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 (29)
Keith
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
Owen
8% doesn't seem excessive to me at all.
Published: May 6, 2008 2:02 PM
Nelson
[" 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
Hector
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
Hector
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
Owen
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
Drew
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
Francisco Torres
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
Owen
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
fundamentalist
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
Owen
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
art poirier
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
newson
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
fundamentalist
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
Nelson
["...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
Geir
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
scott t
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
Person
I'm confused; why hasn't Kevin_Carson arrived yet to declare 8% to be excessive?
Published: May 7, 2008 2:49 PM
newson
to person:
why? can you buy petrol at walmart?
Published: May 8, 2008 12:22 AM
Owen
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
Michael A. Clem
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
Brendan
I do not understand why do so many people think high oil price is a problem? It is a great money-making opportunity!
You can buy oil stocks or buy oil futures.
Now there is a platform that allows trader to trade oil futures at a much smaller contract.
$1 represents only US$100 in your P&L, check out the details here:
http://allaboutoil.blogspot.com/2008/05/cheaper-and-safer-way-to-trade-oil.html
Published: May 19, 2008 7:40 AM
Brendan
I do not understand why do so many people think high oil price is a problem? It is a great money-making opportunity!
You can buy oil stocks or buy oil futures.
Now there is a platform that allows trader to trade oil futures at a much smaller contract.
$1 represents only US$100 in your P&L, check out the details here:
http://allaboutoil.blogspot.com/2008/05/cheaper-and-safer-way-to-trade-oil.html
Published: May 19, 2008 7:44 AM
Steve Alexander
I am not the least bit interested in the latest gossip, what Britney is up to or where or who Paris was with, with or without her underwear.
My only reason in sending this out to every person I know is to get the ball rolling on something that we as a global society need to address.
IF YOU ARE TIRED OF PAYING A RIDICULOUS PRICE PER GALLON AT THE GAS PUMP PLEASE PAY CLOSE ATTENTION TO THIS MESSAGE.
I am starting this e-protest as a reasonable means of reaching 300,000,000 americans and at least as many of our global cousins.
It is very simple......
We as a global culture MUST WORK TOGETHER......
This means that we must all AGREE to do one thing as a group.....
Right now you are asking yourself HOW CAN I CHANGE THE PRICE OF GAS?
Simple.... Join together and collectively act.....
DO NOT BUY GAS FOR ONE WEEK EACH MONTH!!!
I am calling upon all individuals who purchase gas to not buy gas for one whole week.
Fill up on the last week of the month and COMMIT to not buy gas or any products from a gas station from the 1st of each month to the 7th of each month.
I know that I am asking for a huge change in your weekly lifestyle. It will mean carefully considering the number of miles that are absolutely necessary to drive in that week
and not driving unless it is an absolute necessity.
One more thing and this is THE big one. This will only work if every person who receives this message passes it along to every person on their email list.
This is the most critical part. The average person has around 70 email addresses in their contact list, If every person I sent this to forwards it to their whole contact
list that will be over 5000 people.....if these all forward it to about 70 people thats over 340,000 people, if these all participate it will be over 24,000,000 people.
That is only after the third generation of emails if each of these 24,000,000 participate, that is almost 1.5 billion people.
PLEASE DON'T DISCARD THIS EMAIL, SEND IT TO EVERYONE YOU KNOW, AND FOLLOW UP WITH THEM TO SEND IT TO EVERYONE THEY KNOW!
I AM NOT ASKING FOR MORE THAN A COUPLE OF HOURS OF YOUR TIME. THIS IS A SMALL PRICE TO PAY TO PREVENT THE OIL COMPANIES FROM
RAISING THE PRICE OF GAS TO MORE THAN THE HOURLY MINIMUM WAGE!!!!!
If you are not sure just how this could work think about how much impact
BIG OIL will feel if over 1,000,000 people stop buying their weekly gas just one week a month.
If you are like the average consumer and you fill up just once a week at around $50.00 and you multiply this figure by 1 million,
That's 50 million dollars a month that hits hard immediately. Now suppose this happens over the course of three to four months,
and the participation continued to escalate as I have outlined. The results would have to be in our favor. The number of gallons of fuel processed and delivered are carefully
calculated by the oil companies based on the number of gallons sold in the previous months and years...
If the fuel consumption goes down the ammount produced and on standby becomes a backlog situation...
If there is a glut of fuel left over at the end of each month for a few months the Oil Companies have no choice but to lower the price to get the fuel moved!
The result LOWER PRICES AT THE PUMP!!!!! IT"S HIGH TIME WE AS CITIZENS OF AN EMERGING GLOBAL SOCIETY
STARTED TO PUT THESE COMPANIES ON NOTICE. WE ARE THE ONES WHO ULTIMATELY CONTROL THE MARKET BECAUSE WE ARE THE MARKET!!!!!!
Please take this seriously We are only going to change the status quo if we refuse to let the suppliers dictate the rules.
Published: May 23, 2008 4:26 AM
josh m
"Profit" is defined, in the economic sense of the term, as any excess above the going rate of return in the structure of production. With this definition in mind, the question I'd like answered is, is the petroleum industry earning any profits? I think the answer to this should shut up the statists.
Published: June 1, 2008 5:08 PM
mike
I like this spirit above, however I think it is the equivalent for holding your breath. You can only hold it in for so long before you have to exhale. In this case, you can suspend demand for a week, however that same demand will exist in the marketplace a week later. It will not provide a long term solution. As a product of American Media, we like to lable and personify things in the market when there is a crisis in order to fulfill our emotional desires. I really like how they explain the profit margins, because politicians like to state how the oil companies "just reported the largest profits in history" and at the same time they do not take into consideration that they are not keeping any more of it than they did the prior year. Let's be positive folks... these people go to every corner of the wolrd searching for oil, they find it, drill and extract it, and refine it and then it gets sent off to the pump at about 4.50 a gallon. that is not bad at all. maybe if we used a little supply-side logic we might be able to drive the price of oil down. More taxes and regulations will only drive the price up. it's time we start embracing our founding principles of capitalism and stop demonizing the companies that provide the fuel on which our entire country relies on.
Published: June 10, 2008 8:48 PM
Si Fallor Sum
It's about time things got put in the right perspective. Jumping on the blame bandwagon is simply allowing Big Oil and the Government as a scapegoat for greedy over consumpition.
Defending Big Oil.
www.sifallorsum.com/oil.html
Published: June 13, 2008 11:14 AM
Fisher Investments
Interesting article about big oil. I'm from Fisher Investments and we have a related article at Fisher Investments MarketMinder, check it out: Pipeline Politics, 1/8/09
http://www.marketminder.com/a/fisher-investments-commodities-emerging-markets/da296ffa-7248-45de-bd59-96a604f12a22.aspx
Published: March 24, 2009 5:47 AM
FINVEST
As an employee of Fisher Investments, I learn more about the stock market (and market misperceptions) at http://www.fisherinvestmentsforum.com/stock-market-misperceptions.
Published: May 19, 2009 5:08 PM