People hear that Exxon/Mobil made “$40 billion in profit”:http://www.washingtonpost.com/wp-dyn/content/article/2007/02/01/AR2007020100714.html in 2007 and scream “price-gouging”. Of course, price-gouging is impossible because companies don’t control the price of anything in a free market, supply and demand alone controls prices. Don’t believe it? If they do control prices, why is gas only $4/gallon and not $100/gallon? Answer: because they can’t control the price.
Money Magazine “explains”:http://money.cnn.com/2008/03/13/news/economy/gas_gallon/index.htm?eref=rss_topstories the parts of the price of gas. Here’s how gas prices are broken down:
68% of the cost goes to the companies, like Exxon/Mobil, that drill for oil and produce crude oil. Oil can be used to produce “many things you probably use daily”:http://www.thegoodhuman.com/2007/05/25/do-you-know-which-products-are-made-out-of-oil/, not just gasoline. Refineries turn crude oil into gasoline and they get 8%. The distribution companies that deliver the gas to your local gas station also get 8%. The government takes 13%, usually for maintenance of roads. The remaining 3% goes to the gas station that sells you the gas.
Exxon’s $40 billion in 2007 is 10% of their “total revenue of $400 billion”:http://finance.google.com/finance?q=NYSE%3AXOM. That means that Exxon’s profit margin is 10%, which is healthy, but small compared to Microsoft’s “27% profit margin”:http://finance.google.com/finance?q=msft or Google’s “25% profit margin”:http://finance.google.com/finance?q=goog. Before you complain you pay too much for gas, think about how much you overpaid for the computer you’re using to read this.
Using $4/gallon as an example, $2.72 (68%) of that that is paid to Exxon and their profit is 27¢ on each gallon of gas. Even if Exxon decided to make no profit, a gallon of gas would only drop by 27¢. But if that were to happen, Exxon would have to pack up shop unless they could convince their employees to stay given that their salaries will never increase.
Exxon doesn’t care what the price of a gallon of gas is, they only care about their profit. When the price of anything goes down, people buy more of it (and vice versa). Exxon would be just as happy, if not happier, to make 10% profit on revenue of $800 billion than 10% of their current $400 billion. So lower gas prices are in Exxon’s best interest. So you can be sure that Exxon is going to use the $40 billion to find more oil and find more efficient (cheaper) ways to extract it, which will help to lower prices and increase their profits in the future.
Note: What most people don’t realize about gasoline is that once the gas goes into the pipeline, Exxon (and others) are done. The gas is distributed via trucks to local gas stations and they don’t care what gas station they’re selling the gas to – the same truck delivers gas to several local gas stations. If you think you go to an Exxon-branded gas station and buy oil that Exxon extracted from the ground, you’re wrong. That’s why “stupid ideas”:http://www.snopes.com/politics/gasoline/gasout.asp that have circulated on the internet don’t work.