5-12-08 by dugan
It’s a flat-out lie when oil companies say they’re only making an
"average" percentage of profit compared to other companies.
Furthermore, journalists shouldn’t be taking the oil industry’s figures
at face value. That’s the conclusion of a well-explained report in Nieman Watchdog
on how oil companies get away with describing their profit as a
percentage of revenue when issuing a press release, then use the
accurate "return on capital" figure when talking with investors.
OilWatchdog took a briefer look at the subject
recently, and the Nieman piece, by Henry Banta, goes into much more
detail. Also, befitting a journalism website, he’s far more critical of
the mainstream media. Banta says:
This is not another piece about oil prices. It is about how the
media cover the oil industry and its political machinations. Over the
past year, and with increasing intensity lately, the oil industry has
engaged in a massive propaganda offensive claiming that its profits are
no higher than many other industries. It makes this claim by comparing
its return on sales with those of other industries. This is
intentionally misleading and deceptive.
The very fact that a major industry is devoting massive resources to
what is nothing more than an outrageous lie should be major news.
Suppose Clinton, Obama, or McCain set out on a campaign of conspicuous
lying? Wouldn’t it be news? Why should an industry with hundreds of
billions of dollars in resources and a political agenda be immune? Why
does it get a pass?
Actually, I can think of several reasons: When the oil companies issue
their profit reports, they discuss only the profit as a percentage of
revenue, ("It’s only 10%!). They don’t reveal the return on capital
(27% last year, industrywide) until their investor presentations later.
So a reporter has a current figure on the profit report press release,
and if he or she wants to discuss return on capital, the only available
figures are from the previous quarter or the previous year. It’s tough
to explain, requires definitions and will make editors ask questions.
If the explanation gets past an editor, then the reporter’s industry
sources will be peeved. I get how hard it is to dispute the oil
companies’ profit percentages in every danged story. So it’s a
brilliant tactic on the part of the oil companies.
That still doesn’t mean reporters should accept without question
Exxon’s propaganda about how the company’s profit isn’t really so
outsized ("Really! Only 10%!), even if it totals $40 billion.
Here’s more from the Nieman story:
In the most basic sense, [profit] it is the reward that the entrepreneurs get
for taking the risks and putting up the money. Profit is what the
investors get back for putting up money. Profit is not the return on
sales or revenue; it is the return on the dollars invested. It is this
return on capital that enables the market to direct investment where it
will make the most money, and be used most efficiently. It is at the
heart of why we consider our economic system efficient. It is why we
call it “capitalism.” Comparing the return on sales for firms in
different industries is meaningless. It tells you nothing to know that
Microsoft earned a 27 percent return on revenue while Verizon earned
only 6.6 percent on its sales.
By using a return on sales to make comparisons between industries,
the oil industry is engaging in a gross deception. It is simply lying.
No other word works. And the oil firms know better. They certainly do
not talk that way to investors or the financial community As Peter
Ashton pointed out
on Nieman Watchdog last year (June 15, 2007), ExxonMobil got it right
in its annual Financial and Operating Review for 2006. The quote is
"The corporation’s total ROCE [return on capital employed] is net
income excluding the after-tax cost of financing, divided by total
corporate average capital employed. [ExxonMobil] has consistently
applied its ROCE definition for many years and views it as the best
measure of historical capital productivity in our capital-intensive,
long-term industry, both to evaluate management’s performance and to
demonstrate to shareholders that capital has been used wisely over the
That’s in Exxon’s own words, but not the words it uses when defending its profits in press releases.