Oil is still where the money is
"High prices for oil and natural gas propelled Exxon Mobil Corp. and Royal Dutch Shell PLC to their best quarterly results ever on Thursday, with Exxon becoming the first U.S. company ever to ring up quarterly sales of $100 billion.
To put Exxon?s performance into perspective, its third quarter revenue was greater than the annual gross domestic product of some of the largest oil producing nations, including the United Arab Emirates and Kuwait. The world?s largest publicly traded oil company also set a U.S. profit record with net income of almost $10 billion, according to Standard & Poor?s equity market analyst Howard Silverblatt." (msnbc)
To put Exxon?s performance into perspective, its third quarter revenue was greater than the annual gross domestic product of some of the largest oil producing nations, including the United Arab Emirates and Kuwait. The world?s largest publicly traded oil company also set a U.S. profit record with net income of almost $10 billion, according to Standard & Poor?s equity market analyst Howard Silverblatt." (msnbc)
posted by Dody G. at 6:34 PM
12 Comments:
You know you're in a good business when the price of your product doubles within a year, and cutomers keep buying more and more of it...
6:42 PM
Is it because people are buying more of it, or because when prices get this high oil companies are able to get away with higher margins? But by now its all expected, Exxon's stock price has barely budged since the earnings call.
6:48 PM
Well, its a finite resource, and people want 5 million barrels per day more of it now than they did 4 years ago, so you would expect prices to rise. And I am imagining that given oil is fairly commoditised, the margins arent very flexible. But I might be wrong.
This isny my strongest area - maybe someone else knows the details? But I'm not sure how "normal" the oil market is in terms of economics, because OPEC must cause one hell of a distortion, the Iraq war an general middle east chaos cant be helpful, and Russia is heavily involved. None of these points toward a completely "rational" market,
Experts? Or armchair speculators? Would love to hear from someone who actually knows their stuff on this....
8:40 PM
It was surprising how often this subject came up when I was studying a subject at uni called "Politics in the middle east" a couple of years ago.
At a simple level, OPEC's role is essentially to determine supply, and when they decide to change the amount of supply, they make that information public.
Beyond that, it pretty much is the free market forces of supply and demand that run the show.
However, it does differ from regular commodities in a few ways. The suppliers (OPEC's members) don't necessarily have maximizing profit as their objective. They put an artificial cap on total supply. Deals and agreements relating to oil supply or purchase are also used as political and diplomatic tools.
Two more things that make this commodity interesting is 1) The level of demand barely changes when the price goes up, and 2) the performance of an oil company is correlated much more strongly with the performance of the global economy than it is with the economy of any single country.
As for the profit margins of oil companies, I think they work pretty normally. Exxon is still paying a higher price for its raw product, and so charges a higher price for its refined product. And there is enough competition in the market to keep the margins fair. (Unless of course, the oil companies decide to form their own cartel, collude, and all raise prices, but surely they would never do that now, would they?) (and yeah there was a touch of sarcasm in that).
So that's my armchair opinion.
9:44 PM
I'm wondering how you can achieve this
"Today, Exxon Mobil reported net income of $9.92 billion, or $1.58 a share, in the third quarter, up from $5.68 billion, or 88 cents a share, a year earlier. Revenue jumped 31.9 percent, to $100.7 billion, from $76.38 billion."
Their revenue jumps 31.9 percent, but their net profit jumps 87.3 percent.
9:51 PM
For starters Dody, net profit only jumped 74.65%, but your point is still valid.
Let's make a loose assumption that they paid tax equal to half their net profit (ie a 33% tax rate). Then everything between revenues and profit before tax (that is costs, expenses, etc) would need to increase 26.0% to make these figures work. With no tax, costs etc would have to increase 27.9%.
A 31.9% revenue increase along with a 26.0% costs & expenses increase can be achievable with a few efficiency improvements.
10:10 PM
"With no tax, costs etc would have to increase 27.9%."
???
10:28 PM
It's not efficiency.
Take a look at this report
"The world's largest publicly traded oil company, Exxon Mobil said its earnings jumped 75 percent. Royal Dutch, meanwhile, said its earnings climbed 68 percent, and Marathon Oil said its earnings more than tripled.""
This is an industry wide phenomena
10:30 PM
Hey, you said you were just wondering how it could be achieved. I was showing you how.
(Using a very simplified model of:
(+) Revenues
(-) Costs & Expenses
(-) tax
(=) Net profit
And i did it for tax rates of 33.3% and of 0%, just for fun.
I think if one company was able to improve their profit margin, then it's not surprising that others in the same industry could too, by getting the same efficiencies. For example, if we assume that actual barrels sold stayed roughly the same, but price per barrel went up a lot, then that would explain the efficiencies observed. Revenues would increase, but some costs such as shipping would not increase by the same amount, making possible the situation that has materialised. And all the companies in the industry could get these benefits.
11:18 PM
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12:47 AM
Tax credits perhaps? From some energy hungry developing nations...
12:49 AM
I guess the cost of management and infrastruce per barrel produced goes down with the more oil that you produce and sell. It probably doesnt cost Shell much more to produce 10 million barrels of oil than it cost them to produce 9 million. Good old economies of scale.
That would mean that when demand/sales increase, profits would be higher. Just speculation.
7:29 AM
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