Preparing for the Rants from Capitol Hill

Exxon just reported their earning for the fourth quarter of 2005. And what earnings they were. $10.7 Billion. That's a lot. That's a hell of a lot. And now we are going to see, like we saw three months ago, renewed calls from politicians to tax "excessively" large profits. And there will be more complaints that obviously they are price gouging in gasoline and taking food from the mouths of widows and orphans, yadda, yadda, yadda.

What often gets overlooked in most of the more sensationalistic news reporting, however, is the key line of the Earnings report that highlights Exxon's revenue. If you drill into some of the reporting or into the financial statement, you find that they had revenues in the fourth quarter of $99.6 billion dollars.

In other words, they are making a profit of just 10.7%. That's is not an obscene profit margin. In many industries that would be a bad performance.

They generated $10.7 billion in profits by spending $88.9 billion (99.6-10.7). What did they spend it on? Well, oil extraction, exploration, refining, transportation, salaries, dividend, and some probably extremely high executive salaries. In other words, the stuff of running a business.

For the year, they showed a profit of $36.1 Billion on revenues of $370 Billion, or a roughly 9.7% profit margin.

The reason they turn such huge profits is because they are selling a lot of stuff, not because they are gouging the consumer. The US consumes huge quantities of oil and is apparently still willing to do so even with higher prices. Demand for oil is spiking in China and India. And renewed tension in the middle east continues the make the business quite challenging.

Now if they were showing profits in the neighborhood of 30% or more, then maybe there would be more to be critical of. Maybe.

10% though? I think that is certainly reasonable.