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THE PETROLEUM INDUSTRY How The Oil Industry Did Financially In 1991 — Prospects For The Future — Percent 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 The oil industry had a disappoint-ing year in 1991—the combined profits of the leading 20 oil compa- nies were more than 20 percent be- lowthe income earned in 1990. Total sales of the oil companies in 1991 fell by more than four percent—the first time sales have fallen since 1986. The oil industry has been hurt by the recession, as consumers bought less gasoline and depressed industries reduced their demand for other petroleum products and pet- rochemicals. In 1991, the profitability of the industry fell to a 9.8 percent return on stockholders' equity, or only a 3.2 percent return on total sales (see Fig. 1). However, the worldwide prof- itability of U.S. oil com- panies masks the ex- tremely low earnings they've been able to achieve here in the United States. The low rate of return in the United States is largely due to a poor investment climate for exploration and devel- opment: • Political and regu- latory restrictions are limiting access to the most promising lands for exploration, • The political risk has increased even if oil or gas is discovered, because pro- duction could be halted or con- strained by regulation, reducing the value of the find, and • Tax law in the United States is not as favorable to industry as tax laws in many other countries. Largely because other countries have actively encouraged explora- tion, U.S. oil companies are invest- ing massive amounts of capital over- seas. In 1990, for the first time, over half of the exploration and produc- tion spending of U.S. oil companies went toward developing new oil and gas resources outside the United States. Oil Company 1991 Financial Results API aggregates the financial re- sults for 20 leading oil companies to give a picture of industry trends. The 1991 figures for API's sample of oil companies show that: • Total revenues declined 4.4 per- cent. from $425.7 billion in 1990 to $406.9 billion in 1991. Nineteen- ninety-one was the first year since 1968 in which the revenue declined. Fourth quarter 1991 revenues were 18.7 percent below fourth quarter 1990 revenues. • Net income, or income after in- terest and taxes, was $13.2 billion for all of 1991, a 20.7 percent drop from 1990s $16.6 billion. Net in- come in the fourth quarter of 1991 dropped 34.8 percent below the fourth quarter of 1990. Eight com- panies sawtheir profits drop by more than 60 percent, and of those, four companies had more than an 80 per- cent drop in their net income in 1991. Three other firms had actual losses. • The oil industry had a profitabil- ity rate of 9.8 percent in 1991, mea- sured as the ratio of net income to stockholders'equity, down from 12.8 percent one year earlier. The oil industry's earnings as a percentage of total sales dropped from 3.9 per- cent in 1990 to 3.2 percent in 1991. portation are their core businesses. The worldwide petroleum sector earnings of the 20 U.S. oil compa- nies declined by 19.9 percent from 1990 to 1991. Within that, domestic petroleum earnings fell 35.5 per- cent, whereas earnings from the for- eign petroleum operations of U.S. oil companies declined only 1.9 per- cent. As a result, in 1990, U.S. petro- leum operations provided the oil companies with 53.6 percent of their worldwide earnings. But in 1991, only 43.2 percent of worldwide pe- troleum sector earnings were gener- ated in the United States. Or put another way, earnings originating outside the United States rose from Oil Industry Profitability ] Returns On Sales 1 Returns On Equity 1988 1989 Source: Annual Reports, SEC 10K Data 1990 1991 Worldwide Petroleum Earnings Of U.S. Oil Companies ]J] United States Foreign 100% 75% 50% 25% 1990 1991 Source: Annual Reports, SEC 10K Data Figure 1 Oil Companies Did Marginally Better Than Non-Oil Companies The poor performance of the oil industry looks only slightly better when compared with the financial beating taken by the nation's other manufacturing companies in 1991 as a result of the recession. The net income of 100 leading non-oil com- panies tracked by API plummented by 59.7 percent in 1991 from 1990s level. In just the fourth quarter of 1991, their net income fell by 72.4 percent from the same quarter one year earlier. The poor earnings of the manu- facturing companies were strongly influenced by the huge losses posted by the auto companies and IBM. The profitability of the manufacturing companies (net income as a percent of stockholders' equity) fell from 13.0 percent in 1990to 5.1 percent in 1991. Low Domestic Earnings Key To Poor Oil Industry Performance Looking at a more detailed break- down of the operating earnings of the 20 U.S. oil companies reveals some very important trends. Al- though many of these companies have important chemical, coal and other energy operations, the petro- leum sectors of exploration, produc- tion, refining, marketing and trans- Figure 2 46.4 percent of worldwide in 1990 to 56.8 percent in 1991 (see Fig. 2). Overseas Investment As Much As Five Times More Profitable Several factors are responsible for this shift. One reason is that other countries, particularly those in Eu- rope and the Far East, havenotbeen hit as hard by the current recession as the United States. As a result, refining and marketing (down- stream) earnings have held up bet- ter overseas than in the United States. Probably a more important trend, however, is the declining profitabil- ity of U.S. domestic exploration and production (upstream) investments. A September 1991 study by First Boston Corp. found that "operating earnings per dollar of net property, plant and equipment outside the United States are several times greater than the same measure in the United States." In fact, accord- ing to that study, earnings overseas were as much as five times the rate of earnings in the United States. Investment Overseas Will Mean Fewer U.S. Jobs In response, U.S. oil companies are being forced to look for their future abroad. The facts are that: • The foreign exploration and de- velopment expenditures ofU.S. com- panies have nearly doubled since 1986, growing from less than 30 per- cent of worldwide spending in the mid-1980s to over 50 percent in 1990. • While the four major oil compa- nies that already have large foreign sectors increased their investment overseas by a modest 15 percent from 1987 to 1990, the 14 oil compa- nies that have historically operated in the U.S. tripled their investment overseas duringthe same three-year period. Because of a variety of circum- stances, primarily economic and gov- ernment policies, the American pe- troleum industry has been forced to curtail its domestic op- erations. As a result, over the past ten years the industry has lost 326,000jobs, or 17 per- cent of total employ- ment. The exploration and development sec- tor of the petroleum industry has been hit the hardest—with 300,000 jobs lost from 1981 to 1991, a falloff of over 40 percent. On March 2, 1992, an article in The New York Times addressed the issue: "Many in- dustry executives and financial analysts said that the tally of jobs pared from oil and gas produc- tion in the United States since the peak month of the last drilling boom, January 1982, could exceed 400,000 by the end of this year, far more than the number lost in the same period in the American auto industry." One seemingly lost opportunity to create needed jobs and develop im- portant energy resources is the de- velopment of the coastal plain of the Arctic National Wildlife Refuge (ANWR). While oil exploration and development would leave a footprint the size of Dulles Airport in a frozen tract the size of South Carolina, ANWR operations at their peak level could create as many as 735,000jobs across the United States. These po- tential jobs —now apparently lost— would have provided work in explo- ration, development, transportation, refining, equipment manufacturing, and indirect support industries in all 50 states. Without an improvement in the investment climate in the United States, the trend toward overseas investment is unlikely to be reversed. Over the longer term, this "export- ing" of the U.S. oil industry means fewer U.S. jobs, lost tax revenues, and increased dependence on im- ported energy. American Petroleum Institute, 1220 L Street, N.W., Washington, D.C. 20005 April, 1992 103
