Rising Gas Prices--An Objective Analysis

If you were to examine the 2005 annual report for ExxonMobil (http://exxonmobil.com/corporate/files/corporate/sar_2005.pdf), you would find that the world's largest corporation made $36.13 billion of net profit after taxes.

Thirty six billion dollars is a lot of money. When gas prices have gone up to the point where it takes $50 or $60 to fill up one's tank, that seems a bit excessive. Doesn't it?

If ExxonMobil were to cut some of its profits, then maybe gas prices would drop, and the average American who is living paycheck-to-paycheck wouldn't have to choose between prescription drugs or fuel for his car. Right?

Well, maybe not.

According to ExxonMobil's 2005 Annual Report, the company produced 8,257,000 barrels of petroleum products per day for worldwide consumption in 2005. Gasoline represented only 3,274,000 barrels, or 39.65%, of this daily total.

If gasoline represents only 39.65% of ExxonMobil's production, then ExxonMobil's profits from the sale of gasoline should approximate $14,325,545,000 (or 39.65% of $36.13 billion).

A barrel, by definition, is 42 gallons. (http://www.metric-conversions.org/volume/gallons-to-barrels.htm) Therefore, ExxonMobil produced 137,508,000 gallons of gasoline per day last year. Multiplying this by the number of days in a year, ExxonMobil produced 50,190,420,000 gallons of gasoline during the year 2005.

Now, if we divide ExxonMobil's profits from gasoline ($14,325,545,000) by the total gallons of gasoline the company produced (50,190,420,000), ExxonMobil's per gallon profit equals 28.54 cents per gallon.

Today, I paid $2.94 per gallon for a half tank of gasoline. It was not at an ExxonMobil location, but these days every company in a given locale is charging basically the same price. If we assume that ExxonMobil is charging the same price at a nearby store, what would be the company's breakeven price, assuming a profit of 28.54 cents per gallon?

Naturally, ExxonMobil could sell its fuel for $2.66 per gallon (or $2.94 - $0.28).

If ExxonMobil overnight became altruistic and decided to completely eliminate its profits on gasoline, would that really have an impact on your pocketbook? Well, 28.5 cents per gallon multiplied by, let's say, 40 gallons per full tank, would equal savings of $11.20 per fill-up. Nothing to sneeze at, for sure. But, this is still nowhere near the $1.75 per gallon we paid three or four years ago.

Besides, if ExxonMobil did eliminate its profit, giving the rest of us a break, wouldn't that effect the value of the company? Wouldn't its stock price plummet? What about dividends? Wouldn't they drop?

Who gives a flip about the rich oil barons and their stock prices? No one really cares about dividends. Right?

If ExxonMobil eliminated its profit, its competitors would have to follow suit in order to break even. Then the earnings of all oil companies would collapse. Then investors, particularly institutional investors (pension funds, mutual funds) would go ape crap, filing shareholder derviative suits like they were going out of style.

In the meantime, retirees who live off of their investments would suffer as their income droped precipitously. The elderly would then have to choose between their food bills or their prescription drugs. Likewise, middle class workers who are saving for retirement will see an immediate reduction in the value of their nest eggs.

All because we demand $2.66 per gallon gasoline.