They (the media and the left) would have you believe that “big oil” and its billion dollar profits along with inept policy on the part of the Bush administration is the reason you are paying nearly $4.00 per gallon for gas.
I’m gonna have to disagree with them, and I’ll tell you why in this post.
The price of crude oil is not determined by the oil companies. While they may affect it to some degree, the price of crude is subject to the same laws of supply and demand that govern the rest of the US and free world economy.
The prices seen on a daily basis that has the media whipping up a froth of alarm is actually the bidding in the oil futures market. Those prices quoted are for crude oil to be delivered the next month. It’s actually a little more complicated than that, but for our purposes that’ll work.
There’s also a spot market that is even more volatile for crude available for immediate delivery. What determines the pricing in these markets is not “big oil” or even market demand. What drives it is what the traders think demand will be compared to what they think availability will be at that time.
Geo-politics plays a huge role in this. The current major unknown (traders hate unknowns) is the condition of the Nigerian oil fields. In recent years these production facilities have been under constant siege by militants, action that may result in the closing down of Nigeria’s 2.16 million-barrels-per-day production. That’s about 7.2% of OPEC’s production and nearly 3% of total world output.
Normally that wouldn’t seem to be a problem, but with producing nations shipping near capacity, demand from developing countries increasing and some analysts predicting a peak in production in a few years with ongoing declines thereafter, the current pressure on prices doesn’t look to be temporary. Many analysts predict an upward march to near $200 per barrel of crude within 2 years or sooner. At the current rate, it may well be sooner.
China, India, Russia and other rapidly developing nations are competing with the US for the finite supply, exploring and drilling in areas either geographically inaccessible to us or off limits due to the environmental lobby. China, Cuba and Mexico are planning to drill in the Gulf of Mexico while China bids on pipeline services in Alaska.
Bit by bit our resources are sold off or abandoned to foreign competitors while we complain and do little else.
But what about “big oil” and their “billion dollar profits?” Aren’t they making a killing off the consumer? As it turns out the answer to that is…No! The table below compares the 2005 profits of several major companies including oil and you can easily see that while amounts are large, “big oil” exacts a margin much lower than other large US companies in other sectors.
Oil company profits: A perspective Earnings, Revenues, Profits (Billions) for selected companies, recent quarter, 2005 Source: Bloomberg News, reported in AAPG Explorer Dec. 2005 | |||
Company | Net Profit | Revenue | Profit Margin |
Citigroup (banking) | $7.1 | $21.5 | 33% |
Microsoft | $3.1 | $9.7 | 32% |
Coca-Cola | $1.3 | $6.0 | 21% |
Procter & Gamble | $2.0 | $14.8 | 14% |
General Electric | $4.7 | $41.6 | 11% |
ExxonMobil | $9.9 | $92.6 | 11% |
ConocoPhillips | $3.8 | $48.7 | 8% |
IBM | $1.5 | $21.5 | 7% |
Chevron | $3.6 | $51.1 | 7% |
Wal-Mart | $2.8 | $76.8 | 4% |
Oil industry average profit margin is about 8.2%; (3rd Q. '05) for all US industry, the average is about 6.8%. Profits in the oil industry were easily outpaced by those of the Pharmaceuticals, Banks, Household Products, Software, Telecommunications, Semiconductors, Consumer Services, and Food, Beverage and Tobacco sectors. | |||
Should you think that is an anomaly, early figures for the first quarter of 2008 have Exxon, Conoco and Chevron earning .0857% on their total revenues of $235.5 billion dollars. That’s a net profit of $20.2 billion. But don’t worry; at the same time they paid $47.86 billion in taxes.
Let’s put that in perspective. You have a, say, widget you sell for $100. It costs you $71.08 to design, produce and sell that widget. After you collect your $100 from the sale you cheerfully give $20.32 to the government to spend any way they please and they let you keep $8.58 to do with what you wish.
In the case of “big oil” that $8.58 goes to the share holders who risked their money to invest in their future via the stock market while the government, which risked nothing took away nearly 2 and a half times what the investors received. And now Hillary Clinton, Barack Obama, Nancy Pelosi, Harry Reid and other Democrats want even more. (Psst..companies don't really pay taxes guys, it get's passed on to the consumer via cost of goods. Always has, always will. It's under the table taxation of the public.)
If the oil companies were to cut their profits to zero the most that would be saved at the pump would be .91.5¢/gallon. But in reality only .46% of a barrel of oil goes into gasoline so you might in reality see only a .424¢/gallon reduction. But how long do you think that would last? No company is in the business to break even. And no investor will willingly put his hard earned money into an investment when he knows his return is zero.
So the company goes out of business or is sold to an off shore investor, either way people are out of work and either the new owner or other international oil companies pick up the business and they earn the profits. And the government, they lose their cash cow.
"We are all in the same boat on a stormy sea and
we owe each other a terrible loyalty." - G. K. Chesterson
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