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.
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.
Image used in this Post
thistle alpha – belford dolphin 1978 photo courtesy of Flickr user crawfish head published under the CC license.
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26 Comments
I guess the media jumps the gun again. Capitalizing on the social predisposition against Oil Robber Barons. Not that I like Oil Companies anyway, but I guess we owe all companies a little honesty.
Thanks for the insight.
I take issue with the irresponsible reporting by the media who is pandering to popular opinion, which is exactly that: an opinion, not fact or reality.
The media should be held accountable for honest reporting. There is no way I am the only person to have checked into this, where are all those people standing up and saying, “Hey, Exxon really isn’t doing anything wrong. They’re just doing what business is supposed to do, and it just so happens that the demand for their products is ubiquitous, which is what is driving revenues and profits up, not price gouging or illegal practices”?
I’ll have to disagree with all of you – because I’ve done my homework and understand history.
This company has raped the world and every citizen since it was created. It’s owners work hand-in-hand with the military-industrial complex to wage wars throughout our planet.
This company is just another head of the New World Order hydra that also includes the Federal Reserve and the Rothschild Banking Dynasty.
The Rockefeller’s owned oil, the Rothschilds owned the banks. Both of these families united and sought to rape the world for as much and for as long as possible.
Talking about masturbatory percentages and cost/profit ratio bullsh*t is absurd. Wake up.
You missed the entire point of the blog. I am not saying that Exxon Mobil is a philanthropic wonder to the helpless masses of the world.
All I am trying to say is that when people accuse them of price gouging they are wrong, which the “cost/profit ratio bullsh*t” (this leads me to believe you are angry because you don’t understand any of it since your terminology is meaningless)clearly shows that they are not artificially increasing the selling price of gasoline. Period.
If you care to dispute the financial evidence, since this was meant to be a financial discussion, then please feel free to provide it backed up with facts and analysis, as I have, or else leave your conspiratorial rantings for someone who cares.
JL Wallace, according to my indepth analysis of your comments, I’ve discovered the exact composition of your thought processes: 47.11% is ripped from the conspiracy “non-fiction” of David Icke, 27.89% from the pages of the Illuminati series, 15.73% from the writings of Karl Marx, and the remaining 9.27% is a jumbled mass of confused interpretations that owe their thanks to paranoid tendencies.
Unfortunately the analysis has found no trace of independent thinking.
But global warming….corporate America….Baldwin’s head explodes
I am pretty sure the accountants at a company that pulled in 39.5 BILLION dollars are probably a little smarter than you are finding all sorts of loopholes you didn’t account for. While I do think its nice that you actually read a single report to base your blog post on. 39.5 BILLION dollars sure is quite a few bags of M&M sodas and other sundries. Glad they were able to make up the difference between the cost increase of crude vs the cost increase of gas.
Your comment makes no sense. As a matter of fact, I am an accountant for a multi-billion dollar organization – so it’s doubtful that they are much “smarter” than I am….
Admittedly my analysis was high-level. I intended to write a blog about how the consumers were getting screwed by Exxon Mobil until I performed the analysis and the numbers didn’t support that viewpoint.
What the hell does M&M have to do with Exxon? Ironic, someone like yourself who cannot even put together a coherent thought insinuating that I am unintelligent….
Seems to me that the one thing for sure that this post did bring to light was that Exxon has been price gouging all along. The only reason everyone has been attacking Exxon is because they have had better business sense from the beginning.
One could say that. However, that is a relative issue. Exxon Mobil’s profit margin is from 8.5 to 10.5% from 2004 to 2006. Compare this with Pfizer’s profit margin in 2006 at 17.1%. So, you tell me who is doing the price gouging…looks like big pharma is worse.
I’m sorry, you’re saying that they have a gross margin of over 40%, and yet they aren’t a company that is being unfair to the masses? What other industries have that kind of gross margin?
Well, Piers, I’m glad you asked that question. MANY industries have HIGHER gross margins than 40%. Below are the samples I have selected for you:
Pfizer: 84.2% Gross Margin (GM), 17.1% Profit Margin (PM)
Intel: 51.5% GM, 18.2%
General Motors: 20.6%, -19.9 PM
Starbucks: 57.5% GM, 6.9% PM
Campbell’s Soup: 41.9% GM, 10.4% PM
Exxon Mobil: 43.5% GM, 10.9% PM
As you can see, Pfizer, Intel, and Starbucks all have a higher Gross Margin than Exxon Mobil. Campbell’s Soup, a manufacturer of consumer packaged foods, has a very similar Gross Margin and Profit Margin to Exxon. Are you complaining about the cost of your soup? I didn’t think so…
OK People here is how it goes:
The current situation is one where we are discussing the sale of a commodity that has finite volumes at an increasing rate of demand. This will inexorably lead to increased prices because the supply and demand curve displays the supply decreasing over time with demand increasing over time. This results in an exponentially increasing price curve. All I am saying is, Exxon Mobil and it’s counterparts are the merchants of a product with these characteristics. It is not the merchants’ fault that you demand a product with these qualities. If you truly want to change this situation, demand must decrease over time, eventually to zero, because the supply will decrease over time to zero. If you do not, this is a failing proposition. Don’t fault the merchant for your lack of foresight by demanding a product with these economic factors.
I’d like to bring a slightly different perspective to this discussion. I used work in a petrol station in Australia and I got to see where the money was being made.
The profit margins for the petrol were almost nonexistent and most of the profits were made from the mini shop inside the store where you paid for the petrol. If you bought some oil for your car or some sweets for the journey then we would make some profit. The remainder of the profits were made from the garage attached to the petrol station. These petrol stations were franchised from the parent company and they also ran some stations directly themselves.
The main reason for this was that within 100 metres of any petrol station you would usually find three more competing petrol stations, all with their prices advertised in 2 foot high letters. If one lowered their prices by a single cent, all the others had to do they same or they wouldn’t sell any petrol. If they didn’t sell petrol, they wouldn’t get customers in the shop and they wouldn’t sell the secondary items that made the profit.
Of course, if you wanted to screw Exxon and all the other oil companies, you could just stop using petrol. It’s not easy now but it’s getting easier every day and the more people who do it the hard way, the faster it will turn into the easy way.
Thanks for the insight, Dave, that is good information to know.
See, Exxon Mobil IS getting hosed.
I can honestly say that while I do not understand the complexities of running a multi-billion dollar industry, I do understand the basics that if you buy a product for X amount and turn around and sell it to a captive market for X+Y amount and you walk away with billions and billions of dollars profit, you are OVERCHARGING! Its as simple as that. If, as the author of this article claims, the entire profit is being made on the idea of having “managed to do more with less administrative costs” then why were the administrative costs estimated that high to begin with? Isn’t it infinitely more likely that the company made a ton of money off the American people and had to come up with a way to make it look better on paper than just profiting billions? It seems more likely that they made their estimated administrative costs appear much higher while making their actual administrative costs appear lower for the year and then claimed that the profit wasn’t from record gas prices but from smart managing instead? I mean, who honestly can say that the company wouldn’t be facing some serious legal problems if they made $39.5 billion and then said “yeah, we took advantage of all you poor saps… deal with it”
I think not. Its a greedy multi-billion dollar, multi-national corporation and you all think they saved 39.5 billion dollars on administrative costs? Those are some amazing lap-dances the executives must be getting…
All you stupid freaking donkeys believe anything you read… think for yourselves, will you?
So a merchant should buy it for X, and sell it for X? The whole point of business is making that Y. Is it just the big numbers that bother you? I’m not defending Exxon, but it just rankles me to read uninformed opinions based on numbers and generalisations.
First, good read.
Second, its hard to argue basic principles of macroeconomics people. While Jason’s analysis is using broad numbers, which he admitted to, it is still spot on.
Exxon is not the Moral Oral of the corporate world, but they’re not price gouging the customer. That would require some price fixing amongst the major oil companies.
Its our own faults we’re sucking the oily teet of major oil companies. Personally, I bought a home closer to work and drive a vehicle that gets 30 miles to the gallon. I spend 100-125 dollars a month on gasoline to travel anywhere I need to.
Oil is running out of supply. When will you run out of your demand?
Tony & Justin – refreshing to read intelligent comments by informed readers, thank you.
@Josh-At least you admitted that you know nothing, and your comment demonstrates that fully. Let’s use your formula as an example:
Product X Cost per unit: $0.60
Product X unit selling price: $1.00
Your formula (which is a horrible misunderstanding of the situation, by the way…) would lead a person to believe that the profit derived from the above situation with “Product X” is $0.40, which is not true. The $0.40 calculated is the Gross Margin. The administrative costs, depreciation & amortization, interest and taxes all then come out of the $0.40 per unit gross profit. Not too shabby to pay for all those things with about $0.30 per unit sold. This leaves $0.10 in profit per unit.
OK – brace yourself for true understanding, a moment of clarity, if you will: Take the above Product X scenario. If you are running an operation, like a lemonade stand, that sells 150 glasses (units) per day, then the stand’s sales would be $150, the gross margin would be $60, and the profit would be $15. Now imagine a company that sells something that almost everyone needs and those who needs it will ALWAYS need it….say crude oil, for example, and this company sells 150 billion gallons (units) in a year using the same characteristics for Product X. The sales would be $150 billion, the gross margin would be $60 billion, and the profit would be $15 billion.
Do you see that it is the magnitude of the product that is being discussed that results in the $39 billion in profits, not that the companies are selling “…it to a captive market for X+Y amount and you walk away with billions and billions of dollars profit, you are OVERCHARGING” – not so, I’m afraid. Are you saying that the lemonade stand is over charging because they make $15 a day? So if the lemonade stand sold more glasses of lemonade, they should LOWER the price, even though the demand is increasing? That doesn’t make any sense.
It looks like Chavez just the gave the finger to Exxon.
I dare any of you nerdlingers to spout your capitalist jargon at a homeless shelter, or a foodbank. “Hey everybody! 39 billion dollars is actually a fair profit for these grass-roots oil companies. They’re just like you and me! Just trying to make a decent living.” I’m sure that would go over well.
heh…nerdlinger…nerds who linger…
Incredulous – interesting point. Too bad homeless people don’t sell a commodity that everyone needs, like Exxon Mobil or it’s counterparts, and therefore the situations are mutually exclusive and have no relevance to reality.
it’s the bulk of sales that make the profit. you sell a 100 billion units at 1 cent profit you make a billion dollers…
We are definitely being gouged at the pump. But I noticed something interesting.
I passed 2 Exxon stations in my city that DID NOT INCREASE PRICES AT ALL this weekend. Some of their competitors however went up as much as 50-75%.
You can imagine my disbelief+elation when I paid $3.99/gallon for PREMIUM at my local Exxon. I’ve got to give them Kudos for controlling their gas prices this past weekend!
One thing I find conspicuous in its absence.
Any news whatsoever when Exxon paid $30B in taxes. To put it into perspective the bottom of 50% of US citizens paid $27B.
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