I work in the oil industry, but -- due solely to my management's inability to recognize true genius -- I'm not the Chairman or CEO. I'm stuck at supervisor level. In this capacity, I certainly do not make corporate-level decisions, but I'm just high enough in the food chain to be privy to a lot of internal data, including most economics. Because of this knowledge, the little purple vein in my forehead starts throbbing every time I read or hear about the rich greedy oil companies gouging consumers. My wife won't let me watch Bill O'Reilly anymore, for fear I'll throw something through the TV when he gets up on the wrong side of his economic soapbox.

To answer the above questions, Lee Raymond is guilty of taking more money than is politically correct in light of today's fuel prices, but he is innocent of any wrongdoing, and his bonus didn't increase my fuel costs. I'll expound on that toward the end, but first, let's discuss refining economics.

Crude calculus
Right now, oil companies truly are making a lot of money. Refining margins are way up, and virtually all refineries are running at maximum capacity. During times like these, refineries make a lot of money simply because of the volume. Let me give a short review of today's margins.

A 42-gallon barrel of crude oil is $75 on the futures market (at the time of writing). That's a cost of $1.78 per gallon of raw crude oil. The refinery's distillation process separates the oil into the various raw cuts, from gaseous fuels, to naphthas, to jet fuel, to diesel, and then the heavy bottom of the barrel. All these various products are then pumped to other downstream units for further processing and upgrading -- and to make the products environmentally acceptable, including removing sulfur. All these processes also use tremendous amounts of energy, materials, and labor. I'm still amazed when I consider our annual operating budget.

So far, we've bought crude for $75 per barrel and processed it in our refinery. Now, lets see what products and how much money we'll get from this barrel. The column "Value, $/gal." is the actual wholesale price for gasoline and diesel on the market today. I'm using estimates for the value of the fuel, sulfur, and asphalts.

Product in barrel

% of crude

Value, $/gal.

Value, $/bbl

Total Value, $

Fuel gas, sulfur





Gasoline blends





Diesel, jet fuels





Six oil, asphalts





Total value


Gross profit, $81.22 - $75 = $6.22/barrel or $0.15/gallon

In the industry, this is expressed at the "topping margin," or the value of the products minus the cost of the raw material. From this you must deduct the cost of doing business. Energy costs alone are nearing $2 per barrel. The enormously expensive catalyst costs, capital expenditures, labor, etc., quickly cut the net value. As of today, the "high profit margins" in the industry allow for the obscene net profits of about $2 per barrel, or about $0.05 per gallon. That's a net profit margin of less than 3%.

I showed that the wholesale price of gasoline at the refinery is $2.33. Then why is gasoline at the pump $2.99, or $0.66 more? The largest beneficiary of gasoline sales is the federal government. Federal gasoline taxes are $0.184 per gallon, while state and local taxes increase the average total tax bill to about $0.46 per gallon. Let's compare. The oil refiner, after all their huge investments, gets $0.05 per gallon, while the government, with no investment or risk, gets $0.46 per gallon. Darn those greedy oil companies.

OK, with taxes, the gasoline now costs $2.79 per gallon when the distributor fills its tanker trucks at the refinery. The trucking company has to charge a few cents per gallon for delivery charges to the station. The station operator, even the brand-name operators who lease the right to use major brand names at their stations, will pay approximately $2.82 per gallon for the gas that they will sell for $2.99 per gallon. The station owner then hopes he can stop the "drive-off thieves." One drive-off destroys the profits from more than 400 gallons of sales.

So how do oil companies like ExxonMobil (NYSE:XOM), BP (NYSE:BP), ConocoPhilips (NYSE:COP), and Chevron (NYSE:CVX) make so much money? The big numbers in the profit side come from the big numbers on the sales side. The refinery at which I work is small by ExxonMobil standards, yet we process about 80 million barrels of crude oil annually. Even at a nickel per gallon net profit, we're talking pretty good money by the year's end. Remember, we do need to keep the shareholders happy.

That's why my blood pressure rises when Bill O'Reilly and others say the oil companies should cut their profits in half to help reduce gasoline prices at the pump. If only people would understand that cutting the profit in half would cut their fuel costs by 2 or 3 cents per gallon.

If we want to reduce the price of gasoline, we need to quit using so much of it. It's a simple case of supply and demand. When we use less, OPEC can't sell as much, so they drop their prices. Now, if you really want to get serious about reducing consumption, let's build nuclear power plants. No greenhouse gasses. Zip. Nada. The sole negative is the highly radioactive spent fuel, but that's another topic.

Back to RaymondExxon did increase its profits fourfold during Raymond's tenure, and he did make the right call in acquiring Mobil at depressed prices, making the newly formed ExxonMobil the world's richest company. Some of this good was due to Lee Raymond's guidance, for which he should be recognized, and some of it was merely the luck of market conditions that would have happened had Donald Duck been CEO.

The ExxonMobil board of directors gave Raymond a retirement package worth at least $400,000,000. That's a lot of zeroes. That's probably more than the combined retirement packages of all the employees where I work. Do I personally think he, or anybody else, deserves that kind of money? No! NO! A thousand times NO! Is he worth that much money? Yes. The bottom line is this: Whether it's a CEO's pay or an athlete's, it's a free market. The person is worth whatever somebody is willing to pay for his or her services.

Did his huge paycheck increase the price I pay for gas? NO again! I saw in Exxon's annual report that they have a total refining capacity of 6.2 million barrels per day. At that rate, Raymond's retirement package cost less than half a cent per gallon, if it were paid for in just one year.

Now, even though I don't believe it cost me anything, his retirement package was a slap in the face and an insult to all us working stiffs out here. I feel the same way about the athletes who sign the $250,000,000 packages, or who get the $50,000,000 endorsement checks. (But perhaps if I could hit a baseball 500 feet 70 times a year, I'd change my mind.) I'd like to see the ExxonMobil stockholders send a strong message to their board of directors, declaring they won't support any more insults like the Lee Raymond incident.

Fool contributor Glen Kenney is a long time employee of Total. He does not own shares in any of the companies mentioned.

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