What is the "return on investment" to American consumers from higher oil company profits, derived in part from the steeper energy prices they are paying?
The question is at center stage once again as oil companies report first-quarter earnings that so far are showing comparable increases to the spectacular 72 percent earnings gain of the largest 25 US oil firms in 1979.
"It is easy to be preoccupied with the numbers, but they are really beside the point," says Texas A&M University professor of management Gerald Keim. "The meaningful question is what the companies are doing with the profits" to increase the nation's energy independence, he adds.
The oil industry is expected to make capital expenditures of $51 billion this year --past decade, the industry has, on average, invested twice as much money annually as it has earned in profits, the balance coming from debt and internal sources of cash.
About two-thirds of the capital expenditures this year will be devoted to energy exploration and production, with the aim of increasing supplies of oil and natural gas, according to the American Petroleum Institute. The rest will be spent on transporting and refining operations, research and development of unconventional energy sources, and nonenergy-related activities.
The oil industry is optimistic it can tap valuable new supplies of energy now that domestic prices for oil and natural gas are being decontrolled. One sure sign of this upbeat attitude is the higher investment in drilling activity so far this year in the United States. Rig activity reported April 21 was the highest in 25 years.
Still, for all this hefty investment, oil industry officials hold out little hope for any significant increases in conventional domestic reserves or lower energy prices for consumers.
From 1972 to 1978, for example, the oil industry as a whole was able to discover new oil reserves equal to only half of what was produced. New natural gas reserves averaged about half of consumption in the US in the 1970s.
In other words, the country's well of conventional energy reserves continues to run down.
"We're running very hard to stay even . . . but even with heavy spending we have not been able to arrest the decline in production," explained R. C. Thompson, vice-president of finance for Shell Oil Company in announcing the company's first-quarter earnings increase of 67 percent over the same period in 1978.
What is not precisely measureable is how much faster domestic oil and natural gas reserves would decline if companies were not spending more on exploration and production. Indeed, oil industry officials argue that declining reserves themselves are an indication that not enough money has been spent in the past in the domestic energy industry.
Consumers will likely continue to devote more of their paychecks to energy costs, providing funds for oil industry exploration and production and hoped-for additions to reserves.
In 1970, some 4.4 percent of the average household budget went to direct energy expenses, like gasoline and home heating oil, according to consumer economist Martin Duffy of Data Resources Inc. in Lexington, Mass. Today, those costs represent 6 percent of the family budget, and with domestic energy prices rising due to decontrol, American consumers can expect to see US prices rise faster than in other countries.
That will be a switch. Energy analysts conclude that 1979 profits for US oil companies were largely a result of the near-doubling of OPEC (Organization of Petroleum Exporting Countries) oil prices and that the bulk of the earnings was generated overseas, where consumers paid the world price for oil products. American consumers were still sheltered by energy price controls.
Overall, 1979 was an exceptionally good year for oil companies. Profits and rate of return -- earnings as a percent of net worth -- in the oil industry exceeded those among US manufacturing firms in general.
More typical is the pattern of 1969 to 1978, when the oil industry had an average rate of return of 13.9 percent, nearly identical to the 13.7 percent for the entire manufacturing industry, according to Citibank in New York.
Many analysts look for sharply lower earnings increases over the next five years for oil companies than that registered in 1979. "The current rate of gain is unsustainable; it reflects unusual increases in oil prices," said Philip L. Dodge, an energy analyst with Donaldson, Lufkin & Kenrette Securities Corporation in New York.
Mr. Dodge looks for oil earnings to grow on average about 15 percent a year over the next five years.
Some question whether massive capital expenditures -- the basic justification by oil companies for high profits -- is the best way to solve the nation's energy problems.
Mr. Duffy says he believes that current high oil industry profits will result in "excess expenses." He argues that the companies have more earnings than they can efficiently spend and he believes those resources should be taxed and used to encourage energy conservation and to meet other social needs.
"We would get a better return spending $1 on reducing demand [through conservation] than spending $1 on more production" with some of the profits, Mr. Duffy contends.
Government policy is already headed that way. The new US windfall profits tax will transfer energy income to other sectors of the economy. And there is a growing trend at the state level to tax oil company revenues for general purposes.
Connecticut recently enacted a 2 percent tax on the sales of petroleum products distributed in the state by oil companies with refining operations. Similar proposals have been introduced in New York and Illinois.