The oil industry's profits are so huge that it must be taking advantage of customers, right? Actually, it's not that simple.
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%).
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.
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