Robert Reich, former U.S. Secretary of Labor and current professor at Berkeley, is mad that this country’s most efficient manufacturing industry made money in the first quarter. He expressed his disgust over the weekend in a piece published at SFGate.com.
Mr. Reich is aghast that Exxon earned… are you ready for this… 10½ cents on the dollar last quarter! Of course, that is not how he framed his argument. Instead, he highlighted Exxon’s $10.7 billion first quarter profit, up 69% from a year ago. It’s funny, we do not remember Mr. Reich expressing such outrage when Exxon reported a 58% decline in 2009 first quarter profits.
Apparently, he only expresses indignation when a company makes a profit that he deems too high. For instance:
“The five biggest oil companies together report more than $35 billion in profits. This gusher is an embarrassment for an industry seeking to keep its $4 billion annual tax subsidy…”
That is a neat rhetorical sleight-of-hand on Mr. Reich’s part.
First, he neglects to inform that this $35 billion in profits was generated on sales of $406 billion, for an average margin of 8.7%. The gain in revenue was largely a function of the rise in crude oil prices. In the first quarter of 2010 Brent crude oil futures averaged $77.43 a barrel. Prices in the first quarter of this year averaged $105.51; up 36% year-on-year.
Crude oil prices surged last quarter in the wake of Middle East turmoil and U.S. currency debasement. Nevertheless, the Left thinks Big Oil should be brought to task for events that were not in its control. If Mr. Reich wants to go after oil bogeymen, he should try looking at the policymakers that set this country’s foreign and monetary agenda.
Furthermore, Mr. Reich also pulled a Clinton in denigrating the oil industry for trying to preserve its annual tax subsidy. The implication here is that Big Oil is the only industry to benefit from the 2004 Domestic Production Activities Deduction (Internal Revenue Code Section 199). This is a specious indictment. The tax deduction applies to all manufacturing companies… and yes, that includes oil companies.
If the Left thinks it is fair to persecute specific companies based on earnings, then why stop at the oil industry? After all, the five oil companies targeted last week by Senate Democrats earned less than 9 cents on the dollar in the first quarter. Heck, credit card companies, Visa, MasterCard and American Express earned on average 29.9 cents on the dollar last quarter. Surely some of this money should also be confiscated so the Left can dole out the proceeds to their favored interests.
It seems that the biggest sin committed by Big Oil is that the industry has not invested in alternative forms of energy to a degree that is acceptable to Mr. Reich. Therefore, he feels Congress should “…impose a windfall profits tax on Big Oil's money gusher to be used for renewable energy. The tax would be triggered whenever oil company profits exceed 10 percent of their revenues.”
Why does Mr. Reich want to stop at 10%? Why not 5% or 1%? Why not just pass a law that requires all profits be turned over to the State?
Finally, Mr. Reich believes “… there are strong reasons to invest in renewable energy, even in a time of budget austerity. Boosting energy from wind, solar, biomass and water is a far better use of that $4 billion a year than giving it to the oil companies.”
What kind of double standard is this? One industry’s “giveaway” is another industry’s “investment”?
As has been widely reported, GE* claimed a tax benefit of $3.2 billion for last year.
As the New York Times explained it:
Its (GE’s) extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore.
- NYT, March 24, 2011
GE fiercely lobbies for tax breaks and is lauded. The company’s CEO, Jeffrey Immelt was tapped to replace former Fed Chairman Paul Volker to head the White House’s outside panel of economic advisers.
On the other hand, oil companies take a deduction that is open to all U.S. manufacturers (including GE) and somehow Mr. Reich thinks that this is a giveaway.
Let’s be clear on this. When anyone associated with this White House uses the verb invest, that is code for income redistribution; as in taking money from the productive side of the economy (in this case, oil) and giving it to the nonproductive side (alternatives) of the economy.
Here is The Schork Report's bottom line: money appropriated from five oil companies by the State, to be distributed to industries that are cherry-picked by politicians, will do little to spawn innovation and nothing to solve this country’s energy needs. Instead, it will likely encourage waste and fraud by politically-connected rent seeking “green” industries.
* GE maintains a minority ownership of NBCUniversal, CNBC's corporate parent.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.