Help me understand the economics of Exxon Mobil. It's too compllicated and I'm too ignorant

[jpgray]

Using Exxon Mobil as an example, the gasoline/oil industry is posting record profits quarter after quarter, and I'm wondering what this reckless pursuit of profit indicates about supply and the intentions of corporate leadership. Am I naive to think such vast profit margins aren't sustainable over the long term, and indicate a short term plan to acquire as much profit as possible?

This seems to me a way for a few people to make a lot of money while oil supplies are still relatively stable, but such behavior would presume that supply will become far less stable in the near future. I've read some of the information about oil field depletion, and, while I'm no expert, this information combined with the current pricing practices makes me think that a few people are looking to just get as rich as possible while supply remains steady.

Is that an accurate appraisal? I don't know enough about the industry to make a determination as to whether the claims "we will run out of oil!" are valid or no, so does this steep increase in profit indicate knowledge that supply is about to be threatened, or is it (mostly) business as usual, not telling us much of anything about future oil supplies?

[musette_sf]

1. the Bu$hCo raison d'etre:

"a way for a few people to make a lot of money"

[midnight]

2. Yep.... You are right according to Greg Palast. He says as

much in his book the Armed Madhouse. I listen to him,Mr. Palast, say that for generations these oil co. pledged to keep oil in Iraq to keep oil production down, and price up.

[lapfog_1]

3. Actually its likely that the explanation is quite simple

They are maintaining margins and volume while increasing prices.

Crude oil goes up, gasoline goes up, they still sell the same or nearly the same amount and they make the same percentage profit.

Of course, it could also be that they are not spending as much on exploration and development as before... as a percentage of their revenue.

[INdemo]

4. Remember that we were running out of oil 35 years ago

during the Nixon years and once they were able to get the price doubled we all of a sudden had plenty..Ask the Saudi's if we have an oil shortage and the answer is no and they have been saying this for years..
Its just like the price of milk...years ago we had a milk shortage and then the price for a gallon of milk doubled..Well it never went back down when the milk became plentiful..They actually dump gallons of milk to keep the price up there..Now they play the same game with coffee.
Billions of dollars in profits in one quarter..3 months..If their profit reported was in millions than well their bullshit might become somewhat believable...I'm convinced that the energy bill Dick Cheney and the oil industry drafted has a lot to do with the oil companies writing their own rules about how they can legally conduct business and somehow Dick Cheney and this President are rewarding their oil buddies for standing with them and the hell with the middle class consumer..
Notice we dont hear any more about the promises about the windfall profit tax on oil companies,why? The oil companies hold all the cards and we can't do anything except pay their price..But no I dont believe there is a shortage...Its a gimmick that happens to work very well for the oil companies......

[CharmCity]

5. Exxon Mobil would tell you...

that they make more money per barrel than their competitors because they are more efficient and have access to more productive fields based on previous long-term investments. For example, the company employs fewer people than even it did five years ago. That saves money. It uses technology to suck the last drop of oil out of a field. They have the capital to invest in new potential fields. They put a ridiculous of money into technology, which also ultimately saves money. A smaller (in terms of capital investments) or less modern company would not have those advantages (that's what the chart basically tells you).

They can't largely control the price per barrel -- but they can control their costs, and they do.

They also think long term and will tell you they believe there are enough resources to accommodate demand in the next few decades. However, the mix of products will change. Most of the future market actually will not be the US, but in "developing" countries. For example, China and India will be enormous future markets, and they won't want the same products companies sell now. So they are placing their bets on that.

[phylny]

6. ExxonMobil would tell you that they make most of their money in

overseas exploration and production.

[CharmCity]

8. Nah, exploration and production are expensive!

But yeah, most of it is overseas!
They reinvest and pay their stockholders.
An interesting potential beef is that while it spends a LOT on research and development, in proportion to their overall income, it's fairly small, despite all their efforts for future products...

[texanshatingbush]

7. Capitalism is part of the answer.......

I worked in the oil industry for a couple of decades, and here are some observations from my own experience:
*Businesses are like any other living organism--their "prime directive" is to stay alive and, hopefully, thrive. They do what they must do to stay alive.
*For a variety of reasons, some oil companies my have lower "finding costs" than other oil companies. This could be as simple as Oil Company A explores only onshore, while Oil Company B explores only in deep water. If a company's "finding costs" are lower, then its "earnings per barrel" are higher
*The oil companies don't drive prices up. Prices are determined by the futures market. If the futures market is concerned about world events affecting the availability of crude, prices go up. The oil companies are not going to say (who among us would?), "no, that's too much to pay, so I'll sell it to you for $30 less per barrel"
*When oil prices are low, and exploration costs (finding new oil) or production costs (getting it out of the ground and to market)are high, then oil companies would lose money if they continued to explore or produce at the same level as when oil prices are high. Just like any other business, if income falls, then expenses must be reduced also at some point. Some companies might pare back exploration efforts, some might cut personnel, some might do both
*Assume a giant oil field is suspected of lying offshore somewhere in 4000 feet of water. To confirm that the oil is there, a company sometimes must wait for the technology to be developed to drill in water that deep. Once the drilling technology is available, a company must drill a well costing $20-50 million dollars. If the oil field is confirmed to be there, geoscientists and engineers must devise a plan--using the best technology available--to "visualize" how the oil is distributed throughout the field (it is NOT in a "pool" or void in the rock). This will allow them to drill the minimum number of wells which will produce the maximum volume of oil. This process is a TIME cost. Then the company must build an oil platform or platforms from which these multiple wells can be drilled to produce this oil--this is a TIME and MONEY cost. Then the company must determine how to get that oil onshore to refine it--pipeline (another big building project) or tanker ships (gotta build the tanker loading facilities). There are additional permutations of this story. POINT IS: from time of discovery to time of first oil being produced may be 10-15 YEARS. Capitalism is driven by supply and demand. Fields expected to exist may not be drilled when oil is $10/barrel, but may become economically feasible when oil is $40/barrel. Thus, we could be "running out of oil" at $10/barrel, but "awash in oil" at $40/barrel.

As for Cheney's secret meetings with Big Oil--who knows? But as I have described above, there ARE elements in The Story of Oil which are not sinister. Dick Cheney is not one of them, however.

[A HERETIC I AM]

9. Careful. Thoughtful, reasoned opinions by people experienced in that which they speak are often not

well considered. But you've been around this board long enough to know that, i'm sure.

You make some excellent and valid points that are rarely covered in these types of threads. It seems many on DU are conviced the board members of oil companies wake up every morning and rub their hands together with glee, thinking of new ways to screw over the consumer. Nothing could be further from the truth.

Your former line of work must have been very interesting at times.