Monday, April 17, 2006

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.


Maria Elisa said...

So what are we going to do about our soaring gas expense as individuals in the short term? I propose getting together with a bunch of other broke law students and brainstorming on ways to cut back on gas consumption. Carpooling is the obvious suggestion but may not be feasible with differing schedules. What to do, what to do?

False Data said...

I've been thinking about this question most of the weekend, and I keep coming back to the same thng. It sounds flip, but it's actually fairly deep and touches on issues like city planning and the design and financing of public transportation: why wouldn't the bus work? And, if it wouldn't, what sort of transportation could accomplish the goal at an affordable price given acceptable tradeoffs? Finally, what are those tradeoffs?