Who is Big Oil? What constitutes a profit?

Who is Big Oil: Really !!!

Everytime Exxon Mobil declares its profits a collective gasp goes out from the world. Impressive statisticsl ike Exxon generated $1500 per minute profit (or some similar figure) is trotted out by a well dressed "analyst", then the camera would pan to gas prices at a gas station, an unsuspecting customer would have his/her 15 min of fame railing against "Big Oil", of course the ever obliging political class would express its dismay, a Presidential candidate would put up a podium at a gas station and pout pious phrases about alternate energy etc (before stepping back into a gas guzzling SUV that would take him to a chartered flight). Few more impressive rhetoric like "greatest transfer of wealth", "addicted to foreign oil" would be floated. To cap it all the titular congressmen would drag the CEO's of these profiteering companies to a congressional hearing. Of course a distinction would be drawn between legitimate profits and "profiteering".

The world is never simple. Exxon CEO once very justifiably grunted, "I did not come to the government for help when oil sold $10 per barrel, I do not want the government interefering now". It is the duty of every company to maximize shareholder value else they would have failed in their moral obligation. In short, if they do not generate profits its immoral.

Lost amidst all this din is a very pertinent question, what makes these oil companies "Big Oil"? Why are they hated? The plebian commoner, pardon him/her, does not have the time or resource to question every opinion that is tossed his/her way in the name of "analyst opinion". It is my credo to question such opinions and shine a contrarian light.

This article is the result of two stories in "The Economist" dated Aug 12th 2006 and the editorial "What is windfall Profit" in Wall Street Journal (Aug 4th 2008).

The following are excerpted from Economist:

"Big Oil is pretty small next to the industry's true giants: the national oil companies (NOCs) owned or controlled by the governments of oil-rich countries, which manage over 90% of the world's oil, depending on how you count. Of the 20 biggest oil firms, in terms of reserves of oil and gas, 16 are NOCs. Saudi Aramco, the biggest, has more than ten times the reserves that Exxon does. "

"Saudi Aramco's proved reserves alone could keep the world supplied for several decades. But it is only exploiting ten of its 80 or so fields". (Why do people just blame US oil companies for not exploring enough) "Only 2,000 wildcat wells have ever been dug in the countries around the Gulf, according to Leonardo Maugeri, an Italian oilman, compared with more than 1m wells in the United States".

If Exxon Mobil ws run like how Hugo Chavez runs PDVSA these same self styled "analysts" would scream murder. "The company (PDVSA) can no longer maintain its own fields, let alone complete the many new projects it is pursuing, says Diego González, who used to work for its gas division. Wood Mackenzie estimates that output slumped to less than 1.2m b/d in 2003. It subsequently recovered a bit, to 1.6m b/d, but is now falling again.."

Now lets turn to profits. Nobody defines the difference between what is legitimate profit and what is profiteering. One common measure of profits is "profit margin". WSJ editorial scathingly points out "Exxon's profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).If that's what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery -- both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau's industry rankings".

The editorial further points "its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we're missing some Obama-Durbin business subtlety.."

For those who truly hate big oil and would like to see their profits cuts, please take a cycle to work, or at least use mass transit (out of choice), travel commercial flight, buy a sedan with decent mileage if you are not ready for any of that then...stop complaining.

Another blog will follow on that another canard "flex fuels" and "corn based ethanol".