Wednesday, May 10

Are ExxonMobil's Profits all that Bad? - Update

Once again ExxonMobil (XOM) is in the news again. This time for the 'insane' compensation given to it’s retiring CEO Lee Raymond totaling $400 million. I last visited the subject of record oil company profits in September, 2005 and pointed out that record profits are not all that bad for:

  • The Government since it receives record tax payments from the Company
  • The shareholders whose investment continues to grow
  • The Government again from taxing dividends and capital gains made by ExxonMobil shareholders.

(By the way, the compensation came at the cost of the shareholders, if anyone, and not out of your pocket.)

Lets put a little perspective on how much ExxonMobil is earning this last quarter:

Net income (U.S. GAAP) $8.4 Billion

This comes to a net income per share of $1.38. That’s not much as there are 6.1 billion shares outstanding. Lets look at some other figures:

  • Income taxes $7 billion
  • Excise taxes $7.6 billion
  • All other taxes $11 billion
  • Total taxes $25.8 billion

So ExxonMobil paid three times in taxes what it made in profit. Who is gouging who? Each share paid over $4 in taxes to earn $1.38. Now some in Congress are demanding that even more be taken from the company and the holders of 6.1 billion shares because despite not being able to prove gouging, they simply use the fact that the company is making record profits that it must be by gouging.

In this respect, congress has been making highly deceptive and disingenuous comments, pandering to potential voters. Take Senator Dick Durbin of Illinois and his statement on Meet the Press:

SEN. DURBIN: Am I the only one of your guests here that think that profit taking is a problem? I mean, I understand the basic laws of supply and demand. I understand that if the input costs have gone up, it’s going to reduce your, your profitability. But here we have the most enormous profits in the history of the United States of America in business. The equivalent of $1,000 per household in America for profits. All of the market factors you described may suggest that the product is going to be more expensive to sell, but they don’t forgive what I think is an outrageous profit taking by this industry. - Meet the Press

Opinion Journal makes a minor error here by suggesting that "the senator complained that the high prices at the pump will cost the average household $1,000 this year" although I suspect that this is exactly the message that Senator Durbin was hoping people would get out of his statement. Well Senator, I am not surprised that America's largest company just happens to be making huge profits. As other sites have noted, it's profit is only about 9% of revenue. FAR FROM WHAT ANYONE OTHER THAN A SOCIALIST WOULD CONSIDER GOUGING.

As Joint Strike Weasel points out, the $1,000 per household averages out to $250 per American. This might be shocking if a company was making that much profit off each American, but that is not true. ExxonMobil is a global company and that total is it’s worldwide profit, not it’s profit on US operations. And imagine, all that profit was accumulated at an average of 27 cents a gallon. If the oil companies were fixing prices, you would think that they would be making more than 27 cents a gallon. ($3/gallon times 9%) Of that $250 per American, only $67 is US related revenue.

Congress neglects to mention where ExxonMobil is earning their billions from. Well here are some figures from the first quarter report:

  • Upstream (Exploration, Development, Production, )
    United States $1.28 billion
    Non-U.S. $5.1 billion
  • Downstream (Refining and Supply)
    United States $679 million
    Non-U.S. $592 million
  • Chemical
    United States $329 million
    Non-U.S. $620 million

73% of ExxonMobil's Profit was made outside the United States.

With all the talk of the US buying everything from China, you would think that ExxonMobil would get some gratitude for being such a profitable international American Corporation.

Many are suggesting that the oil companies are fixing the price of oil, resulting in these profits. That is simply idiotic. People are just ignoring a couple of simple facts:

Demand for oil is increasing – Not only is the US increasing it’s demand for oil, but the rest of the world, especially India and China, are increasing their use of oil. Not by a little, by lots and oil companies are not able to keep up with pumping ever larger quantities out of the ground, moving the oil, refining the oil, and getting it to the final customers.

The current supply is limited - It is getting increasingly harder to replace the oil that has been pumped – Oil companies have proven reserves for pumping. Actually pumping the oil reduces the reserves. To be an ongoing business, they need to replace the reserves that they have used, otherwise the company will eventually run out of oil to pump.

Replacing the oil pumped has been getting harder recently for the oil companies, compounded by the fact that they are increasing production to meet increasing demand, which increases the amount needed to be replaced is year greater.

One way of replacing reserves is to increase the amount of oil that you can get out of existing oilfields. Another way is to go out and purchase another oil company and add their reserves to yours. While this does increase your reserves, it has no net change in the world’s proven reserves.

Falling Dollar - A declining dollar makes oil more expensive in the US compared to what other countries are willing to pay for it. As foreign countries get more dollars for the same amount of their currency, they can offer more per barrel without it costing them more money. However, a declining dollar increases the profit earned overseas as profit being sent back to the US results in more dollars even if the foreign revenue is the same.

Not for anything, but if this company is making a fortune gouging the planet, why haven't you purchased some shares?

Note: This is part 2 of 3 concerning Gasoline, Congress and ExxonMobil. Keep in mind that I am currently an owner of a small portion of exxonMobil and BP.

See part one here: "Impending Ethanol Shortage?"

Profits of Doom? - OpinionJournal
$3-a-gallon gas: Blame Washington, not Big Oil - Fortune

Are Record Oil Company Profits all that Bad? - FFI - September 2005


Anonymous said...

Well said. The American public are getting a crash course in economics that has been a long time coming.

The oil industry is enormous and profits are realized through sheer economies of scale. Billions of people buying a product adds up to billions of dollars in profits.

The reality is that we need to grow the industry even larger to keep up with demand as the rest of the world industrializes and catches up to North America and Europe.

Fred Fry said...

Thanks for the compliment!

The size of these companies is amazing.