Friday, August 2, 2013
Busting Conspiracy Myths
There is always a lot of ranting about big oil profits and the fact that they are spending it to buy back their own stock rather than creating jobs or going after more oil. Whenever the price jumps, the “pain at the pump” brings out accusations of Big Oil gouging, conspiring to fix prices. Years ago people would swear there was a connection with the Bush administration, implying that some government higher-ups were profiting personally from this plot.
Critical thinking requires research before jumping to conclusions or buying into the arguments of known opponents. According to Forbes, Big Oil’s average profit from gasoline is about 7 cents per gallon. This website confirms the 7 cent figure but goes on to blame the current administration: “Gas prices are increasing because of costs of new regulations by the Obama administration and failed policies in the Middle East.” Apparently presidents always get blamed by one side or the other.
Overall oil companies make a lot of money, around $100 billion for Exxon, Chevron and BP together, but they do it by selling a lot of gasoline and other products. For a good comparison use profit as a percent of revenue; for every dollar we give them, how much do they get to keep? For Big Oil the answer is about 10 cents. And who benefits? “Compared with a small fraction of oil stocks (about 1.5%) owned by corporate management, the vast majority of such investments are held by average Americans, primarily via retirement accounts.” The latest news on Big Oil, Exxon and Chevron, is that they are experiencing cost increases greater than price increases. If they really controlled the price of oil and gasoline, how could this happen?
The airline industry is another recipient of constant complaints and overall disapproval. They keep charging us for things that were once free: checked luggage, in-flight snacks, extra legroom, etc. Then they shrink the lavatories to squeeze in a few more seats. Prices for flights change from hour to hour, and it seems like no two people are paying the same amount for a ticket on the same flight. It’s ridiculous, frustrating and maddening!
It's no wonder we suspect them of ripping off passengers. That’s why I was very surprised to learn that in 2012 they earned only about 37 cents in profit per enplaned passenger – including all fees. That’s about the cost of the peanuts you don’t get for free any more. Overall they lost money in the first decade of this century. (See the exhibits.) This year may be better with projected profits around $4 per passenger.
Now McDonalds, Apple and Starbucks earn about double the rate (profit/revenue) of oil companies and many times more than airlines with substantially less risky businesses, yet we don’t hear conspiracy theories and price-fixing accusations about those companies. (For the quarter ending June 30, McDonalds earned $1.4 billion on revenues of $7.08 billion. That’s 19.8% of sales.) It’s curious how the concept of enemies can spread through society with so little effort to challenge or verify the data.