Last weekend, I got into a debate with my brother about whether the oil companies' profits were excessive. He argued that Exxon's profits were $40B last year, and that their profits had increased twentyfold in five years, while the price of gas had only doubled. I didn't think that was true, and thought that their profits had only increased in proportion to their revenues, that their margin was fairly constant (and not particularly egregious), and that they were only setting record total profits because their revenues were huge and the price had risen. So I decided to take a look at Exxon's annual reports, and though I'm not sure I fully understand all of the trends, I was pretty close to right, I'd say. As I suspected, Exxon's profits in the last five years have been fairly steady around 10%, as gas prices doubled (from $1.50/gal in 2003 to $3.00 in 2007) and crude oil prices more than doubled (from $28/barrel in 2003 to $64 in 2007). In 2006, Exxon derived about 2/3 of their profits from their "upstream" business (oil production) versus their "downstream" business (refineries and gas stations). Their volume of oil produced has been fairly steady around 2.5 million barrels/day since 1999, though there was a slight (4%) increase between 2005 and 2006. There has been some small growth in margin, which is to say profits growing slightly faster than revenues. I didn't look into why, which would take more time to get to the bottom of. (One thing I did note was that capital expenditures, which includes exploration costs, have not kept pace with revenues. Not sure if that means increased efficiency, or just downscaled investment in the future. Intuitively, I'd expect a time lag of some years between capital investment and its resulting revenue in this industry, and I'd also expect that new barrels of oil are generally more costly to obtain than in the past.) Anyway, here is data that I mined from Exxon annual reports, plus a couple industry sources for background history on crude and pump prices.
| Year | Revenue | Profit | Profit margin | Cap Costs | Cap/Rev | Mbarrels/day | $/barrel | $/gallon |
|---|---|---|---|---|---|---|---|---|
| 1999 | $184.8 | $ 7.9 | 4.3% | $13.3 | 7.2% | 2.51 | $17 | |
| 2000 | $231.8 | $17.7 | 7.6% | $11.2 | 4.8% | 2.55 | $27 | |
| 2001 | $212.8 | $15.3 | 7.2% | $12.3 | 5.8% | 2.54 | $23 | |
| 2002 | $204.5 | $11.5 | 5.6% | $14.0 | 6.8% | 2.49 | $23 | $1.35 |
| 2003 | $237.0 | $21.5 | 9.1% | $15.5 | 6.5% | 2.51 | $28 | $1.50 |
| 2004 | $291.2 | $25.3 | 8.7% | $14.9 | 5.1% | 2.57 | $37 | $1.90 |
| 2005 | $359.9 | $36.1 | 10.0% | $17.7 | 4.9% | 2.52 | $50 | $2.10 |
| 2006 | $365.5 | $39.5 | 10.8% | $19.8 | 5.4% | 2.68 | $58 | $2.85 |
| 2007 | $390.3 | $40.6 | 10.4% | $20.9 | 5.4% | 2.62 | $64 | $3.00 |
| 2008 | $93 | $4.00 | ||||||
Thus, of the three factors that account for a record profit -- volume, price, and margin -- it is price that accounts for the lion's share. (And if you want to understand why prices are so high, Jim Manzi recently provided an excellent synopsis -- look to supply-and-demand, inflation, already-high efficiency, and uncertainty compounded by speculation.) Bottom line: while 10% is certainly a nice profit to be making these days, it's not extraordinary or usurous in my opinion, and not what I would call a "windfall".
1 comment:
While your review of Exxon's 10K's disproves Andrew's contention that its profits went up 20-fold in five years, the figures -- assuming they aren't fixed to hide some of the profits -- I Andrew's error was quantitative, but not qualitative. In a free market, any industry that faces a marked increase in the cost of a raw material sees profit margins decrease. Price increases for the retail product never keep pace with cost increases. This economic fact is even true for most companies for which oil is a raw material or commodity used, from taxi drivers to trucking companies, and even gas-station owners. But despite spikes in the price of oil, Exxon has seen its profit margin increase each year, with the margin more than doubling during the time span of your statistics.
There is only one explanation for contradicting market theory: unfair trade practices, antitrust violations and corruption.
Look at it this way. If Exxon made 50 cents per gallon when it sold for $2, and the cost of gas doubled, to $4, if Exxon made the same 50 cents per gallon, its profit margin would drop by half even though it made the same profit. However, it's profit margin increased, not decreased, and it's profits increased at a greater rate than the increase in the price of gas.
Again, Andrew may have overstated the degree to which Exxon's oil profits are obscene, but he is correct that something fishy is at play.
Jeff Hersh
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