Liquid Gold
Yesterday afternoon while I was cleaning out the blackberry patch I was thinking about the oil patch, both of which are mighty thorny.
So sez I to me, "Has the price of oil really increased of late?" Now that's a dumb question you might say, but if you look at the price of oil in terms of that universal currency, gold, the answer is "No!"
If you had taken a sack of gold out to the oil patch with the idea of buying a barrel of crude oil anytime since 2000, any shiek would have sold you a barrel of crude for a tenth of an ounce of gold.
In other words, the value of oil, within the bounds of short-term fluctuations of the price of gold and oil in US dollars, has not substantially changed.
So, sez I to me, "What has changed?"
Well, the answer is the power of the US dollar to buy any goods and services not produced in the United States.
And, who loses?
That would be you. Your US dollars buried in that coffee tin out in the backyard will not buy nearly as much gold or oil today as they would seven years ago.
And, who wins?
That would be the oil patch.
Let's take a gander the the biggest of the biggies in the patch, ExxonMobil, by looking at their operating results from 1999 and 2006. All figures are in millions of US dollars.
So, from 1999 to 2006, ExxonMobil sales increased from $233B (as in Billion) to $378B, an increase of 62%. But, you already knew that because you were paying about $1.50 a gallon in 1999 and last year you were paying an average of, say, $2.70 a gallon.
And, did the price of crude oil have much of an effect on ExxonMobil. Well, yes, for a sales increase of 62%, they experienced a increase of 69% in the cost of crude oil. And, that wasn't good for the bottom line becasue the cost of crude increased from 46% of sales to 48% of sales. In other words, ExxonMobil did not adjust their prices upward enough to completely cover the increased cost of crude oil.
Production costs increased by 63% for a 61% increase in sales. Again, not good for the bottom line. ExxonMobil must be losing money right and left in 2006 you are thinking, I'll bet.
Well, things start to get better now.
Their depletion charges only increased by 23%, decreasing from 4% to 3% of sales. Good. That made up for half of that 2% in lost margins from the cost of crude oil.
Now, folks, it doesn't take that many more people to sell $3.00 gasoline than it does $1.50 gasoline. So, SGA (selling, general and administrative) costs increased by only 10% from 1999 to 2006. That resulted in a reduction from 6% of sales to 4%. Now we have completely made up for lost margins from crude oil prices and are 1% better than before. Anything else if gravy.
Ok, the excise tax that ExxonMobil collects for the Federal government is based on gallons of gasoline sold, regardless of it's selling price. They increased by 38%, reflecting changes in both sales volumes and tax rates. However, excises taxes paid by ExxonMobil decreased from 10% of sales in 1999 to 8% of sales in 2006. More gravy.
Same thing for other taxes on gasoline. They increased by 27% over the period but decreased by 3% of sales. Even more gravy.
In fact, when all cost of sales are added together, they increased by only 51% from 1999 to 2006 on a 62% increase in sales. The net result? With pretax profit margins increasing from 12% to 18%, ExxonMobil earned 6% more on every dollar of income in 2006. That, coupled with the 62% increase in sales, resulted in pretax profits increasing from $27B in 1999 to $67B in 2006. And that, folks, is a 149% increase in earnings, fueled primarily by the increase in the price of crude oil.
Now exactly how does all this affect those of us not involved in the oil patch? Well, our supply of US dollars in that coffee can out there in the back yard is going to dwindle away more quickly unless we quit driving that SUV around so much. That gold bling our wife wants for Christmas is going to be a great deal more expenensive. And, the cost of a BMW is going to go completely out of sight. In other words, your standard of living is going to take a hit ... sooner or later ... depending on how big your coffee can might be.
As for those involved in the oil patch, well ... we could cut our gasoline usage in half and ExxonMobil's earning would still be up by 49%. And NOW you know why these two oil patchers are smiling.
So sez I to me, "Has the price of oil really increased of late?" Now that's a dumb question you might say, but if you look at the price of oil in terms of that universal currency, gold, the answer is "No!"
If you had taken a sack of gold out to the oil patch with the idea of buying a barrel of crude oil anytime since 2000, any shiek would have sold you a barrel of crude for a tenth of an ounce of gold.
In other words, the value of oil, within the bounds of short-term fluctuations of the price of gold and oil in US dollars, has not substantially changed.
So, sez I to me, "What has changed?"
Well, the answer is the power of the US dollar to buy any goods and services not produced in the United States.
And, who loses?
That would be you. Your US dollars buried in that coffee tin out in the backyard will not buy nearly as much gold or oil today as they would seven years ago.
And, who wins?
That would be the oil patch.
Let's take a gander the the biggest of the biggies in the patch, ExxonMobil, by looking at their operating results from 1999 and 2006. All figures are in millions of US dollars.
| Year | 2006 | % Sales | 1999 | %Sales | %Change |
| Sales | 377,635 | 100% | 232,748 | 100% | 62% |
| Crude | (182,546) | 48% | (108,135) | 46% | 69% |
| Production | (29,528) | 8% | (18,135) | 8% | 63% |
| Depletion | (10,253) | 3% | (8,304) | 4% | 23% |
| SGA | (14,402) | 4% | (13,134) | 6% | 10% |
| Excise Taxes | (30,742) | 8% | (22,356) | 10% | 38% |
| Other Taxes | (41,554) | 11% | (32,708) | 14% | 27% |
| Total Costs | (310,233) | 82% | (205,667) | 88% | 51% |
| Pretax Profit | 67,402 | 18% | 27,081 | 12% | 149% |
So, from 1999 to 2006, ExxonMobil sales increased from $233B (as in Billion) to $378B, an increase of 62%. But, you already knew that because you were paying about $1.50 a gallon in 1999 and last year you were paying an average of, say, $2.70 a gallon.
And, did the price of crude oil have much of an effect on ExxonMobil. Well, yes, for a sales increase of 62%, they experienced a increase of 69% in the cost of crude oil. And, that wasn't good for the bottom line becasue the cost of crude increased from 46% of sales to 48% of sales. In other words, ExxonMobil did not adjust their prices upward enough to completely cover the increased cost of crude oil.
Production costs increased by 63% for a 61% increase in sales. Again, not good for the bottom line. ExxonMobil must be losing money right and left in 2006 you are thinking, I'll bet.
Well, things start to get better now.
Their depletion charges only increased by 23%, decreasing from 4% to 3% of sales. Good. That made up for half of that 2% in lost margins from the cost of crude oil.
Now, folks, it doesn't take that many more people to sell $3.00 gasoline than it does $1.50 gasoline. So, SGA (selling, general and administrative) costs increased by only 10% from 1999 to 2006. That resulted in a reduction from 6% of sales to 4%. Now we have completely made up for lost margins from crude oil prices and are 1% better than before. Anything else if gravy.
Ok, the excise tax that ExxonMobil collects for the Federal government is based on gallons of gasoline sold, regardless of it's selling price. They increased by 38%, reflecting changes in both sales volumes and tax rates. However, excises taxes paid by ExxonMobil decreased from 10% of sales in 1999 to 8% of sales in 2006. More gravy.
Same thing for other taxes on gasoline. They increased by 27% over the period but decreased by 3% of sales. Even more gravy.
In fact, when all cost of sales are added together, they increased by only 51% from 1999 to 2006 on a 62% increase in sales. The net result? With pretax profit margins increasing from 12% to 18%, ExxonMobil earned 6% more on every dollar of income in 2006. That, coupled with the 62% increase in sales, resulted in pretax profits increasing from $27B in 1999 to $67B in 2006. And that, folks, is a 149% increase in earnings, fueled primarily by the increase in the price of crude oil.
Now exactly how does all this affect those of us not involved in the oil patch? Well, our supply of US dollars in that coffee can out there in the back yard is going to dwindle away more quickly unless we quit driving that SUV around so much. That gold bling our wife wants for Christmas is going to be a great deal more expenensive. And, the cost of a BMW is going to go completely out of sight. In other words, your standard of living is going to take a hit ... sooner or later ... depending on how big your coffee can might be.
As for those involved in the oil patch, well ... we could cut our gasoline usage in half and ExxonMobil's earning would still be up by 49%. And NOW you know why these two oil patchers are smiling.
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