In the news… Exxon-Mobil profits

A few days ago, Exxon Mobil, the world’s largest corporation, announced their 2005 financial results. And what results they were. Revenues were over $370B (that’s more than the GDP of Saudi Arabia) and profits were $36B. That’s over a billion dollars a day in revenues, and profits of over $100M per day! A pretty good year, though Exxon was quick to point out that the pharmaceutical industry was doing better (an interesting argument: “don’t complain, the drug companies are price gouging worse than us”). But I shouldn’t begrudge a company its profits – making money is a good thing. What gets me is I don’t understand why they were so profitable this year. After all, they experienced record high costs of their raw materials (crude oil) and major disruptions of the refining and distribution operations during the hurricane season. Shouldn’t that have hurt their business, at least a little?
It seems that the basic principles of a free market economy don’t apply here. And that’s the problem, with two parts. First, the US oil industry is massively protected and subsidized by our government (even more than most other big industries). When things go bad (or at least appear bad, since obviously 2005 was not a bad year for Exxon), we can count on congress to give tax breaks and price subsidies to the big guys. Second, and more importantly, us consumers are so hooked on oil that we have become total immune to price changes. Raise the price 50%, and we don’t lower our consumption one bit. That’s not what they teach us in Economics 101. Why do we act this way? Maybe we will change our oil consuming habits, it just takes us a while. I can only hope.

4 thoughts on “In the news… Exxon-Mobil profits”

  1. Everyone should just ride bikes, like me. Of course to do this would require a serious redesign and implementation of every city in the US (beaucoup bucks, maybe we can get exon to chip in, even if it is funding their own demise), not to mention a major paradigm shift for every American citizen. On a side note, do you have any idea about the oil spending habits of other nations? Are we alone in our constant consumption, or is the rest of the world as hooked?

  2. One factor in the profits is that the oil industry has successfully implemented its strategy of reducing supply of refined gasoline, made more acute by the storm disruptions. In the early 90s refinery margins were too low so the industry decided to reduce capacity to increase margin.

    I’d say they have every right to manage their business to be profitable, but what bugs me is they use environmental regulations as an excuse for current refinery capacity shortage ("it’s too expensive and difficult to get new refineries online"). That’s disingenuous.

    Also, all the mergers in the 90s have reduced competition so that active collusion isn’t even needed in a lot of areas to control price.

    One source:

  3. Is it possible that the "why" behind high profits is simply that the oil companies are marking up their product by a percentage of raw material costs? I think gallon of gas at the pump has always cost about 2.5x the cost of a gallon of oil.

    Since refining and distribution costs are fixed, they make more money when oil goes up?

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