Thursday, May 05, 2011

Wait, Exxon only makes $0.02/gallon of gas?

Poor little Exxon, how can they survive on just $0.02/gallon? If you're mad about gas prices blame those evil state and Federal tax collectors taking your hard earned money for pork projects like fixing roads.

Well that's not my opinion, but this is the spin that's made it's way around the web over the last week as Exxon has tried to defend it's $10.65 billion first quarter profit. I don't begrudge Exxon making a profit, even a $10 billion profit. They have product that is priced by the markets and they suffer when oil is $20/barrel and they thrive when it's $110/barrel, but the spin they put on their earnings was a little hard to swallow.

Here are their contentions (you can see all of their pretty charts on their blog):

Exxon only makes $0.03/gallon - this is bit of the old game of telephone in the digital era. What Exxon actually said was "3% of our earnings come from US gasoline sales". So in this case that would mean they earned a relatively modest $319 million on US gasoline sales. What they did say was that for every gallon of finished product they sell in the US they only make $0.02/gallon.

Fair enough, but let's consider some other facts in their own words: Exxon only owns 5% of the gas stations in the US labeled ExxonMobil. The balance are owned by small business owners. So, little old Exxon is only making $0.02/gallon on the 5% of stations they own and that still equates to a pretty healthy profit of $319 million in the first quarter, but it's makes you wonder how did they earn the other $10.33 billion, right?

As you can see from their own chart - in March 68% of the cost of a gallon of gas was due to the price of crude oil. In order to simplify the math let's call it 70% which is probably close to accurate as crude has surged to $110/barrel. At $4/gallon that means $2.80 of the cost of gallon of gas is due to the cost of crude oil. Hmmm, I wonder where all of that crude oil comes from......

Again, it's true that Exxon doesn't set the price of crude oil, but they do sell their oil for the market price. So, all oil companies that sell in the US are deriving huge profits from the spread between their cost of production and the price the market will pay for their product. Again, this capitalism at it's best and I don't have a problem with that. However, for an oil company to spin it that they're only making $0.02/gallon is at best some wicked spin and at worst a bald faced lie.
So, $2.80 of every gallon you pump doesn't go directly to Exxon, but that's money they've already collected when they sold their crude to the refiners. A better representation would be to say "It costs Exxon about $0.56 to get our crude out of the ground and you pay $2.80 for that gallon of crude. We earn about $2.24/gallon of PROFIT off each gallon sold from our crude oil. Oh, yeah and we make $0.02 on each gallon sold at our retail stations."

The analogy I would make would be this: Let's say Walmart wants to control the cost of their t-shirts so let's assume they buy every cotton farm in the US. When cotton spikes like it did this year, Walmart would sell all of that cotton to the cotton mills in China for twice what the price was last year. Now when the $5 t-shirt comes back to the US this year, Walmart charges $10.

The public is outraged over this inflation. However, what if Walmart put out a press release and said "but, we're still only making $0.02 per t-shirt. The higher costs comes from higher cotton prices." Yes, but Walmart owns the cotton!! In this analogy, Walmart would have reaped huge profits when the cotton was picked and sold.

This is exactly what Exxon did with this press release. They used smoke and mirrors to confuse angry consumers.

Like a good friend always says "everyone lies these days."

Fact of the day: 7% of GM's sales last quarter went to subprime borrowers. Wash, rinse, repeat....


Anonymous said...

Lets see ... 83600 people at Exxon work 365 days for 2 to 3 cents a gallon profit. The state, local and federal government does zip and gets 48.8 cents a gallon .... and Exxon is the bad guy here? Get a life jerk.

Anonymous said...

ok, so eliminate all gasoline taxes. now there are no roads. no gas sales. problem solved.

Anonymous said...

Couldn't have said it better.. The government takes more out of a gallon of gasoline then the company that produced and sold it.. And no roads? I beg your pardon but a growing number of highways in this country are being maintained by private sector companies who do a better job of maintaining them (road work actually gets finished) I believe Chicago highways have been under construction since 1985...

Unknown said...

I'd like to know where you get these $0.56/2.80 figures from which you calculate a $2.24 profit margin. The source of this $0.56 cost to extract number is not previous listed in your article, nor to any of your links seem to present any figures regarding the costs of producing crude oil.

It's hard to believe that Exxon would make an 81% profit margin on oil production, yet still only manage a meager 5% total profit margin on the whole. Is crude oil production such a miniscule portion of their total revenues?

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