Oil Profits – Can’t Someone Else Pay for Them?

Every time the issue of oil profits makes the news or is part of a nearby conversation, I wonder why we only get upset with big oil? Why don’t we rant and rave about others who make fast growing profits like the high tech companies that survived the bursting of the tech bubble? Well, I may have stumbled across a possible answer.

Thousands of companies do what they are supposed to do – make money. Most never make the news and are certainly not heard about around the water cooler or over lunch. Some, like the oil and high tech companies, have a string of years where profits grow rapidly. Most of these make the news, but only the oil company profits result in Congressional pandering to the electorate and bad pictures of oil executives.

New companies can go years without making money and never be noticed except by their investors. Some never make money and go away without being noticed except by a few former customers. Some (think Enron) aren’t making real money but cook the books to indicate they are and then the result is real heartbreaking news. But we only get angry at oil profits. Are they really excessive or is there something else more basic that causes raised voices and pontificating politicians? Maybe taking a broader look at the situation might provide another perspective.

The chart below shows a relative ranking of 38 companies including seven oil companies. This ranking is based on the growth in annual earnings per share (EPS) of stock. The time frame for the growth is from fiscal year 2001 to 2005. The scale is logarithmic to graphically normalize the differences. A chart with a linear scale is also viewable.

Click on image to view full size version.

The top eight companies include five high tech, one coal (Peabody), one mining (Phelps Dodge) and one reinsurer (Berkshire Hathaway). The next eight companies include the top six oil companies with one engineering services company (Haliburton) and an agricultural products company (ADM).

The average five year EPS growth for the top eight is 2,567 percent. The average five year growth for just the top 4 oil companies is 258 percent, or about one tenth that of the top eight.

Now let’s take a closer look at number 1, Google. Not only does Google have the greatest five year growth in EPS of 7,486 percent, it also has the highest gross profit per employee for 2005 of $627,020. Compare that to the 2005 average gross profit per employee for ConocoPhillips, Chevron and ExxonMobile – $296,268. That’s less than half. So, if we are that angry with the oil companies, why aren’t we in an outright revolt over the even higher profit growth of the top 8?

Maybe it’s because someone else is paying, willingly, for those profits. Again, if you look at Google, the cost for our use is zero. Advertisers are the ones paying for Google’s profits while we are the ones paying for the relatively smaller, but still high, oil profits.

If we could only get the oil companies to think like Google and figure out how to get others to pay for their profits and take at least some of the burden off us. However, where’s the insentive for the oil companies to change? What would make them spend some of their profits on developing a high tech idea that isn’t oil related? Only one thing.

Oil has to become unprofitable and something else has to replace it. In the mean time, we either pay the piper or change how we live.