Unfair Profits or Lots of Volume?

Most people, if asked to name off the top of their head which industries were taking advantage of consumers to generate insanely high profits, would likely have the oil and gas industry at the top of their list. Isn’t it a well-known fact that with gas prices spiraling through the roof, “Big Oil” is by far the most profitable industry out there, hence they must be taking advantage of consumers?

Actually, it’s not that simple. But public opinion would have it otherwise.

In fact, industries such as internet information providers and personal computers rank well above major integrated oil and gas (Big Oil) when it comes to profit margins. The simple definition of profit margin is: A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.

To be sure, the U.S. oil majors have been generating huge profits. As U.S. President Barack Obama pointed out in a recent speech urging Congress to repeal tax breaks for the oil industry, “the three biggest U.S. oil companies took home more than $80 billion in profits. Exxon pocketed nearly $4.7 million every hour.” For more on the breakdown of gas prices, see: What Makes Up the Cost of a Gallon of Gasoline?

But it’s difficult to see it as ‘windfall profits‘ for the oil industry when they rank so low in terms of profit margin. The fact that they’re turning such a large profit speaks more to the scale of their operations rather than excessive profits.

Out of every dollar they did in sales during the most recent quarter, the Major Integrated Oil & Gas industry (a.k.a. Big Oil) kept 7.9 cents in earnings. Compare their 7.9% profit margin to those of Publishing – Periodicals (53.1%), Brewers (20.3%), Industrial Metals & Minerals (26%), Drug Manufacturers – Major (16.7%), Railroads (15.55), Water Utilities (12%), Cigarettes (22.5%), and Industrial Metals & Minerals (26%). Or compare it to other industries that have benefited greatly from high commodity prices such as Silver (41%), Copper (25.1%), and Gold (24%).

Courtesy: Yahoo Finance

Rank Industry Net Profit Margin (mrq) 1 Publishing – Periodicals 53.1 2 Silver 41 3 Closed-End Fund – Foreign 38.3 4 Closed-End Fund – Equity 30.1 5 REIT – Diversified 29 6 Industrial Metals & Minerals 26 7 Copper 25.1 8 Gold 24 9 Internet Information Providers 23.8 10 Application Software 23.2 11 Cigarettes 22.5 12 REIT – Healthcare Facilities 20.9 13 Beverages – Brewers 20.3 14 REIT – Residential 20.1 15 Diversified Investments 18.4 16 Semiconductor – Integrated Circuits 18 17 Regional – Southwest Banks 17.7 18 Semiconductor – Broad Line 17.2 19 Beverages – Wineries & Distillers 17 20 Drug Manufacturers – Major 16.7 21 Foreign Utilities 16.5 22 Personal Computers 16.2 23 Semiconductor Equipment & Materials 16.1 24 Publishing – Books 15.6 25 Railroads 15.5 26 Regional – Northeast Banks 15.3 27 Agricultural Chemicals 15.2 28 Beverages – Soft Drinks 15 29 Networking & Communication Devices 14.7 30 Drug Manufacturers – Other 14.1 31 Wireless Communications 14 32 Medical Appliances & Equipment 13.7 33 Oil & Gas Drilling & Exploration 13.6 34 Medical Instruments & Supplies 13.6 35 Savings & Loans 13.3 36 Personal Products 13.3 37 Security Software & Services 13.2 38 Conglomerates 13.1 39 Technical & System Software 12.9 40 Air Services, Other 12.9 41 Research Services 12.8 42 Regional – Midwest Banks 12.7 43 Real Estate Development 12.4 44 Property Management 12.1 45 Water Utilities 12 46 Biotechnology 11.9 47 Semiconductor- Memory Chips 11.5 48 Processed & Packaged Goods 11.5 49 Specialty Chemicals 11.3 50 Semiconductor – Specialized 11.2 51 Confectioners 10.7 52 Mortgage Investment 10.6 53 Long Distance Carriers 10.5 54 Telecom Services – Domestic 10.4 55 Money Center Banks 10.2 56 Diversified Computer Systems 10.2 57 Business Services 10.2 58 Credit Services 10.1 59 Resorts & Casinos 10 60 Restaurants 9.9 61 Education & Training Services 9.9 62 Business Software & Services 9.9 63 General Entertainment 9.8 64 Broadcasting – TV 9.8 65 Toys & Games 9.7 66 Regional – Pacific Banks 9.7 67 Asset Management 9.7 68 Drug Related Products 9.5 69 Textile – Apparel Footwear & Accessories 9.4 70 Specialized Health Services 9.4 71 Investment Brokerage – National 9.4 72 Foreign Regional Banks 9.4 73 REIT – Office 9.3 74 Specialty Eateries 9.2 75 CATV Systems 9.1 76 Paper & Paper Products 9 77 Scientific & Technical Instruments 8.9 78 Property & Casualty Insurance 8.7 79 Data Storage Devices 8.6 80 Oil & Gas Equipment & Services 8.5 81 Diversified Utilities 8.5 82 Information & Delivery Services 8.3 83 Industrial Equipment & Components 8.3 84 Diversified Electronics 8.3 85 Independent Oil & Gas 8.2 86 Gas Utilities 8.2 87 Diversified Machinery 8.2 88 Synthetics 8.1 89 Entertainment – Diversified 8.1 90 Major Integrated Oil & Gas 7.9

Some may argue that Return on Capital Employed is a better metric to use, but in terms of excessive profits and price gouging, I see profit margin as a very telling statistic. What it tells me is that the oil industry is making its money on volume as opposed to unfairly high prices. It’s not the oil companies that are killing us at the pump, it’s us consumers doing it to ourselves by consuming so much.