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By Samuel R. Avro on Apr 19, 2012 with 8 responses

Is Big Oil Guilty of Price Gouging?

Unfair Profits or Lots of Volume?

Most people, if asked to name off the top of their head which industries were taking advantage of consumers to generate insanely high profits, would likely have the oil and gas industry at the top of their list. Isn’t it a well-known fact that with gas prices spiraling through the roof, “Big Oil” is by far the most profitable industry out there, hence they must be taking advantage of consumers?

Actually, it’s not that simple. But public opinion would have it otherwise.

In fact, industries such as internet information providers and personal computers rank well above major integrated oil and gas (Big Oil) when it comes to profit margins. The simple definition of profit margin is: A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.

To be sure, the U.S. oil majors have been generating huge profits. As U.S. President Barack Obama pointed out in a recent speech urging Congress to repeal tax breaks for the oil industry, “the three biggest U.S. oil companies took home more than $80 billion in profits. Exxon pocketed nearly $4.7 million every hour.” For more on the breakdown of gas prices, see: What Makes Up the Cost of a Gallon of Gasoline?

But it’s difficult to see it as ‘windfall profits‘ for the oil industry when they rank so low in terms of profit margin. The fact that they’re turning such a large profit speaks more to the scale of their operations rather than excessive profits.

Out of every dollar they did in sales during the most recent quarter, the Major Integrated Oil & Gas industry (a.k.a. Big Oil) kept 7.9 cents in earnings. Compare their 7.9% profit margin to those of Publishing – Periodicals (53.1%), Brewers (20.3%), Industrial Metals & Minerals (26%), Drug Manufacturers – Major (16.7%), Railroads (15.55), Water Utilities (12%), Cigarettes (22.5%), and Industrial Metals & Minerals (26%). Or compare it to other industries that have benefited greatly from high commodity prices such as Silver (41%), Copper (25.1%), and Gold (24%).

Courtesy: Yahoo Finance

Rank Industry Net Profit Margin (mrq)
1 Publishing – Periodicals 53.1
2 Silver 41
3 Closed-End Fund – Foreign 38.3
4 Closed-End Fund – Equity 30.1
5 REIT – Diversified 29
6 Industrial Metals & Minerals 26
7 Copper 25.1
8 Gold 24
9 Internet Information Providers 23.8
10 Application Software 23.2
11 Cigarettes 22.5
12 REIT – Healthcare Facilities 20.9
13 Beverages – Brewers 20.3
14 REIT – Residential 20.1
15 Diversified Investments 18.4
16 Semiconductor – Integrated Circuits 18
17 Regional – Southwest Banks 17.7
18 Semiconductor – Broad Line 17.2
19 Beverages – Wineries & Distillers 17
20 Drug Manufacturers – Major 16.7
21 Foreign Utilities 16.5
22 Personal Computers 16.2
23 Semiconductor Equipment & Materials 16.1
24 Publishing – Books 15.6
25 Railroads 15.5
26 Regional – Northeast Banks 15.3
27 Agricultural Chemicals 15.2
28 Beverages – Soft Drinks 15
29 Networking & Communication Devices 14.7
30 Drug Manufacturers – Other 14.1
31 Wireless Communications 14
32 Medical Appliances & Equipment 13.7
33 Oil & Gas Drilling & Exploration 13.6
34 Medical Instruments & Supplies 13.6
35 Savings & Loans 13.3
36 Personal Products 13.3
37 Security Software & Services 13.2
38 Conglomerates 13.1
39 Technical & System Software 12.9
40 Air Services, Other 12.9
41 Research Services 12.8
42 Regional – Midwest Banks 12.7
43 Real Estate Development 12.4
44 Property Management 12.1
45 Water Utilities 12
46 Biotechnology 11.9
47 Semiconductor- Memory Chips 11.5
48 Processed & Packaged Goods 11.5
49 Specialty Chemicals 11.3
50 Semiconductor – Specialized 11.2
51 Confectioners 10.7
52 Mortgage Investment 10.6
53 Long Distance Carriers 10.5
54 Telecom Services – Domestic 10.4
55 Money Center Banks 10.2
56 Diversified Computer Systems 10.2
57 Business Services 10.2
58 Credit Services 10.1
59 Resorts & Casinos 10
60 Restaurants 9.9
61 Education & Training Services 9.9
62 Business Software & Services 9.9
63 General Entertainment 9.8
64 Broadcasting – TV 9.8
65 Toys & Games 9.7
66 Regional – Pacific Banks 9.7
67 Asset Management 9.7
68 Drug Related Products 9.5
69 Textile – Apparel Footwear & Accessories 9.4
70 Specialized Health Services 9.4
71 Investment Brokerage – National 9.4
72 Foreign Regional Banks 9.4
73 REIT – Office 9.3
74 Specialty Eateries 9.2
75 CATV Systems 9.1
76 Paper & Paper Products 9
77 Scientific & Technical Instruments 8.9
78 Property & Casualty Insurance 8.7
79 Data Storage Devices 8.6
80 Oil & Gas Equipment & Services 8.5
81 Diversified Utilities 8.5
82 Information & Delivery Services 8.3
83 Industrial Equipment & Components 8.3
84 Diversified Electronics 8.3
85 Independent Oil & Gas 8.2
86 Gas Utilities 8.2
87 Diversified Machinery 8.2
88 Synthetics 8.1
89 Entertainment – Diversified 8.1
90 Major Integrated Oil & Gas 7.9

Some may argue that Return on Capital Employed is a better metric to use, but in terms of excessive profits and price gouging, I see profit margin as a very telling statistic. What it tells me is that the oil industry is making its money on volume as opposed to unfairly high prices. It’s not the oil companies that are killing us at the pump, it’s us consumers doing it to ourselves by consuming so much.

  1. By Andrew Holland on April 19, 2012 at 12:34 pm

    Sam – I’m a little skeptical of your chart here, because we see that print magazines are right at the top – and they keep going out of business!

    But on the merits, your argument is right. The reason the oil companies make so many profits is because they’re so big. And, they’re so big because they have to compete with National Oil Companies (like Saudi Aramco) for access to oil fields. 

    As the report I recently put out – and as you state – says: “The only way to reduce our vulnerability to spikes in oil prices is to use less of it”

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    • By Samuel R. Avro on April 19, 2012 at 2:23 pm

      Here’s a link to the data on Yahoo Finance. Note: Some of the numbers may have fluctuated a little since I created the chart.

      As the report I recently put out – and as you state – says: “The only way to reduce our vulnerability to spikes in oil prices is to use less of it”

      Exactly. And it certainly doesn’t help matters when politicians and their constituents blame it on the scapegoat of the day rather than admit to the fundamental problem. Until there’s universal agreement on what we really need to fix, it’s hard to see anything other than the price signal having much of an affect on the situation.

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      • By armchair261 on April 20, 2012 at 3:39 am

        Another telling indicator from the same source is the P/E ratio. If the oil industry were so extremely profitable, critics might ask themselves why industry P/E ratios are mediocre. After all, investors would know that an industry that can gouge and name its price would always be a source of future profitability, as opposed to “normal” industries that have to face (shudder) market forces and price accordingly. But investors are valuing oil companies at modest P/E ratios. They seem to know something that politicians and the general public don’t.

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  2. By bo crikey on April 20, 2012 at 12:21 pm

    The real problem of oil is the amount of cash put into the hands of people that hate the free world (there is some good reason for that due to the manipulations of corporations and their compliant governments).  The US will never be self sustaining for its oil demand, even if every off shore resource is developed, and that would be a pollution nightmare, almost as bad as our future fukushima.  Solar and wind, with hydrogen as fuel storage must be made the majority energy source as soon as possible, i believe.

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    • By Russ Finley on April 21, 2012 at 3:00 pm

      I don’t know. It all comes down to public ignorance. Politicians will always say whatever their polls suggest they can get away with, which is a great deal because the public is so poorly educated on topics like energy.

      The conduit used by politicians to disseminate their campaign rhetoric is the real problem (the lay press and TV news). Why do they uncritically pass along gibberish like this? To stay solvent. Blogs like this one, are acting as the fifth estate, a watchdog for our lay press which is supposed to be the fourth estate but is rapidly degenerating into  grocery store tabloids.

      http://en.wikipedia.org/wiki/Fifth_Estate

      bo crikey said:

      The real problem of oil is the amount of cash put into the hands of people that hate the free world…

      Case in point.  Xenophobia is part of our human nature, an instinctive proclivity that evolved in a world of competing hunter gatherer bands. It isn’t very hard to override with a little effort.

      I have watched the corn ethanol lobby successfully fan those flames for many years now via our sensationalist, for profit lay media. The root of Iran’s problem is the failure to maintain a separation of church and state. It’s more or less a theocracy. Oil isn’t the main problem there. In fact, their need to trade their oil with the world has probably moderated their behavior.

      The US will never be self sustaining for its oil demand, even if every off shore resource is developed, and that would be a pollution nightmare, almost as bad as our future fukushima.  Solar and wind, with hydrogen as fuel storage must be made the majority energy source as soon as possible …

      Another case in point. How accurate are the above remarks? Where is all of the pollution from the BP well blow out? Is it hiding in the Gulf of Mexico dead zone caused largely by agricultural runoff?

      The Fukushima exclusion zone will be repopulated in very short order. It was mostly, although not entirely, a temporary precautionary move. Solar, wind, and hydrogen are utterly incapable of fueling our modern industrial world on their own.

      i believe.

      To think something is true without having proof or empirical evidence.

      http://en.wiktionary.org/wiki/believe

      The propensity to simply choose what to believe rather than conclude what is true from evidence isn’t going to be overcome any time soon.

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      • By armchair261 on April 21, 2012 at 5:34 pm

        One of the best written posts I’ve come across in a long time. Thanks for that.

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  3. By Douglas Hvistendahl on April 21, 2012 at 7:40 pm

    Whatever the future, it is likely to work out better, at least for our own families, if we take sensible action on our own, instead of waiting for some big shot to push action. We have a big backyard vegetable garden, and have been modifying our house as we could afford to, for years. This chopped the heating and cooling bill by about a third, so far. And the used car we just bought, after a year of research, gets about 50% more MPG than the average new car.

    We can’t solve all the problems. But with thought, study, and work, we can make improvements!

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  4. By Optimist on May 3, 2012 at 2:48 pm

    I’m a little skeptical of your chart here, because we see that print magazines are right at the top – and they keep going out of business!

    Could it be that Big Oil is just way more efficient than print magazines? It certainly is a dog-eat-dog, fiercely competitive world out there. Consolidation has created huge oil companies, but perhaps very efficient organizations.

    For print magazines, OTOH, an era of living it up is coming to an end. Don’t you love creative destruction?

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