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Oil Industry Profit Margin Ranks Fairly Low: There Are Bigger Fish

May 12, 2011 5:20 PM ETCVX, SHEL, BP, XOM, COP20 Comments
Mark J. Perry profile picture
Mark J. Perry

The table below shows industry rankings for net profit margin (profits / sales) of the top 114 industries out of 215 total industries during the most recent quarter, from Yahoo!Finance.

The top five oil companies (Chevron (CVX), Shell (RDS.A), BP, ExxonMobil (XOM) and ConocoPhillips (COP)) are part of the "Major Integrated Oil and Gas" industry, and the CEOs of the "Big Five" are appearing today before the Senate Committee on Finance, to get grilled about the "taxpayer subsidies" and "tax breaks" they receive, explain why they deserve to earn record "windfall" profits, and explain the role they play in higher oil and gas prices.

As the table below shows, the Integrated Oil and Gas industry made an average profit of 6.2 cents per dollar of sales, which ranks #114 out of 215 industries by profit margin, and puts oil companies right in the middle of industries by profitability.

If the Senate Finance Committee wants to investigate "excessive" or "windfall" profits, they might consider going after some of the other industries that have benefited from higher commodity prices and achieved much higher profit margins than oil (at 6.2%), like silver (44.7%), copper (24%), gold (21%), and industrial metals (21%) and lumber (17.7%).

Rank Industry Net Profit Margin
1 Closed-End Fund - Equity 81%
2 Publishing - Periodicals 51.7
3 Silver 44.7
4 Closed-End Fund - Foreign 38.3
5 REIT - Diversified 36
6 Copper 24
7 Internet Information Providers 23.8
8 Application Software 22.7
9 Foreign Utilities 20.5
10 Industrial Metals and Minerals 20.1
11 Gold 20.1
12 Cigarettes 19.8
13 Semiconductor - Broad Line 19.2
14 REIT - Healthcare Facilities 19.1
15 Lumber, Wood Production 17.7
16 Semiconductor - Integrated Circuits 17.6

This article was written by

Mark J. Perry profile picture
Dr. Mark J. Perry is a full professor of economics at the Flint campus of The University of Michigan, where he has taught undergraduate and graduate courses in economics and finance since 1996. Starting in the fall of 2009, Perry has also held a joint appointment as a scholar at The American Enterprise Institute. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University and in addition, and has an MBA degree in finance from The University of Minnesota. In addition to an active scholarly research agenda, Perry enjoys writing op-eds for a general audience on current economic issues and his opinion pieces have appeared in most major newspapers around the country, including USA Today, Wall Street Journal, Washington Post, Investor’s Business Daily, The Hill, Washington Examiner, Dallas Morning News, Sacramento Bee, Saint Paul Pioneer Press, Miami Herald, Pittsburgh Tribune-Review, Detroit News, Detroit Free Press and many others. Mark Perry has been best known in recent years as the creator and editor of one of the nation’s most popular economics blogs, Carpe Diem. Professor Perry has written on a daily basis since the fall of 2006 to share his thoughts, opinions and expertise on economic issues, with a strong emphasis on displaying economic data in a visually appealing way using graphs, charts and tables.

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Comments (20)

Ray Merola profile picture
Oil companies ship oil to the U.S. based upon what their refineries can run and the netback cost of the crude. Sometimes they have enough of their own production to refine. If they are short, they buy the difference on the spot market. (not to be confused with the futures market)

All "oil" is not the same. Some is heavy (higher gravity), and some is sour (higher sulfur). U. S. refineries are configured to run certain types of crude. This has a lot to do with where they get their oil.

We import more oil from Canada and Mexico than any country in OPEC. More than 60 percent of our imported oil is from non-OPEC countries.

We import more than half our oil consumption. The number of bbls and percentage we import has risen over the past 40 years or so, despite having many billions of bbls of oil and gas right here in the U. S. A.

The largest oil companies are government owned and government run.

The largest private oil companies are international. These are the companies most Americans think about when talking about oil. They include Exxon, Chevron, BP, Shell and ConocoPhillips. There are others out there that have less of a U. S. footprint: Total and ENI come to mind quickly. These companies produce oil where it's in their economic interest. They are "for profit" companies that try to make money for their shareholders.

The U. S. has had no credible energy policy for decades. I believe this is largely because no politician has the guts to rock the boat. They pander to us voters. We allow it to happen since the consequences would include a significant change in our standard of living. The best way to avoid dealing with the issue is to complain about Big Oil. This deflects the argument away from Washington and us voters and to entities that we "cannot control."

For any politician to stand up and say what needs to be said would ruin him; yet our country and our economy (think jobs!) is based upon the premise of low-cost, abundant, fossil fuels.

To all Americans: we have an entitlement to unlimited cheap energy; we won't invest in mass transit infrastructure because voters don't want it, they want to drive, and it's expensive; the won't raise taxes on energy because it will cripple the economy and job market; therefore the government back-doors the tax by providing subsidies to oil and alternate energy producers.

It should be noted that the major producers do not need these subsidies to survive. The alternate energy industry needs it: they are incapable of survival in a competitive marketplace. The government keeps them on life support through back door subsidies...trying the pick the winners and losers.

To the Greens: we can have all the energy we need without tapping our own resources. We are the only major industrialized nation in the world that refuses to tap most of it's own reserves.

They throw the Greens a bone by providing subsidies to losing alternative energy industries to keep them afloat. Alternate energy sources provide about one-half of one-percent of our total energy needs. Alternate energy cannot compete with fossil fuels unless the government taxes fossil fuels enough to make people want to use something else, or subsidizes alternative energy enough to permit it to compete. Either way, it's your money they are using.

Here's a good site to look at regarding our oil import statistics:

It must be all those juicy breaks that have motivated big oil to produce so much oil that we have increased our energy deficit 500% in the last 30 years. Right.

Lets be honest. Your government wants oil to produce less, drive gas to $8 a gallon and you to ride a bike. Aint green great!
Stone Fox Capital profile picture
Thats b/c it became so much cheaper to import from the middle east. Those low prices choked off innovation and those days of cheap oil are long gone. It shows what happens when commodity prices fluctuate too much. High oil prices has started leading to new discoveries, but not to the extent of nat gas. Remember those higher prices led to more discoveries and the innovation of horizontal/frac drilling, but now prices are starting to stagnate that sector as companies decrease drilling. Inconsistent copper prices has choked off new mines and discoveries. The boom in 2008 ended so quickly that most mines were shelved and now we remain in a likely deficit for the next couple of year.
David Crosetti profile picture
No, it didn't become cheaper to import from the middle east. The reason we purchase so much oil from the middle east is so we can appear to be the good guys. The purchase of middle eastern oil is nothing more than FOREIGN AID PAYMENTS.

When Obama visited Brazil and he touted their oil program, what did he SAY? "We want to be your biggest customers!" Foreign aid, under the table.

We don't drill here, because if we do, we will lower the amount of money sent to the oil producers. Then we will have to write them checks, in the form or actual foreign aid and then someone might ask, "Why are we sending so much money to the Saudi princes?"
No one asks when that money is to pay for oil.

Drill here. Drill now. If the Cubans, the Brazillians, the Russians, the British, the Chinese, the French can drill oil safely and enviornmentally positive, then why can't we? Are they better petroleum guys that we are? I don't think so.

Just Sayin
1) It was big oil that saved us all in WW2, out producing the rest, 2:1. Bums.

2) Maybe we should quit subsidizing the government. Postal service comes to mind. How many taxes do they create? Oh, that's right. Nothing but liabilities so that we can throw out 80% of our mail because it is marketing crap none of us want. BO should grow a pair and revolutionize the idiotic government fake businesses.
Big oil has been a whipping boy for liberal politicians ever since they realized there were public opinion gains to be made by aggressively deriding their so-called windfall profits. All half truths and lies dreamed up by liberals. This chart simply substantiates was most intelligent individuals have known all along. Political corruption in equals political bs rhetoric out!
Ray Merola profile picture
The issue with tax "subsidies" is pervasive and another product of the governments' quest to "pick the winners and losers." This in and of itself is a :"loser." I would prefer to see the market pick the winners and losers versus the theorists in Washington and state houses.

To be "fair," this would mean chiseling out most all of the tax breaks and subsidies afforded to individuals and businesses. Let's gore all the oxen at once.

If the politicians want to reduce or eliminate oil depletion allowances, then let's open up farm subsidies, too. If they want to talk about overseas royalty credits, then let's can all the free ride money for mortgage interest. I used these examples for comparison purposes since they offset the governing going after one industry for political points with other longstanding and unnecessary "breaks" for other groups that may hit home for some readers.

Don't even get me started on the ethanol subsidies.....
Stone Fox Capital profile picture
Corn based ethanol subsidies are the worst. Also definitely shouldn't be subsidizing solar/wind projects, but I do believe the govt has a place in pushing along research in such sectors as its vital to our national security and energy independence. Research credits should help create new technologies that are cost efficient and not to let a tree hugger to put a solar panel on his roof at a discount. That doesn't help create better technology. That just wastes money implementing a inferior product. It also helps keep oil/gas/coal prices lower which blocks the private sector from innovating. Maybe all the research money should go to universities and such where the products are then sold to private institutions that pay the govt back.
I think you all are missing the point the senate was making. These big 5 do not need US gov't subsidies if they are making a profit, let alone a large $ profit. The subsidies amount to a small % of their profits, and that money can be put to better use elsewhere.
David Crosetti profile picture
Following your logic and I am NOT making a political statement here. If oil companies do not need tax subsidies because they make a profit, then why does Planned Parenthood need a subsidy, because they make a profit without that subsidy? Same thing, why do you need to be able to deduct your mortgage interest on your home? Why should you get a credit for dependents? Why should you get a child care credit? No one forced you to have a kid. I could go on, but I hope you see my point.

Coming to these pages, you are likely an investor. If you invest for capital gains or if you invest for dividends you will learn a lot from these pages. Lets say you are older, like me. I invest for income. The government takes 15% of my income (passive income, by the way). The state takes their cut. My 4% profit is reduced, taken by a "partner" who contributed nothing, took no risk, did not put his own capital at risk--he just confiscated his cut from me. And now, he's not happy, because his cut isn't big enough. How big of a cut should he get? You tell me. If I'm a capital gains guy, the government takes more. If I happen to get dividends and a capital gain, I get hit twice. Fair, huh?

How much of YOUR money, made from YOUR hard work and risk do you think the government should take from you? The 4 billion they are talking would cover govenment spending for about a week. This is more posturing by the politicians in DC. Do you think they really care about the oil company profits? Or are they making "points" with their constituency? I will bet you dollars to donuts that if you look into the campaign contributions received by these politicians, you will find that one of their contributors will be one of those evil oil companies.

The politicians don't have a problem chastising their campaign donors--the politicians aren't going to do anything about the oil company tax breaks--it's all for show--to a gullible American electorate.

Costa Rica looks better and better every day.

Just Sayin
Stone Fox Capital profile picture
To tell the truth I haven't done much research on how and why they get the subsidies and just presuming its for just producing oil/gas and not something out of the ordinary, I'm completely fine with doing away with the subsidies. I'm also fine with oil/gas prices going higher to compensate for the lost subsidies. Higher prices are needed to encourage conservation.

All these 'poor' people complaining about high gas prices can switch from their Tahoes to a Volt or whatever and basically spend the same on gas as before. In the process they'll use half the gas and won't be wasting a valuable natural resource anymore.
David Crosetti profile picture
The federal government actually makes more per gallon of gasoline than the oild companies do. This is political grandstanding at its best and really frosts my rear end. I love how this guys know that what they are saying to the oil executives is bs. The oil guys know it's bs. You and I know it's BS. But, the politicians ignore what everyone else knows and just lie anyway. As Will Rodgers said so many years ago, "We have the best politicians that money can buy."

A few years ago, my son ran for office at his high school. He enjoyed the experience and told me that he might want to go into politics in the future. I told him that I would prefer him becoming a bum, because at least he'd be able to maintain his integrity.

Just Sayin
You are right. It is at best a wash. They give the oil companies some incentives, they produce oil, refined into gas, and the money comes back to uncle sugar in gas taxes.
Tom Au, CFA profile picture
Puts this into perspective. Oil companies' high profits are due to their high volumes, which in turn stems from their longevity, not high margins.
Ray Merola profile picture
High volume turnover coupled with an incredibly high capital investment base.

The story I share with those who will listen is this:

If you invest $100 and make a 20 percent return, you make $20 a year on your investment.

If I invest $1000 and make a 10 percent return on it, I make $100 on the capital invested.

Is my return "greedy" and "obscene" because it's five times your return? Indeed, it most certainly is fivefold more that what you get.

Taking it a step further, I have the option of investing my money in many places around the world. If so, and one wants me to invest in the USA, why would you vilify me for spending so much capital here, along with the well-paying jobs and opportunities that go with it?
Agree completely..I have pointed out to whiners for years that if you made this kind of return in other industries you would be fired. The only reason their total profit is so high is because of the volumes they handle.
Oil, natural gas, coal are valuable hydrocarbon resources that are being depleted rapidly and when gone will not be coming back. What does a barrel of say orange juice cost? I guarantee you it's a lot higher than $100 but I don't see the posturing cretins that inhabit the senate investigating that. Left to me oil would not be
less than $200/bbl...period. I don't care what the US, or anybody else for that matter, can "afford" to pay and I've actually heard this
absurd argument to try to justify a return $60-70/bbl again. You don't blow an irreplaceable resource for cheap simply because you can't afford to pay more.
Ray Merola profile picture
Having worked for a major oil company for over 30 years, it's always refreshing to see someone point out some facts such as Mr. Perry has done here. Thank you.

Politicians (particularly Democrats) like to grandstand to pander the Green vote, as well as steer the public away from thinking about the underlying, foolish energy policies we've enacted over the years...by both parties.

Every time the price of oil jumps, these folks declare outrage and "an investigation" of the oil market and marketers. Each and every time: nothing comes of it. Each and every time.

Unfortunately, the public does not express outrage at being duped by politicians over and over again for the time and money wasted on hearings. Those in our industry have seen this movie before.

Perhaps a better approach would be to examine U.S. energy policies and make real decisions on real issues that require thought and leadership.
gnuman profile picture
So if I understand this, if they want to reign in the complaints about high oil and want to end tax breaks then drilling will slow down, maybe refining as well so it will just cause a shortage of new finds and cause oil to spike even higher.

If they make 6.2% profit, think about the volume they must be pumping to make those high profits.
Stone Fox Capital profile picture
Exactly. Guess the Senate just wants to make oil more expensive. Will they ever get it that low interest rates and a huge national debt pushes oil up higher by weakening the dollar.
The point is this is just posturing by the Senate. Don't kid yourself. They aren't going after anything except keeping themselves in power and making sure the trough is there to dip in. Dog and pony show for their constituents.

Look at these charts; of course big oil is making profits. It isn't about that, just a show. The folks at home are unhappy because it is getting so bloody expensive to fill up the tank.


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