Big Oil Ruined My Life

Let's face it. Short of burying a bunch of dead lizards in our backyards and waiting a quarter of a billion years, we're going to run out of oil someday.

Surging oil's assault on our wallets is undoubtedly agonizing. I understand the frustration. I understand the immediate need for change. But I can't make peace with the argument that American oil companies -- we'll call them "Big Oil" -- should be lambasted, blamed, and punished in the face of higher profits.

There. I said it.
When we see Big Oil making insane amounts of money while gas prices soar, it's easy to assume they all consist of a bunch of cigar-chomping, beer-bellied robber barons on a mission to rob you blind. As Sen. Dick Durbin asked a group of oil executives last week, "Does it trouble any of you when you see what you're doing to us?"

That's where a great misconception of Big Oil's influence begins.

Yes, oil companies are making unprecedented amounts of money. ExxonMobil (NYSE: XOM  ) made more than $40 billion in 2007, up from $11.7 billion in 1997. The main driver behind the surge was an increase in the price of crude, now topping $130 a barrel. But the increase was not due to some sort of newfound profit wizardry, despite the complaint du jour.

How do we know? Look at Exxon's profit margins over the past five years:

Metric

2007

2006

2005

2004

2003

Revenue

$390.3 billion

$365.4 billion

$358.9 billion

$291.2 billion

$237.0 billion

Net income

$40.6 billion

$39.5 billion

$36.1 billion

$25.3 billion

$21.5 billion

Profit margin

10.4%

10.8%

10%

8.6%

9%

Profit margins hovering around 9% to 10% are hardly anything to be giddy over. To put it in perspective, Google's (Nasdaq: GOOG  ) profit margin was more than 25% in 2007, while Microsoft's (Nasdaq: MSFT  ) exceeded 27%. Big Oil's net income is such an eye-catching dollar amount because -- not to be master of the obvious -- oil is really expensive, and we use a lot of it.

Ah-ha!
That leads us to a new road: Big Oil must be behind crude oil's ghastly price. Those thieves!

Easy there, Sherlock. Consider:

  • The U.S imports nearly 60% of oil from foreign countries, the biggest of which include Canada, Saudi Arabia, Mexico, Nigeria, Venezuela, and Iraq.
  • The largest U.S oil company, ExxonMobil, produces just 3% of world oil supply.

The argument that the run-up in price owes to Big Oil manipulating supply ignores an important fact: An overwhelming amount of oil production is controlled by nationalized companies you've probably never heard of. Most of them could give a hoot what you think, for that matter. One of them -- Saudi Aramco -- claims almost a quarter of the world's conventional oil reserves, and boasts on a company-affiliate website that a single day's oil production could make enough gasoline to drive roundtrip to Mars 48 times.

Have you ever heard of Sonatrach? OAO Rosneft? Qatar General Petroleum? They're all oil companies, and they're all much, much bigger than anything based in America. Despite their intimidating size, Big Oil companies such as Exxon, Chevron (NYSE: CVX  ) , ConocoPhillips (NYSE: COP  ) , and Marathon Oil (NYSE: MRO  ) are small fish in a very large pond. Their ability to control price is about as strong as my ability to manhandle Shaq.

There's more
We also need to consider that some of the consumers who complain about higher prices are the same ones who have contributed to the copious demand for oil in the first place. While the U.S. represents around 4.5% of the world's population, it consumes about 25% of the world's oil production. Trucks -- including pickups, SUVs, and vans -- make up nearly half of all U.S. auto sales. I'm still trying to figure out how driving a GM (NYSE: GM  ) Hummer in Manhattan makes sense, but whatever. We'll have fun, fun, fun until Daddy takes the T-Bird away.

The crumbling value of the U.S. dollar also plays a role in oil's rising costs. Since 2002, the price of Brent crude has climbed more than 430% -- when priced in dollars, that is. When priced in euros during the same period, the nominal price would have climbed around 200%. What's led to the falling value of the dollar? Well, our trade deficit, driven by a demand for imported oil, for one. A weaker dollar might be beneficial in a few places, but the gas pump isn't one of them.

Open your eyes
Big Oil didn't ruin my life. It's probably not ruining yours, either. Want to find the reason for the spike in gas prices? Go look in your garage. It's sitting right there.

Light, sweet crude Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. He appreciates your questions, comments, and complaints. Microsoft is an Inside Value recommendation. The Fool's disclosure policy drives a tiny car and -- despite being heckled by bigger disclosure policies -- doesn't have to worry about gas prices.


Read/Post Comments (23) | Recommend This Article (186)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 27, 2008, at 5:06 PM, champ9010 wrote:

    Petroleum products are priced driven by the markets. As such, it is much more instructive to analyze the volume of contracts bought and sold each month and compare that the the volume of oil delivered.

    Prior to 1983, "big oil" probably did control the price much more than they do today. However, today it seems the traders play a far more important role.

    Champ

  • Report this Comment On May 29, 2008, at 1:48 PM, ChannelDunlap wrote:

    It wasn't until I started seeing these types of articles pop up that I really changed my tune on 'Big Oil'. Until people like you started pointing out the profit margins and such, I really did think it was a vast conspiracy to loot us of all our money. I kinda liked it better that way, it was eaiser to point the finger at 1 place and say "Fix that, fix it all." Now the problem looks so much bigger...

  • Report this Comment On May 29, 2008, at 1:56 PM, Blindnomore wrote:

    This has to be the BEST article about the reasons for the the prices at the pump and how the US Congress needs to get their grubby greedy hands off. BTW- that was the only thing missing here, if Congress does impose ANY more kinds of taxes on "big oil", they won't be the ones who get hit with the bill, they just pass that bill on to us. This article should be circulated into every Email box in the US to spread the truth.

  • Report this Comment On May 29, 2008, at 2:12 PM, Blindnomore wrote:

    I just find it impossible to believe that Dianne Feinstein, Sen. Durbin, and all the other supposedly well informed and educated representatives of our country actually sit up on capitol hill lambasting those oil execs. The obviuos conclusion is either 1. Congress does know that what they are doing is lying to the public and they are doing it only to increase their coffers or 2. They are about the stupidest people ever to walk the face of the earth. We all know they are not stupid. Vote the thieves out in Nov. and say no to ANY new tax or increase of any kind.

  • Report this Comment On May 30, 2008, at 11:53 AM, rickalaskan wrote:

    It never ceases to amaze me that so many people will send their money overseas to buy the oil of countries that really do hate us.

    We have oil, a lot of oil, right here in the US but it is politically impossible to touch it. That has to change some day.

    Some of it is here in Alaska. All we have to do is go get it.

  • Report this Comment On May 30, 2008, at 3:05 PM, lerej wrote:

    This article is like a breath of fresh air! Everyone in the country should be made to memorize this article, granted it wouldn't make certain politicians stop promising to "take on the oil companies" could open a few million peoples eyes though. Sarcasm aside, THANK YOU!

  • Report this Comment On June 01, 2008, at 8:54 AM, patientlyholding wrote:

    I've had several debates around the water cooler. My co-workers are clueless and think the "big Oil" companies are pushing the prices up themselves. I think the next phase of this discussion should be to diversify America's energy portfolio and mandate 50+ mpg vehicles.

    Great article...it's what I've been saying for the past 12 months.

  • Report this Comment On June 02, 2008, at 6:51 AM, shaheenkhan wrote:

    good article

  • Report this Comment On June 02, 2008, at 8:55 AM, srikanth71 wrote:

    Great article.. I am pretty sure the Senator is aware of it but puts a typical politician facade in front of the press.. accusing the oil companies..

    One thing is sure.. Oil is going to run dry and the way we are consuming it is sooner than later..

    Interesting thought is on what will happen to oil companies big/small..

  • Report this Comment On June 02, 2008, at 9:37 AM, Bullcub wrote:

    I switched careers a year ago, I'd been a carpenter for 27 years, I now drive a Haul Truck at an open pit copper mine. I traded in my Dodge diesel pickup for a Prius. It doesn't matter who moved the cheese, You just have to find it again. Maybe I'll take some knitting classes, Knit one, pearl two.

  • Report this Comment On June 02, 2008, at 5:01 PM, TMFSpiffyPop wrote:

    Great article, especially just the macro numbers that many of us don't get exposed to very often, like how we in the US use 25 percent of the world's annual oil supply, or how Exxon only made about a half a bill more this year than last, with lower margins.

    Thank you, Morgan.

    David G.

  • Report this Comment On June 02, 2008, at 5:22 PM, osho2025 wrote:

    Rickalaskan:

    Keep in mind that drilling in alaska does nothing to help us.

    1.) It will take a decade to see any oil produced.

    2.) There is nothing to prevent every drop from being sold to China!

  • Report this Comment On June 03, 2008, at 10:22 AM, stanton17 wrote:

    If your numbers are correct, or even in the ballpark, all this is makes for a pretty eye opening article. Nice job and thanks for bringing this to my/our attention.

  • Report this Comment On June 03, 2008, at 1:28 PM, Calculated4Risks wrote:

    By going through the comment, I really believe you did a good service in educating a lot of people, most of them, I believe are liberal minded.

  • Report this Comment On June 08, 2008, at 4:49 PM, rjenne wrote:

    I am really pleased to see articles such as this that tell it like it is. As an exploration consultant in the oil field, I tend to get a bit overheated when I hear people blame "Big Oil" for the current prices we are seeing in crude oil and gasoline. Saying they are fixing the prices is like blaming 7-11 for setting food prices. It is just not possible given their market share. I don't agree that it follows the basic supply and demand model either since a correction in the demand due to higher prices is not fully possible given our dependency on this commodity.

    And it is going to get worse. There are at least three major factors that I see that will ensure this. 1-People often have a misconception of oil fields as well. A large field can produce many barrels a day for twenty years. But as soon as the underlying water cone hits the well bores, thats it folks. You go from 100% oil to 5% oil in that well in the space of two years or less. And it can rarely be fixed to any extent. 2-And when some one says that it should get better soon because they just found a new "huge" field in ....say Canada. What is that going to amount to? 100,000 bbl/day, more? Less? So what. In the face of a demand in excess of 86 million bbl/day globally, it is still a rain drop in a bucket. 3-We are entering the "desperate" stage of the business now. The lengths we are currently going through to find it and get it out of the ground are amazing. Exploring in 9,000 feet of water with deep reservoirs at high temperatures make the production costs reach spending levels that few people even imagine.

    My point, as this article says, is that there is no one to blame except us users. There is just no other possibility in the next ten years except for prices to continue to rise at what most people see as an outrageous rate. It will take at least this long, likely a lot more, to reconfigure our lives in a way that will allow demand to actually start dropping. Anyone that believes we can continue this oil dependent life style without paying a large price for it just does not understand the fundamentals of the oil supply situation. That includes may wall street investors who seem to think that this "commodity" will correct itself in the near future just like the others.

  • Report this Comment On June 08, 2008, at 6:28 PM, fwlim wrote:

    True that their margin isn't as high as some other companies, but they make it up with high volume of sales. They have not done anything to wean/decouple the American economy from oil. There are cases that they bought and shelved technology that would threaten their monopoly on the American energy market. Why? So they can keep their huge profits. They have gone thru extraordinary efforts in lobbying to keep their position in the economy. The government has been sitting on their hands for decades because of payouts from these companies. Bush makes a lot of money from oil also. Why should he oppose them when that's his bread & butter?

    It's like a drug dealer, the first one's free. Once, you're hooked, you're their hostage. Our economy has been built on cheap oil. We are finally pushing to decouple ourselves from the grasps of Big Oil. The country would've been served better if the money we spent on the Iraq war was used to alternative energy sources.

    Big Oil might not be the primary reason we're paying out of our noses for gas, but they certainly did not do anything to help. Aren't they just as guilty for not advancing alternative energy sources and influencing government policy?

  • Report this Comment On June 09, 2008, at 10:29 AM, Buffal0Bill wrote:

    According to Exxon's quarterly report for Jan - Mar 2008, Exxon made a profit of 10.9 billion dollars. If you total the taxes paid in that quarterly report, you come up with approximately 29 billion dollars. Who are the villains, oil execs or Senators playing to passions of the crowd?

  • Report this Comment On June 11, 2008, at 10:19 AM, oldbogus1 wrote:

    When you drive through the oil patches, it is obvious where a lot of that ROI is going: literally down holes. Massive amounts of cash are being spent modifying how oil fields work in order to extract some more oil from these old fields. At current prices, it is worth the expenditure.

  • Report this Comment On June 13, 2008, at 12:28 AM, eprobasco wrote:

    Osho2006 :

    Yes it may take a decade in ANWR or the west cost, east cost, gulf coast, Ohio, etc, but why not START?! We could have started under the Clinton administration and we would be reaping the benefits now. That is the most overused excuse I've heard... 10 years is really not that long.

    Article:

    Everyone said everything I want to say. Thank you for writing this.

  • Report this Comment On July 01, 2008, at 1:01 PM, mitchtak wrote:

    Morgan Housel;s comment says it all!

    "Big Oil didn't ruin my life. It's probably not ruining yours, either. Want to find the reason for the spike in gas prices? Go look in your garage. It's sitting right there."

    I live in California -- near San Francisco. Our gas prices are among the highest int he country. People just don't get it. With all this talk about SUV's and trucks guzzling gas -- But I still see 50% or more of the traffic with this monsters crowding me out. Driving 70 mph plus.

    The SUV's.. taking more space in a parking lot. Making it difficult to back out when surrounded by 2 of them. ANd they often us to parking slots. Filling up gas at Costco.. the lines are filled with SUV's.

    My solutions:

    1) Make it very very expensive to drive these SUV monsters. Add a hefty fee, such as $10,000 when one is purchased. The DMV annual renewal fee should have an added $3,000. And if it is a 4WD, add another $1000 or two!

    2) Decrease the national driving speed to 55 or 60 mph. No reason to go 70 (which in California freeways is the "slow lane")

    3) There is absolutely no reason a car should go faster than 80 or 90 mph maximum. And no reason a car should be able to go from 0 to 60 mph in 8 or less seconds. No reason to have more than 150 or 180 horsepower. If one once it, needs to PAY FOR IT. Some kind of tax/surcharge for each mph/horsepower etc.

    4) All cars should be able to go at least 30 mpg on freeways, and 24 mpg overall. A hefty tax on those cars that don't.

    5) increase the bridge tolls to a more more signficant level; Such as $10 or $20. Especially on our Bay area "spare the air days".

    6) Our Diamond Lanes (two or moe passengers/car (no SUV's allowed) to 24 hours per day, including free toll bridge passage) to encourse carpooling 24 hours per day.

    I can think of other ways, but that should be a start. Some of this, of course, is tongue in cheek. But we have to realize that the enemy is Us. By cutting down on gasoline consumption, we could decrease our needs to 50% or better. The Price of oil will drop dramatically. Our balance of trade will improve. The Dollar willl get stronger. The economy will improve. A favorable cycle will ensue.

    But the penalties imposed on gas guzzlers need to stay in place. Otherwise, the same post 1973 "gas crisis" will ensue, with the big 3 trying to force those culprits (SUV's) on us again.

  • Report this Comment On July 02, 2008, at 7:36 PM, armedangel wrote:

    As it has been for quite some time, the pundits and powers that be never mention the role the Federal Reserve Bank and its debasement of the dollar has on oil prices. In order to pay for America's Empire and endless War, the government is borrowing money and the Fed is printing it. This money ends up in circulation, and the value of the currency decreases. We are broke as a country, and the leadership has sold out the American people by putting us in debt. Remember that debt = slavery. For this publication to ignore the actions of the Fed proves that it is incompetent at best, and likely corrupt. I bet this editor at the fool still believes Ben Bernanke when he says that America is not in a recession. Beware any corporate media still trying to get your dollars in the market. I have seen countless rosey analyses that the market has reached bottom, this is bullcaca. Wall St. would like nothing more than to lure average Joe and Jane into the market to buy so that they can sell and get out.

    Oil is traded in dollars and when the dollar is weak, oil costs more. We have a dollar crisis more than an oil supply or speculation problem. The banking cartels that run the Fed and this country know why oil is over $140 a barrel. Our currency is being devalued and may soon be worth nothing. This is the way with which the wealthy redistribute wealth away from the middle class, a middle class soon to be decimated. Shame on you fool, you should instead be called jerk.

  • Report this Comment On July 25, 2008, at 5:43 PM, thidmark wrote:

    Our government leaders ARE stupid. Have you seen them trying to set economic policy!

  • Report this Comment On December 03, 2008, at 8:18 PM, gec231 wrote:

    The consumption of oil in the US is not largely due to autos. The food industry uses roughly 1/3, and aviation is another big chunk. I recall autos while significant are not the largest users of oil.

    Spiking oil prices have been due to increased comsumption by BRIC and have since slumped due to the faltering world economy. The US car owner (or tank owner in some cases) has been hurt by the poor fuel efficiency of their behemoth vehicles.

    Whilst 'big oil' in the US was not controlling the price OPEC was. The Venezuelan government for instance has gotten into big trouble by spending assuming they could keep oil above $100 a barrel. OPEC has a vested interest in high prices. They control these by limiting production when demand falls.

    Why should the oil companies make record profits this year? I agree with this article at large but it seems that the oil companies took advantage of the public and squeezed even more profit blaming it on market forces knowing the demand was inelastic. Some people couldn't afford their heating bills.

    I guess they are paying now as the market sorts itself out causing a new technology drive and a new awareness of waste by the American consumer.

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