Is Big Oil To Blame For Big Gas Prices?

Posted on 31. Jul, 2008 by in Business, Economy, News

As you may have heard Exxon Mobile released the financial results from the second quarter. The Company broke its own record for the largest quarterly earnings ever booked by a corporation – $138 billion of revenues for net income of $11.68 billion. That turns out to be about $1,486 each second of every day!

The news of the insane profits instantly fueled the hate towards the public face of high gas prices – the oil companies.

Obama said in a statement, “Perhaps the only thing more outrageous than Exxon Mobil making record profits while Americans are paying record prices at the pump is the fact that Senator McCain has proposed giving them an additional $1.2bn tax break.”

And on Obama’s heels, four senior Democrats in Congress called a press conference critisize the largest US oil companies for spending more on stock buy-backs to enrich shareholders than on energy exploration.

Some argue that Exxons profit margin of 8.5% is significantly lower than other blue-chip stocks and that the company is actually not making that much money. But its hard to hear the words “record profits” at a time when there are “record prices.” It doesn’t take much to convince Americans that the two are related.

But the real question is, are the two related? Is a profit margin (defined as the net income divided by revenues) of 8.5% too high for a company that sells a commodity? After all, it is publicly held and must do its best to earn a healthy return for its investors. Aren’t they just doing their job.

After a little research, and a pass through their most recent press release… I’m convinced its a little bit of both. Is Exxon taking advantage of the high gas prices? Probably. Are they the root of all evil and the cause for the $4.95 gas in San Francisco? Probably not.

I spent a few minutes pulling up the most recent financial statements for a few other commodity companies to see if a 8.5% margin was fair. I was surprised to learn it was:

Exxon: 8.5%
Coal: 9.2%
Sugar: 4.6%
Aluminum: 8.3%

Of course this back-of-the-napkin approach has its flaws. An in-depth look into the financial statements of these industries is needed to get a clearer picture. However, it does shed a little light (or at least a little perspective) on the subject of high gas prices.

As much as I would like to blame big oil for the dent in my wallet, I’m not sure it’s entirely their fault.

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