Acutely aware of public dissatisfaction over pump prices, the petroleum industry tries to explain fuel-sector economics.

The energy sector found itself reacting to a flurry of events in early 2006 that put the industry on front pages across the country - and occasionally on the defensive. First, there were tragic mine accidents in West Virginia (see page 6 for more.)

Later, Exxon Mobil posted a record annual profit for a U.S. company, an announcement that didn't sit well with many consumers upset about prices at the pumps. ("Largest. Profit. Ever." read a banner headline in the Chicago Tribune.) Soon after, President Bush in his State of the Union announced that the country is "addicted" to oil.

Letter to Congress
The same day Exxon Mobil announced its $36 billion earnings, Red Cavaney, president of the American Petroleum Institute (API), sent a letter to Congress explaining his industry's perspective.

"Our companies are working hard to increase supply, reduce demand, expand and diversify infrastructure and compete in a global marketplace," Cavaney wrote. "While the industry's revenues are large, so are its costs to provide consumers with needed energy."

The API president insisted that the petroleum industry's earnings are equivalent to other industries "and often much lower. This fact is not well understood, in part because reports typically focus on only half the story: the size of the profits earned. The total profits earned reflect the size of an industry or company, but are not necessarily an accurate reflection of financial performance."

Cavaney argued that profit margins "provide a more relevant and accurate measure of company performance, especially when compared with other companies that compete for financial capital. In 2004, the oil and natural gas industry earned seven cents on every dollar of sales compared to 7.2 cents for all U.S. industry. The five-year average for the oil and gas industry is 5.8 cents, close to the 5.5-cent industry average.

"Meeting consumer demands for energy takes tremendous investment," Cavaney told lawmakers. "Included are the costs of finding and producing oil and natural gas, and the costs of refining, distributing and marketing the many different energy products. The energy Americans consume today is delivered through investments made years or even decades ago. Today's industrial earnings are invested in new technology, new production, and environmental and product quality improvements to meet tomorrow's energy needs."

In his letter, Cavaney repeated his call for the government to concentrate on increasing the nation's fuel supplies while encouraging energy efficiency. "Congress can do its part by opening up the vast areas off our coasts and throughout America that remain off limits to new production," Cavaney wrote. "And while refiners have increased the efficiency, utilization and capacity of existing refineries, Congress should examine ways to reduce government barriers to capacity expansion."

Cautious Support
The industry was also quick to react to the president's State of the Union comments. Bob Slaughter, president of the National Petrochemical & Refiners Association (NPRA), said Bush reacted to consumers' concerns "in an appropriate fashion.

"NPRA also believes that technological advances will point the way to our nation's energy future," he said. "It is important, however, that mandates, price controls and other command-and-control or punitive measures not be adopted as energy policy, and we do not believe that the president indicated any support for these options."

Slaughter also cautioned that "the nation must not lose sight of the fact that oil and natural gas will continue to serve as foundation fuels for the American economy not only today, but for the foreseeable future. It follows that U.S. energy policy must continue to target its efforts on increasing domestic production of petroleum products and natural gas supplies, and the efficient usage of these fuels while maintaining environmental progress."

The president's call to increase investment in clean-coal technology garnered praise from Kraig R. Naasz, president and CEO of the National Mining Association.

"In this era, we should make greater use of abundant domestic fuels such as coal and lessen our nation's dependence on foreign energy sources," Naasz said. "The same technological innovation that has made coal increasingly clean will eventually lead to a near-zero-emissions coal-fired plant."

Naasz predicted that "technology can also make coal increasingly useful and safe to produce ... as a liquid fuel for transportation."  E+P