Anybody who says that the oil companies "price gouge" are pinheads.

The BBQ Pit
1

How many times do I have to hear this same assertion? “Ooh, oil companies are making record profits, let’s take some off of them because they’re price gouging”? Hey, I’m hurting more than most, but even I recognize the disingenuousness of that assertion.

For those of you that don’t, I suppose I must lay it out for you. So be it.

As of right now, the price of a barrel of oil is $111.76 per barrel. There are 42 US (never mind Imperial) gallons per barrel. Therefore, before anything else happens, oil costs the oil companies $2.66 per gallon.

Now we have refining costs. Amazingly, oil companies are to blame for refining costs. I say that with no small amount of cynicism, because they simply cannot build any more refineries, and what they do have is old. Anything that is old costs a fortune to maintain.

Let’s move to transportation and delivery of gasoline. You think your bill is high? Imagine towing a big trailer full of gasoline to the furthest reaches of the United States. That ain’t cheap, even for the oil companies.

Now we can add state taxes. In the Commonwealth of Pennsylvania, taxes amount to .40 or so per gallon. Add that to the spot price of gas and you’re up over $3 right away.

Let’s not forget that the station owner is entitled to make some money. So let’s add .05 to the price per gallon.

So, with all of that in mind, the oil companies make, at most, .20 per gallon (out of $3.35).

Now, does anybody really think that the oil companies are price gouging? ExxonMobil, the most profitable oil company, makes 11.23% profit margin, which is not (in my opinion) excessive, nor is it out of line with what they have made on a regular basis. A simple analogy will suffice: if I spend $5 to get $10, when prices go up I am forced to spend $10 to get $20. The margin is exactly the same, yet profit has doubled. That is essentially what we’re looking at, but there are still people that insist, in total defiance of the facts, that the oil companies are cheating them, when they are as much at the mercy of the oil market as we are.

Well, I’m sick of hearing it. It hurts me just as much as it hurts everyone else, if not more so. Yet I’m pragmatic about it. Were that everybody else (including the Presidential candidates) could be the same. There is no “windfall profit”. There is no “price gouging”. Suck it the hell up and get used to it, because it’s only going to go up in the future, and unless “ExxonMobil” became synonymous with “China” in the last year, it’s hardly their fault.

2

Nailed it in one, not that I expect many people to agree with you.

3

Oh, yes. “nailed it in one”, my favorite fucking expression. I’m sure we’re on our way to enlightened discussion.

Honestly just curious, Airman, where did your 11.5% profit margin number come from?

4

Well said, Airman. I think the crux of the misunderstanding happens when people hear that some oil company made a large dollar profit, without looking at that the immensity of all the numbers involved. If an oil comp[any makes 11% profit, is that automatically evil and if a company making solar panels makes 25%, all is groovy? For some, I think it is.

5

The political merits (or otherwise) of your arguments aside, i have a question about your math and your understanding of the refining process.

You note, correctly, that the oil itself costs the oil companies $2.66 per gallon. Then you mention refining costs, taxes, and some other costs, and conclude that the companies are making, at most, 20c per gallon.

But you’ve moved from dollars-per-gallon of oil to dollars-per-gallon of gasoline without telling us:

a) how much the refining costs are

and

b) how many gallons of gasoline the oil companies make from 1 gallon of oil.

I do not know the answer to either of those questions, but i suspect that your calculation might need to be revised.

6

Here is a breakdown of the products that the oil companies get from one barrel of oil.

Something tells me that, if you want to draw any conclusions about their profit levels, it’s going to take a slightly more sophisticated set of calculations than the sophomoric attempt in the OP.

7

Here

Profit Margin (ttm): 11.23%

At $3.35, the current price where I live, less $2.66+.05+.40 ($3.11), estimating transportation costs, .20 is a generous estimate. I couldn’t find the exact refining costs, but even so, to make .20 per gallon the costs could be no more than .04 per gallon, which is lower than I would expect. If you care to dispute the numbers, perhaps you can dispel my numbers with something more accurate. Even if we reduce it to .15, or even increase it to .22, that isn’t a lot of money for what is an essential commodity.

8

I wouldn’t go so far as to call it “sophomoric”, but you’re free to make a counterargument if you wish.

9

It’s not a matter of making a counter-argument. I’m not even necessarily disagreeing with your point about what constitutes reasonable profit.

But if you march in and claim to offer an economic analysis, the way you did in the OP, based on issues like costs of raw material, cost of refining, taxes, etc., etc., then you should at least make an effort to accurately represent the process you’re allegedly analyzing.

Your whole OP assumes that 42 gallons of crude oil yields 42 gallons of gasoline, and that the refining costs, taxes, and other costs associated with the gasoline are the only other costs associated with the process. But, as the link i provided demonstrates, 42 gallons of crude oil yields about:

  • 19.6 gallons of gasoline
  • 10 gallons of diesel fuel and heating oil
  • 4 gallons of jet fuel
  • 1.7 gallons of heavy fuel oil
  • 1.7 gallons of LPG
  • 7.6 gallons of other stuff

If you want to calculate the oil companies’ total profit on a barrel of oil, you need to take into account the price of all those products. You can’t simply look at the price of gasoline, because it makes up less than 50% by volume of the products gained by refining a barrel of oil.

And if you want to calculate the profit per gallon of gasoline, you need to work out what percentage of the profit on a barrel of oil comes from the sale of gasoline, and what percentage comes from those other products. In sum, you need to disaggregate the costs, so that you can measure the cost of producing a gallon of gasoline, and then assess the income from each gallon of gasoline.

Your OP doesn’t do that; instead, it basically assumes that 42 gallons of oil plus refining gives 42 gallons of gasoline, and nothing else, But it doesn’t work like that.

10

The claim of price gouging and the call for a windfall tax are related but separate issues. I’m not sure why the profit margin is the relevant statistic for arguing against a windfall tax.

I think the logic of a windfall tax goes something like this: Exxon has received record profits–albeit at an unexceptional margin–for reasons having nothing to do with the quality of their products or management of their company. We generally allow companies to reap the rewards of luck, natural disaster, or war. But we shouldn’t feel bad about taxing those rewards more heavily than usual in isolated cases because in some genuine sense the money is unearned. It is a windfall, and taxing windfalls creates fewer perverse incentives than taxing earned income.

The logic of a windfall tax is debatable, and there may be other economic reasons to reject it, but it seems quite independent from the argument you’re making about profit margin.

11

I acknowledge that the OP is oversimplified. I didn’t account for waste, and I didn’t account for diversion into other areas. Yet somehow I can’t help but think that that only serves to make my case stronger. It is for you to judge.

My point is merely that the accusations of “price gouging” and the candidates’ platforms of “taxing windfall profits” are out of line and that the general public is misinformed about what the actual costs are in a gallon of gas. I paid $41 to fill up tonight, and my jaw dropped. yet when i thought about it I realized that $41 sucks but it really isn’t removed from what it should be. We’ve lived with cheap gas for generations. Now it’s time to pay for it. It sucks, but it is what it is.

12

MSN has it at 10.04% Source.

You make a very good point in that it isn’t as simple as the OP might have stated, but the profit margins are the equalizer. For example, Microsoft is at 29.3% link.

In fact, just for the hell of it, let’s look at all the companies that comprise the Dow Jones Industrial Average:

Company/net profit margin

3M/16.97
Alcoa/8.3%
AMEX/12.83
American International Group/6.8
AT&T/10.05
Bank of America/22.59
Boeing/6.11
Caterpillar/7.71
Chevron Corporation/8.46
Citigroup/4.78
Coca-Cola/20.73
DuPont/9.77
ExxonMobil/10.04
General Electric/NA
GM/-23.97
Hewlett-Packard/7.29
Home Depot/5.44
Intel/18.20
IBM/10.55
Johnson & Johnson/17.31
JPMorgan Chase/21.53
McDonald’s/10.25
Merck/13.54
Microsoft/29.29
Pfizer/17.05
Procter & Gamble/13.96
United Technologies Corporation/8.31
Verizon Communications/5.9
Wal-Mart/3.51
Walt Disney/12.22

All this data was found using MSN money stock quotes for each company listed. Gross oil profits are high because of total volume, not because of gouging. Sheesh!

13

Hey, thanks. I had forgotten every word of the OP by the time I got to the next post, so I’m sure everyone will agree that it was totally necessary to quote it in its entirety for a fifteen-word reply.

Eh. I guess it’s not really fair to single you out. I’ve just been seeing a lot of that shit lately.

14

Boy, did you tell me! I can’t help but agree with you completely! :smiley:

15

I agree with the OP, in almost everyway; “price gouging” and Excess profit" have no economic meaning.

However, your analysis isn’t quite correct for Exxon, because they can acquire oil for less than the spot price, as they extract it themselves. It would hold for the downstream portion of Exxon, or for a pure downstream company like Valero, who don’t produce crude oil themselves.

Most upstream projects are evaluated at a much lower then spot crude price (which drives me mad, as that’s not how you should be evaluating risk, but that’s a different story) So, when crude is high, upstream does pretty well, but what is an excess profit? It’s pretty hard to say in a very risky industry. Imagine if Wal-Mart had to do their planning knowing that 7 out of 10 new stores would fail, and they couldn’t really predict which ones.

Furthermore, international oil companies face a quickly growing chance of project nationalization as price goes up. That’s hard to plan for.

16

For me, it would have been enough simply to state that Exxon’s net margin is around 10%. Huh, I think, that’s not unreasonable. But for those who don’t know what a net margin is, I don’t think Airman’s OP is a bad way to illustrate that high profits <> greedy company.

You could go on and on about how much of those costs are not even COGS but SGA and other operating expense and the relationship between fixed and variable costs . . . but why? Airman’s made his point to those who can’t read an income statement, and for those who can, they should understand and agree with Airman’s point already.

17

I’m still not understanding why the rising price of oil should necessarily lead to increased profits for oil companies. They’re doing the same work refining and hauling the same oil, but instead of raising prices to match the increase in cost of operations, they get to raise prices to make TWICE as much as they did, after accounting for the cost of operations.

Anyone with a brain knows that spending 10 dollars to make 20 is a much, much better deal than spending 5 dollars to make 10, when you’re limited on the number of times you can make that transaction. So oil companies are affected NOT IN THE TINIEST BIT bit the increased cost of oil, and consumers are passed the increased cost of extracting/refining/transporting oil AND the increased raw profit dollars the oil companies have managed to convince people they deserve.

But the oil companies aren’t price gouging? Seriously?

18

Never suggested otherwise. In fact, i never made a single claim about whether or not 10% is a reasonable or unreasonable net margin.

I was merely making the point that his “calculations” regarding costs and profit on a gallon of gasoline were, at best, a dramatic oversimplification.

Yes it is, because the factual basis of his analysis is simply incorrect. If you want to make an argument about margins, and you want to use the margins on a gallon of gasoline as the basis for your argument, then you cannot simply assume that 1 gallon of oil yields one gallon of gasoline, and leave it at that. It’s wrong. Period.

As Airman suggested, if he corrected his assumptions and did the calculations properly, it might even make his case stronger. But this doesn’t excuse the poor foundations upon which the OP was laid. Especially when the OP began his analysis with the introduction: “For those of you that don’t, I suppose I must lay it out for you.”

If you’re going to “lay it out” for us, then do it right.

19

Funny, as an investor the two transactions look equivalent to me.

Crudely: What if your bank offered you a chance to deposit money in an account wherein if you deposit $1000, you can get 4% interest but if you invest $2000 you can only get 2%? Who would want to put their money (i.e., invest) in such an account?

Furthermore, there’s a lot of upfront investment in machinery, exploration and whatnot to be recouped, not just current cost of goods sold.

20

How do you define price gouging? We can’t really have a debate until that bit is settled.