It seems to me that the above computations of additional US taxable income would be a good starting point to assess a fair windfall profits tax on all of Big Oil for the 2000s Lost Decade.

Also, for 2010 going forward, I think I would put in an additional US income tax each year for situations where a Big Oil company has a US Pretax Income Percentage Mix that is less than say 90% of its US Revenue Percentage Mix.

Further, I think it is only fair to also close the above four earlier mentioned Big Oil tax loopholes.

These Big Oil companies placed immense financial pressure in the 2000s Lost Decade on both US businesses and US individuals, while at the same time, they were generating nosebleed worldwide profits. Thus, I think it is only fair that they pay for some real very healthy US private sector job creation as well as providing funding for innovative very robust, permanent research tax credit, with a clear green emphasis....China is moving up much too quickly on the US competitive technological advantage here.