Gasoline prices are high, politicians are desperate and so we are back to demagoguery about the oil companies. We’ve been here before, and we are as wrong now as we were then. It may be popular, but facts, some of which I will provide here, do not support the tale of oil companies as evildoers.
Last night on Hardball and Last Word, every politician shown or interviewed, from Obama on down, spoke of the oil companies and referred to their “huge profits” or some phrase equivalent to that. The popular budget balancing act is to “eliminate subsidies to the oil companies” because “they certainly aren’t hurting right now.” Media stories continue to report “record profits” for oil companies, giving the amounts in absolute dollars and not putting those dollars into context of inflation or sales volume.
The rhetoric of raising taxes or eliminating subsidies on oil companies because of high gas prices is utterly nonsensical on the face of it. The price of the product is too high so your solution is to raise the cost of business for the companies producing the product? Can anyone seriously think that such a move would drive the price of the product down?
Any corporation is required to file documents with the Securities and Exchange Commission, and these documents are public record. They are not hard to read, so I went to the filings for the biggest three domestic oil companies, ExxonMobil, Chevron and ConocoPhilips, and studied their 10Q filings for the first quarter of this year.
ConocoPhilips had revenue of $58,247,000 in the first quarter of 2011, up from $45,720,000 in the same quarter of 2010, an increase of 27%. Their profit was $3,028,000, up from $2,098,000, an increase of 44%. On the face of it, this is not good, their profit increased 44% on a sales increase of only 26%, but there’s more to the story. Their profit margin was 5.2% in 2011, up from 4.58% the prior year. Making a profit of 5.2 percent on sales is barely acceptable in any business.
Chevron had revenue of $60,341,000 in the first quarter of 2011, up from $48,179,000 in the same quarter of 2010, an increase of 25%. Their profit was $6,211,000, up from $4,552,000, an increase of 36%. Here too, we see a profit increase of 36% on a sales increase of only 25% but their profit margin went from 9.45% in 2010 to 10.29% this year. That is a comfortable profit, certainly, but not what anyone would reasonably call usurious.
The biggest is ExxonMobil, whose revenue increased from $90,251,000 in the first quarter of 2010 to $114,004,000 in the same quarter of 2011, an increase of 69%. Their profit increased from $6,300,000 to $10,650,000, an increase of 26%. Here we see a different pattern; while their sales increased by 69%, their profit increased by a smaller 26%. Their profit margin still increased, from 6.98% in 2010 to 9.34% this year, but obviously it could have been higher had they chosen to do so.
Profit of 10% on revenue certainly falls within the definition of “not hurting,” but it hardly calls for stringent measures to punish them as evildoers. By contrast, consider that no one is arguing for punishment of Oracle Corp. for its earnings of 24% on revenue, or Microsoft for its 30%. We won’t even get into the earnings in the financial services industry.
The real culprit for high gasoline prices is, of course, mostly the falling value of the dollar on the international market. Nobody is going to mention that because then we would have to talk about why the dollar is falling, and we most definitely do not want to talk about that. The oil companies are so much an easier target. Too bad they are the wrong target.