Why is Exxon Making Huge Profits?

chisueApril 30, 2011

OK, this is only somewhat 'household' related, but maybe someone here can 'splain this to me.

I read that Exxon's profit is running 90% over last year. If the cost of oil is sky high, isn't that a COST for them? If people are curtailing their use of gasoline, doesn't that mean less INCOME? Does Exxon receive subsidies from the federal government?

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mike_kaiser_gw

I haven't investigated your claim of a 90% increase in profits but while Exxon's costs may have increased so have their revenues because the cost is passed on to the consumer in the form of higher prices at the pump. Exxon is also a multinational company and worldwide the demand for oil has increased if for no other reason that the world population increases every day along with a corresponding increase in the demand for petroleum and petroleum products. Exxon also produces natural gas and chemicals.

Corporate P&L statements are very complex and there are many items that impact the bottom line beyond cost and revenue. Look at something like depreciation. Let's say, for sake of discussion, Exxon has an oil well that cost them $1 million to buy. They're allowed to, say, depreciate the cost of that oil well at the rate of $100,000 per year over ten years. So, in 2009, they included the $100,000 of depreciation into the P&L. So profits are $100,000 less but they haven't actually spent any cash (to some degree it's a "paper" loss although at some point they will have to replace the equipment or it will become obsolete). Now, in 2010, the oil well has been fully depreciated so they their profits appears to "increase" yet they have no more cash in the bank and they may not have actually replace the well until 2012.

That's just one of the reason you also need to look at the balance sheet and statement of cash flows to get a full understanding of how a company is performing financially.

    Bookmark   May 1, 2011 at 1:33PM
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Billl

First - it is 69% - but that doesn't tell the whole story. Looking a percentage doesn't tell you much if you don't know the actual numbers behind it.

First quarter profits

2007 - 10.25 billion
2008 - 11.66 billion
2009 - 3.5 billion
2010 - 6.3 billion
2011 - 10.65 billion

Exxon is a massive company and it very profitable. During the recession, their profits shrank like pretty much every other business. Now that the economy has started to recover, so has their profits. They are now back to their 2007 levels but still below the peak.

And yes, like all oil companies, Exxon receives special tax considerations from the federal government for numerous decades. It isn't a "subsidy" in the sense that the government doesn't cut Exxon a check. Exxon just doesn't have to pay as much tax as they might without all the special provisions.

    Bookmark   May 2, 2011 at 8:43AM
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chisue

Thanks to both of you for making this easier to understand.

    Bookmark   May 7, 2011 at 12:47PM
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christopherh

The average oil company makes between 8 and 10 cents per gallon of product sold.
Exxon sold hundreds of billions of gallons of oil, gasoline, jet fuel, wax, industrial lubricants, etc. Oil goes into everything made of plastic. Exxon sells that kind of oil also.
Gasoline sales are but a portion of what Exxon produces.

    Bookmark   June 2, 2011 at 5:52AM
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coolvt

If Exxon was as profitable as people make it sound I would have my entire IRA invested in them. Same with the drug companies. Sound like they are making a fortune, but an investor will get a 3&-5% return on investment....and that's with the risk of zero return and the risk of losing the entire investment.

    Bookmark   June 2, 2011 at 12:32PM
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