An undoubtedly stupid question about Exxon profits...

[lelgt60]

I understand why gasoline prices might reflect the price of its major component - crude oil, but I don't understand why Exxon profits increase just because its cost of goods goes up.

Say Exxon wants to make 10 cents per gallon of gas sold (its gross margin) to cover its non-material costs plus make a "reasonable profit". Says its total material costs are 50 cents per gallon. So, it sells gas at 60 cents per gallon. Now, its supplier raises the price of crude oil, so Exxon's material costs are now 55 cents per gallon instead of 50 cents per gallon. Exxon raises it price to consumers to 65 cents per gallon.

As long as Exxon sells the same number of gallons, it still makes 10 cents per gallon gross margin and its profit out of that gross margin doesn't go down. But, it DOESN'T GO UP either.

So, it seems to me that there's no reason that Exxon's profits should go up just because the price of oil goes up. Yet, I think many people just accept this reason from Exxon as being "OK". In reality it seems to me that Exxon is using the rise in crude oil prices to justify raising its profit. Isn't this the definition of gouging? Am I missing something? I don't see any question of this on MSNBC, let alone CNN or our own government.

[kentuck]

1. That is a good question.

And the idea to do away with their $4 billion subsidy is really no big deal. They could raise the price 4 cents per gallon and get that money back.

[Bandit]

2. How does Exxon get the oil in the first place?

Doesn't Exxon drill for it and remove it from the ground and also set the price for it? They own the oil in the first place and they also own many of the refineries that turn it into heating oil and gasoline. then they sell the gasoline and diesel as well...Exxon is the one that raises the price of oil as well as gasoline..

[Chris_Texas]

4. No. The traders set the price.

[Zebedeo]

7. Yes and no

Yes, Exxon produces the oil (drills for it). No, they do not set the price for it. The price of oil is set by the laws of supply and demand in the global market for this commodity. If Exxon tried to raise its price above the price that others are selling equivalent oil for, they would not be able to find a buyer.

Similarly, the price of refined gasoline at the pump is subject to the competition of the market. If one station raised its prices above those charged by other stations, consumers could and would go to the other stations.

[Chris_Texas]

3. They produce the oil.

It is now selling for more, so they earn more per barrel.

[Scuba]

5. So what they're saying is that Exxon controls the price of gas at the pump....

....and the Lamestream Media spreads the 'truth' that high gas prices will sink Obama's re-election hopes.


Yep, that sounds about right.

[ChoppinBroccoli]

6. I Thought It Was Common Knowledge............

.........that in order for profits to INCREASE, one of two things needs to happen: Either your COSTS go down or your mark-up goes UP.

In this case, we know for a fact that Exxon's production costs are NOT going down. So what does that leave?

[TreasonousBastard]

8. Exxon drills a lot of its own oil, and if...

it costs $5 or $10 a barrel to get the oil, it costs the same whether oil is selling for $10 or $100. Besides, an incredible amount of money is made trading oil while it's being transported and through exchange rate hedging.

And, there is also a market in gasoline futures, so if it looks like gasoline will be in short supply in a while, the price goes up while the actual cost of production stays the same.

[Zebedeo]

9. Exxon

already owns the oil in the ground where it is being drilled. So when the market value of this commodity that Exxon already owns goes up, it greatly benefits Exxon's bottom line.

[ParkieDem]

11. This is part of it.

Also, when it comes to pricing and getting a return on investment, all companies (Exxon included) view their margin in terms of percentages, not nomnial dollars and cents.

For example, let's say you own a lawn mower factory. You want to make a profit of $20 per lawn mower. At first, your costs are $100 per lawn mower, so you price your lawn mowers at $120. Over time, however, costs go up .... eventually they are $150 per lawn mower. You have two choices: eat this cost, or pass it on to consumers, or a combination of both. Eventually, if the cost gets too high, you're going to want a return of more than $20 per lawn mower. As your costs go up, you're putting more of your capital at risk, so it's not unreasonable for you to want more than $20 per lawn mower, especially if market conditions change.

With Exxon, of course, it's not near this simple. I have many problems with Exxon, but their profit margin has historically been only around 8%. That's nothing compared to Apple, Microsoft, let alone the big banks.

The price of gasoline largely has to do with the weak dollar, low interest rates and QE2. Unless something along those lines changes, or crude oil ceases to be priced in dollars, not much will happen unless everyone just quits driving all of a sudden.

[Zebedeo]

12. Agreed

100%

[alc]

10. they want 10% not 10 cents (or whatever values)

This is not unreasonable in our economic system.

Imaging an extreme case: a gallon of gas costs $1 and a loaf of bread costs 10 cents. Whether you make 10% or 10 cents per gallon, selling a gallon of gas lets you buy a loaf of bread. Then, inflation causes that to change to gas costs $100 and bread costs $10. If your goal is to make 10 cents/gallon of gas, it now takes 100 gallons but if you make 10%, one gallon of gas still gets you one loaf of bread.

Inflation isn't the main cause of price increase here but they are looking for an X% return in their costs. Investors expect that or their stock price will go down. Also, they build up funds for when X% results in less profit so they can continue marketing and exploring/drilling. They will also probably buy back some stock and push the price up. Whether you agree or not with our economic system, it's not unreasonable in this system to have a goal of a % profit rather than a fixed profit.