record oil industry profits

No time for much of a post right now, since I'm right in the thick of moving, but you might find this interesting. It came from a discussion about this e-mail, that I've seen a couple times now, which calls for a boycott of Exxon until it lowers gas prices to $1.30/gal. That led to a discussion of the fact that Exxon has posted record profits again this year. I was curious about whether Exxon's profits were due to increased volume, selling more gallons of gasoline, or increased margin, selling each gallon at a higher mark-up. So I did a bit of digging.

Just to be clear up front, this is not a defense of Exxon, about whom I've been critical before. (See here and here.) I did this analysis because this is a serious, complex problem that we're not going to be able to solve without either accurate information or a whole lot of luck, and I'd rather bank on accurate information.

So, let's start with Exxon's income statement to see where their record profits are coming from. I've also added the government's numbers on average gas price per gallon (which I had to calculate by downloading their spreadsheet file) and some historical information on crude oil prices.

	12/31/2005	12/31/2004	12/31/2003
Total Revenue	371B	298B	247B
Gross Profit	158B	134B	117B
EBIT	59.9B	41.8B	32.1B
Gross Profit / Revenue	43%	45%	47%
EBIT / Revenue	16%	14%	13%
national average gas price, all grades / all locations	2.28	1.85	1.55
average crude oil price, per 42 gallon barrel	50.04	37.66	27.69
crude oil price per gallon	1.19	0.897	0.659
gas price / crude oil price	192%	206%	235%

Notice that Exxon's Gross Profit as a percentage of their Total Revenue hasn't been increasing. In fact, it's actually decreasing a bit. Their EBIT as a percentage of revenue has increased, but that would be consistent with fixed costs not increasing at the same rate as sales (which is why they're called "fixed" costs.) Notice also that the price of gas, expressed as a percentage of the price of a gallon of crude, has actually been decreasing.

My interpretation of these numbers is that there doesn't seem to be price gouging going on in Exxon. Instead, gas prices are roughly tracking oil prices, and oil prices have been going up.

Why are oil prices going up? I don't have any hard data right now, but I'd suggest a couple factors. The first is instability in the Middle East. For instance, if the markets think the U.S. is going to invade Iran, which would tend to blow up oil wells and reduce the amount of oil coming out of Iran, they may bid up oil prices. The second is that the U.S., China, and India are all interested in buying a roughly fixed amount of black stuff in the ground. Lots of buyers and a fixed supply should mean higher prices.

Conclusion: if we want gas prices to drop, we need to stop wanting gas so much. That means either parking the cars (which is unlikely to happen) or fueling them with something that's not made from crude oil.