Note: For the best understanding of the post below, please download the following excel workbook, my analysis of Exxon Mobil’s Income Statement.

I was on the bandwagon with the media and internet frenzy about Exxon Mobil Corp (XOM) being a nefarious company preying on the people of the U.S. who are hog-tied to their cars/trucks by the infrastructure that our country has provided. The recent earnings release of Exxon Mobil that showed the largest earnings of a U.S. company for a one year period ($39.5 billion) HAD to be proof that we were being taken advantage of at the pump, right? I’ll admit it: I was wrong.

I have no love for Exxon Mobil, nor any other oil company for that matter, however I cannot in good conscience agree with all of the popular hype and conclusion-jumping that is now rampant across the media and the internet. I fundamentally disagree with these assertions because I have performed a financial analysis of Exxon Mobil and the numbers do not support the popular claims. Numbers do not lie and the numbers say that Exxon Mobil is, in fact, not passing down all of the increased costs of crude oil down to the consumer.

Oil rig

I determined this by taking the Income Statement for Exxon Mobil from 2004-2006 and calculated what is known as the Compound Annual Growth Rate (CAGR) for Revenues, Cost of Revenues (cost of raw material acquisition and manufacturing), Operating Expenses, and Operating Income for the three year period stated. Revenues increased at a rate of 8.2% while Cost of Revenues increased at a rate of 9.2%. This indicates that the increase in crude oil and natural gas prices has not been totally passed down to the consumer.

The Operating Income of Exxon Mobil has increased at a rate of 17.4% despite the fact that their Gross Margin has eroded from 45.1% in 2004 to 43.5% in 2006. So, how did they manage to increase their profits without passing down the increased Cost of Revenues to the consumer? Exxon Mobil has done an extraordinary job of managing their overhead costs, or Operating Expenses. The Operating Expenses of Exxon Mobil have only increased at a rate of 1.2% over this three year period, meaning that while they increased revenue (but not at a level above the cost of that revenue) they have managed to do more with less administrative costs. This is good business, plain and simple.

In the end, all of the talk about “price-gouging” and being deceived by the big, bad oil company is fictitious. Placing blame on the corporations that provide the commodities we require to maintain this technological world is erroneous and childish, at best. If you really want to see something change, then ask for policy changes from world governments to provide incentives to these companies for research and development work on alternative energy sources. Don’t point the finger at a company for doing what a company is supposed to do: increase profit through efficient operations.

Picture: www.nasa.gov/…/science/robo_sensors.html

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