How profitable is big oil?
In the context of the recent spike in oil prices, this clip from Glenn Beck show might be of interest to some.
Particularly noteworthy is the fact that the oil industry has been facing a thirty years [sic] moratorium on exploring new fields within the United States. According to the president of Shell Oil, John Hofmeister, the US is dependent on the order of over 60% of its overall consumption on oil imports. The moratorium, though not mentioned in the clip, I suspect has got a great deal to do with environmentalism. Speaking about sponsoring of international terrorism!
Another fact is that the profit margin of oil companies is about 8% on capital invested. There are other extremely interesting facts in the clip as well.
Comments (21)
So whenever I buy something from an oil company, about 8% of what I pay is going to ward the oil company's profit. Yet the government(s) take about 40% of everything I earn in a year, no matter how much they provide back or how much I agree with what they spend it on.
Those damn oil companies.
Published: May 6, 2008 12:39 PM
8% doesn't seem excessive to me at all.
Published: May 6, 2008 2:02 PM
[" Another fact is that the profit margin of oil companies is about 8% on capital invested." ]
____________
Only eight percent ??
Doesn't pass the common sense test.
Why spend all that money, time, worry and sweat producing oil... when historically one could passively invest one's money for much higher interest rates in securities and stocks with less risk ??
For example, the S&P 500 Index average rate of return since 1926 is 11 %.
Spending billions on oil production for only an 8% return cannot be the correct number. The true profit must be much higher, however it is actually calculated.
Published: May 6, 2008 4:05 PM
I agree with Nelson. I was born in an oil producing country. It's a known fact that the cost of producing a barrel of oil in the mid 90's was in the $7.50 range, when the oil was sold at around $11 barrel. Let's rise that amount by inflation to maybe double - $15 / barrel... It cannot be any higher because whatever new oil is found, it has been found in "cheaper" countries - countries where labor costs are a lot cheaper than America and Europe - and you know that the biggest chunk of oil costs is the manpower and machinery used to bring oil to the surface... This means that big oil is making probably $100/barrel profit...
Doesn't this figure sound more logical than the 8% Glenn Beck mentioned?
Please think hard... don't you think that Big Oil wants everyone to jump at the thought of "an oil production worker kidnapped in Nigeria", or "terrorists in Iran bombing a pipeline" as the reason why oil costs $120 /barrel, than to realize that the bottom line is a 5 letter word....G-R-E-E-D.
Published: May 6, 2008 5:50 PM
I agree with Nelson. I was born in an oil producing country. It's a known fact that the cost of producing a barrel of oil in the mid 90's was in the $7.50 range, when the oil was sold at around $11 barrel. Let's rise that amount by inflation to maybe double - $15 / barrel... It cannot be any higher because whatever new oil is found, it has been found in "cheaper" countries - countries where labor costs are a lot cheaper than America and Europe - and you know that the biggest chunk of oil costs is the manpower and machinery used to bring oil to the surface... This means that big oil is making probably $100/barrel profit...
Doesn't this figure sound more logical than the 8% Glenn Beck mentioned?
Please think hard... don't you think that Big Oil wants everyone to jump at the thought of "an oil production worker kidnapped in Nigeria", or "terrorists in Iran bombing a pipeline" as the reason why oil costs $120 /barrel, than to realize that the bottom line is a 5 letter word....G-R-E-E-D.
Published: May 6, 2008 5:51 PM
Sounds like Nelson and Hector are on the right track.
From Frobes Magazine: "Exxon's 2006 ROI of [b]32.6%[b] is the second-highest among all integrated oil companies and nine percentage points higher than that of the next-most-profitable oil major."
Link: http://www.forbes.com/2007/04/11/exxon-oil-exploration-pf-guru-in_rm_0411soapbox_inl.html
From a stock website about Exxon Mobil:
Return on Assets (ROA) 16.8 %
Return on Equity (ROE) 33.4 %
Return on Capital Invested (ROCI) 31.5 %
http://www.advfn.com/p.php?pid=financials&symbol=xom&cb=1180212583
Someone must be telling everyone porkies...because the "fact" was not actually...
I think what is missed though is that the bulk of the petrol price is made up of Crude oil prices and taxes. The petrol companies are making huge profits though and I am not exactly sure how they are able to do this simply because the crude price has risen, because their refining and distribution costs and risks will have stayed the same so more profit is not 'required' by the average investor.
What we see in NZ especially is that OIl Majors immediately increase their prices once crude prices rise so capturing a huge excess margin on petrol that did not cost that much to produce. In times of rising oil prices this results in constantly inflated profit margins at the pump. The only reason that can explain it is the oligopolist/semi-monopolist nature of the industry where there is in reality not much price competition, why?
Because ALL of every oil companies petrol is being sold at the moment so there is never any incentive to reduce prices because you will reduce your profit.
Published: May 6, 2008 6:39 PM
The Shell President's closing comments are quite right here. For those interested, read a book called The Energy Non-Crisis by Lindsey Williams, which details just how much the government has tried to nationalize the oil industry. They went to tremendous lengths in the 70s to stop oil companies from drilling in Alaska, which the author posits, the north slope alone, has more oil than all of Saudi Arabia. This oil would be enough to eliminate the national debt tomorrow if it were open to drilling. It's the government trying desperately to squeeze the middle class in rake in money from industry.
Published: May 6, 2008 7:02 PM
Hector, you forgot to factor in the tax burden the oil companies have to suffer. Assuming you are correct, that the cost of production is about $15.00 USD, then the $100.00 profit would only encourage competitors to underbid any company that tried to get away with such profits. The price of oil inn the face of competition is just high enough to allow companies to remain profitable, and low enough to clear the market, which means that the difference between costs and selling price must be going somewhere else besides the Oil Companies "bottom line". Did you factor in the huge tax rates these companies must pay the various governments?
It cannot be any higher because whatever new oil is found, it has been found in "cheaper" countries - countries where labor costs are a lot cheaper than America and Europe
Most of the oil from those "cheaper" countries is actually state owned, which means it ain't cheap at all. You just assume it is.
Published: May 6, 2008 7:36 PM
Drew:
"Lindsey Williams, who has been an ordained Baptist minister for 28 years, went to Alaska in 1971 as a missionary. The Transalaska oil pipeline began its construction phase in 1974, and because of Mr. Williams' love for his country and concern for the spiritual welfare of the "pipeliners," he volunteered to serve as Chaplain on the pipeline, with the subsequent full support of the Alyeska Pipeline Company."
As much as I love conspiracy theories ther are alot more seemingly credible ones to get through before this one.
Here I was thinking he was some kind of disgruntled oil expert. (yawn)
Published: May 6, 2008 7:38 PM
Return on Assets (ROA) 16.8 %
Return on Equity (ROE) 33.4 %
Return on Capital Invested (ROCI) 31.5 %
Profit margin 8%
There's no conflict with these numbers. They simply measure different things. Profit margin is revenue minus costs. That small margin can be enlarged to the levels of the other measures by leverage (debt) and by high inventory turnover. For example, grocery stores often make a profit of just 1-2% on many items. But their inventory turnover is quite high, which can translate into annual profits of 10% or greater.
The main point is that the oil industry is just an average industry. Many industries earn far higher rates, other far lower ones. But there are no unusual profits being made.
Published: May 6, 2008 7:51 PM
fundamentalist:
Actually reading things helps.
"Another fact is that the profit margin of oil companies is about 8% on capital invested"
But you wrongly quoted it as:
"Profit margin 8%"
Published: May 6, 2008 9:09 PM
Having been an Exxon shareholder since the age of 12 (2/3 of my life), I have seen many market ups and downs in oil. Funny, I never heard the politicians playing violins nor screaming when crude was selling for $9 and change, and many lesser and poorly managed American oil companies were in the red. There was no baleouts for wildcatters who were overleveraged, undercapitalized, and underwater. The were just sold off at auction, as so many pieces of pipe and drill bits.
Talk about a housing crisis, when I was in junior high, Houston saw many $150K homes tumble to $30K. Nobody offered to bail oil workers when they went into foreclosure. Nobody offered to help farmers when they were, well... "buying the farm" in the dive of commodity prices in those times.
Several of my 10 to 20 share odd lots of oil and gas companies lost 80-90% of their value because of the 80's collapse in oil prices. Not easy when you're 14 or 15, and had invested earnings from several weeks of mowing from sun up to sundown to see evaporated in the marketplace.
It is obscene that the U.S. government is going to bail out the spendthrifts and speculators, who are in foreclosure or holding their fractional debts. The Fed's defacto devaluation of the dollar is the problem, not oil-producers or oil companies, despite what the jignoist, anti-free enterprise politicians tell us.
I was wised up, and learned the hard way. When will they learn their lesson?
Note: I live on an island where electricity is $.45/kWh and gas is almost $5.00. . . Americans on the mainland are such whiners. Get over it, and reduce your energy consumption, and take your bankrupcy medicine, so the whole economy can become stronger once again.
Published: May 7, 2008 3:02 AM
agree with art poirier. caltex australia did it so tough in the ninetines. refining was a terrible business to be in.
these businesses require such enormous capital outlays, and lag times are so long, that it's mad just to look at the latest bonanza without looking at the previous couple of decades.
we already ploughed this ground in the "has capitalism failed?" blog.
to owen
higher margins would attract more competitors, were it not for the extensive barriers to entry - things like environmental, maritime, chemical and occupational safety, as well as legitimate and illegitimate local opposition to refineries or docking facilities.
a small market like nz probably wouldn't support more than one refinery in any case, but there could be far more competition in shipping in fuel from singapore.
given that the government revenue increases with the fuel price, i cannot see the nz government doing anything to encourage more competition. their tax regime would militate for higher prices, not lower.
Published: May 7, 2008 4:02 AM
Owen, You're right. I didn't read closely enough. The problem with the sentence "...the profit margin of oil companies is about 8% on capital invested." is that profit margin and return on capital invested are two different measures. The first one stuck in my mind. Profit is the difference between costs and revenues; profit margin the ratio of that difference to total revenues. Return on assets is the ratio of profits (or earnings) to assets.
Published: May 7, 2008 8:05 AM
["...8% on capital invested" ]
_____________
...Gotta define your terms --
("capital invested" ; "profit" ) ??).
There are at least a dozen ways to state corporate "profit" ... each with large differences in the bottom line answer.
Corporate accounting is complex with many shades of meaning. Formal "Accounting" definitions are often different than those used by economists or average people.
That "8%" probably is calculated 'after' taxes... and a host of other 'adjustments' concealing what average people would consider as normal 'profit'.
I don't begrudge oil companies their profits -- but be honest & straightforward when reporting them to the public.
John Q. Public thinks in terms of simple interest rates & returns on money invested.
Thus, the honest profit numbers for oil companies are more like 30% currently.
Published: May 7, 2008 8:14 AM
I hope Big Oil is earning sky-high profits (both in numbers and ratios) so that;
1) It can afford the increasingly expensive investments necessary to explore and produce oil for the next 50 years and,
2) have enough capital to invest in new kinds of profitable and economically viable energy sources to remain on top in the energy creating business when consumers start to frown at the oil prices and want cheap alternatives.
For those who think oil companies are making "too" much money (and want to tax it away); please buy an oil field (preferrable one with proven ressources), hire engineers and rent equipment and sell oil with a lower profit margin, but still high enough to earn some big bucks!
Published: May 7, 2008 11:01 AM
http://royaldutchshellplc.com/2008/04/25/bp-plans-to-invest-560m-in-biofuels/ --
Published: April 24 2008 19:09 | Last updated: April 24 2008 19:09
BP announced plans to invest $560m in biofuels on Thursday and argued that its proposals to develop ethanol production from sugar cane in Brazil would not affect food supplies.
The oil group plans to spend $60m buying a 50 per cent stake in a Brazilian joint venture and invest a further $500m in two ethanol refineries.
26 June 2007
http://www.bp.com/genericarticle.do?categoryId=2012968&contentId=7034350 --
The wide spread availability of biofuels in the UK took a major step forward today as BP, Associated British Foods (ABF) and DuPont announced major investment plans, totalling around $400 million, for the construction of a world scale bioethanol plant
if the above articles are true i dont know if gasoline will return to the lower relative prices of past decades -- these articles indicate that many millions are making their way into development of alleged 'greener' (less dense and more costly??) fuels that instead could be directed toward the expansion and more efficient extraction petroleum and additional gasoline refining.
hopefully reducing the price at the pump.
Published: May 7, 2008 12:28 PM
I'm confused; why hasn't Kevin_Carson arrived yet to declare 8% to be excessive?
Published: May 7, 2008 2:49 PM
to person:
why? can you buy petrol at walmart?
Published: May 8, 2008 12:22 AM
Newson:
I agree. There are a variety of government-imposed and economic barriers to entry which mean that it is just no economic enough for every oil company in the world to come to such a small place as NZ.
The fact is that the NZ big 4 can charge almost any price until the government stops them because they jointly own the refinery here and the only way to get around this is from Gull who has been imported refined petrol from Australia. Trouble is, they are too small to worry the majors.
The fact is that petrol refinery and distribution is an integrated business that takes billions and billions of sunk capital before a dollar of profit is made. This is a huge barrier to entry for anyone.
Despite all that, i still do not advocate any intervention into the petroleum distribution market in NZ because I believe that petrol and diesel have had their day and high prices now and in the future are simply speeding up the delivery next electric or hydrogen based transport systems.
Published: May 8, 2008 3:45 AM
why? can you buy petrol at walmart?
Yes, you CAN buy gas at Wal-Mart. And if you get their card, they'll give you 3 cents off the regular price, too. But we can't have that--Wal-Mart is evil and greedy.
Published: May 11, 2008 6:49 AM