[Archive April 27, 2006]
The outrage-of-the-week™, as well as for some time now I suppose, has been the high price tag of gasoline and diesel fuel at the pump. (The cost of aviation fuel has increased as well but this doesn't result in "popular outrage.") The response of many has been consternation at the “record profits” that the oil companies are making. I’m certainly not an oil industry expert but I do know some basic economics. Basic economics and sanity require that these numbers be put in perspective. Those who are either "lost in the numbers" (quite reasonable) or don't understand them (quite reasonable) seem prone to find comfort in "conspiracy theories." The profits are indeed “record” but their expenditures are also very large. The profit margin is the real economic indicator which in my estimation puts these “record profits” in perspective. If I were more economically savvy I would perhaps accept the correction that the "price to earnings" (P/E) ratio is the best —or at least more accurate— indicator of the economic health of a company.
"Obviously it was a good quarter for us," Ken Cohen, the vice president of public affairs at Exxon, told reporters during a conference call. "We understand that people are quite upset with the price they're paying at the pump, and we empathize with it.""I think we haven't done a good enough job explaining the fundamentals of our business," said Mr. Cohen of Exxon. "I think we're going to be very busy."
“Exxon Profits Rise, and So Does Scrutiny” By Jad Mouawad, N.Y. Times April 27,2006
Exxon Mobil Corporation for the first quarter of 2006 had “Total revenues and other income” of 88,980 million U.S. Dollars; Net income (U.S. GAAP) of 8,400 million compared to a net income of 7,860 million for the first quarter of 2005. The margin for Q1 is close to 10 percent. Their stock, XOM, has a P/E ratio of 10.93 (April 27,2006 close). I neither have the inclination nor the time to research the profit margins of other corporations. However, I do know that many like Microsoft Corporation have much high profit margins than companies in the oil industry. Industries outside of oil are smaller so it follows that their income, expenditures and profits will all be smaller. It's grossly unfair to focus solely on "profits". Confidence in coprorations has been justly shaken with recent scandals but nonetheless, we have laws and regulations in the United States and elsewhere to help ensure that the corporate books are not "cooked."
Supply and demand is the basic principle in oil. The growing economy of China —yes, economies grow—is driving up demand. Stability in oil producing regions is another factor. Higher prices result when there is instability or forecasted instability like in Iraq and Iran. Federal taxes (18.4 cents per gallon) and state taxes add to the cost of fuel. Fuel costs always rise in the summertime due to demand or the higher costs of producing "cleaner blends."
Some Democrats in congress are proposing to decrease tax breaks on the oil industry (increase taxes) which will have to be recovered most certainly by the oil compamies with higher prices at the pump. (It's fair to say that Democrats most often always respond to problems with higher tax proposals of some sort.) Some Republicans Senators in congress are offering a $100 "gas-tax holiday" rebate check for every family. This is certainly not going to go too far in practical terms. This proposal seems to be geared more towards garnering “perceived compassion and good will” (i.e. a political move.)
We should always approach “screaming headlines” and the “outrage” of others with perspective. These profits go towards investors. They go towards my 401k in fact! I like this. Profits are not evil. They are good and healthy for the economy and jobs. Let’s hope that the oil industry can indeed be up to the challenge of explaining more clearly the economics of the oil industry for the average man or woman on the street.
Photo: Pipeline ©Don Wilkie
Tags: Oil Profits, Exxon Mobil
