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Big Oil Ruined My Life

By Morgan Housel - Updated Nov 11, 2016 at 6:28PM

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Get out of the Hummer, put on a sweater, and quit griping.

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:

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