Photo by Timothy Newman on Unsplash
 It’s earnings season, and with Exxon Mobil and Chevron posting big profits, that can only mean one thing. They are once again being blamed for gouging consumers and for causing inflation.As I have argued before, such thinking reveals a massive misunderstanding of economics. Oil prices are set on exchanges based on short-term expectations about supply and demand. Neither Exxon Mobil nor Chevron can move the needle much on supply, and demand is determined by consumers. Thus, these companies have practically no effect on prices.It is true that they profit more when prices rise, and it is probably true that they prefer high prices to low prices. After all, they are corporations whose purpose is to make money. But their profits are riding oil prices like passengers on a ship. U.S. oil companies are not the captains of that ship. (OPEC is a different story; the cartel does have the market power to strongly influence prices).As such, it isn’t that profits are causing inflation. The oil companies are profiting from the same factor — higher prices — that is causing inflation.But the other thing many don’t tend to understand is scale. If you told me that a company made $20 billion in profits during a quarter, I would have some questions. How big is the company? What are their capital expenditures? What are their profit margins? How much money “should” they make, and why?In other words, “$20 billion” without any of that context is meaningless. So, let’s put some numbers in context.Exxon Mobil recently reported the results of Q3 2023. According to data provider FactSet, Exxon Mobil reported generally accepted accounting principles (GAAP) earnings of $9.1 billion on revenues of $89.6 billion. The company further reported capital expenditures during the quarter of $4.9 billion and it paid out dividends to shareholders of $3.7 billion.Exxon Mobil’s net margin in Q3 was 11.9% and its return on assets was 11.1%. Income taxes are only available on an annual basis, but in 2022 Exxon Mobil’s income tax bill was $20.2 billion on net income of $55.7 billion. Exxon Mobil’s shares trade at a price-to-earnings ratio (P/E ratio) of 10.7 based on earnings estimates for the next 12 months.Now, let’s compare these results with those of Google, another company that is ubiquitous in our lives. In contrast to Exxon Mobil, Google has a great deal of power over the pricing of its products and services.In Q3 2023, Google reported GAAP earnings of $19.7 billion on sales of $76.7 billion. So, Google made more money than Exxon Mobil on less revenue. Google reported Q3 capital expenditures of $8.1 billion (more than Exxon Mobil) and it paid out no dividends to shareholders.Google’s net margin in Q3 was 22.5% (nearly double Exxon Mobil’s) and its return on assets was 17.7%. Google’s 2022 income bill was $11.4 billion on net income of $60.0 billion. Google shares trade at a price-to-earnings ratio (P/E ratio) of 20.5 based on earnings estimates for the next 12 months — nearly twice that of Exxon Mobil.So, Google makes more money on lower revenues and pays a lower overall tax rate than Exxon Mobil. It has a net margin that is nearly double Exxon Mobil’s. So why do people rage over Exxon Mobil’s profits, but say absolutely nothing about Google’s?The main reason is that we can see the direct impact of gasoline prices on our pocketbook, but we can’t really see how Google is impacting us. Thus, we feel like Exxon Mobil is taking advantage, but we don’t feel the same way about Google.Nevertheless, it should raise questions about what is an appropriate profit in a capitalistic society. Sure, Google and Exxon Mobil are very different types of companies, but can you say what Exxon Mobil’s profit margin should be? If I gave you Exxon Mobil’s profit numbers, but told you it was for Starbucks or Apple or Nike, would you complain that it’s too much?The reality is that the energy industry consistently ranks at or near the bottom of all sectors when it comes to profit margins. If you really think Exxon Mobil is making too much money, then perhaps you could explain how much would be an “acceptable” amount, how you made that determination, and whether you apply that same standard to other corporations. And of course, you can always choose not to consume the company’s products and contribute to that profit.More By This Author:October Was The Highest Oil Production Month In U.S. History
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