Oil Company Profits Oil Profits in Perspective Oil Company Income Versus Other Industries Profit Dollars at Work Oil Company OwnershipFor More Information
Oil Company Profits
A multitude of factors can affect a specific oil company's profit on gasoline sales including the efficiency of the firm's refining, distribution and marketing system, as well as its source of raw material. In times of rising oil prices, companies that own and produce a considerable portion of the crude oil used in their refineries may benefit more than other companies that must purchase most or all of their supplies on the open market.
The most recent data compiled by the American Petroleum Institute indicate that U.S. oil and gas companies made an average of 9.5 cents on every dollar of sales in the second quarter of 2011, compared with 10 cents per dollar of sales for all manufacturing.
The cost of crude oil currently accounts for close to 70 percent of gasoline's price at the pump, as shown in the graphic. Other price components include refining, distribution (pipelines, storage terminals and tanker trucks) and marketing (service stations and convenience stores). When gasoline reaches the pump, another important factor comes into play – federal, state and local taxes – which generally amount to about 15 percent of the pump price.
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Oil Profits in Perspective
As the strengthening of global economic activity, major oil companies have experienced significant improvements in profits compared with financial results from prior years. These big percentage increases have helped support the impression that oil profits are excessive. But business analysts stress that other measures should be considered in assessing a company's or industry's profit picture. One important measure is profit margin – which is net income (profits) for each of dollar of sales, which is calculated by dividing net income by sales. In the case of oil and gas companies, total sales consist of the money companies receive from selling their products as well as revenue received from any other sources. Net income is the money left over after all costs and taxes are paid.
In recent years, oil profits generally have remained on a par with or below those of other major industries. As the chart indicates, an analysis of data by the American Petroleum Institute from 2006 through 2010 shows that the average earnings of oil and natural gas companies stood at less than 7 cents on each dollar of sales. This profit margin was on a par with the rest of American manufacturing. For 2010 alone, earnings of oil and gas companies were about 6 cents per dollar of sales – well below the average of all major manufacturers.
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Oil Company Income Versus Other Industries
The graphic shows the most recent data available on the profit margins of various major industries for 2010. During this period, the profit margin of U.S. oil and gas companies (5.7 cents per sales dollar) was below the average profit margin for all manufacturing industries (8.5 cents per sales dollar). Industry classes ranking well above oil and gas companies included computers/peripherals, pharmaceuticals/medicines and beverages/tobacco
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Profit Dollars at Work
Oil company profits are used primarily for two purposes: to pay dividends to shareholders in the business and to pay for capital investments to find, produce, process and transport energy products to consumers. From time to time, oil companies also may use available cash to pay down debt and to buy back shares of their stock to help enhance its value for investors.
Shareholder Dividends. Millions of Americans own stock in oil companies either directly as shareholders, as owners of mutual fund shares or as participants in pension fund and other retirement accounts. Each year, dividends paid by oil companies put hundreds of millions of dollars into the hands of the public.
Capital Investments.
By far the largest portion of oil profits goes back into the business to find and develop resources and improve and expand facilities. Consumers most often see industry capital investments in the form of new or upgraded marketing outlets, such as local convenience stores. But in reality, investments in the retail marketing business are very small when compared to the massive amounts of money spent by the industry in places that few consumers ever see, such as the middle of the North Sea, the Alaskan North Slope or the deep waters of the Gulf of Mexico.
Higher prices provide greater incentive to look for oil and gas in more remote, expensive locations. As the graphic indicates, most of the industry’s billions of dollars in capital spending goes toward exploration and production of oil and natural gas resources. ConocoPhillips’ capital program for 2011 totals more than $13 billion – with nearly a billion dollars a month going to discover, develop, process and transport energy supplies.
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The ownership of America’s oil companies is dispersed among a wide variety of individuals and institutions – ranging from individual IRA accounts to teachers’ pension funds to modest “mom-and-pop” investors. According to a recent study, less than two percent of oil and gas company stock is owned by company executives. The study, compiled by two prominent economists, concluded that: 
• Nearly 70 percent of the shares of oil and gas companies are held by institutional investors, especially asset management companies, and predominantly on behalf middle-class American households who own shares through mutual funds, pension funds and retirement accounts.
• Individual investors who manage their own portfolios and are not company insiders account for almost 30 percent of all industry ownership, which again includes significant numbers of middle-class households holding IRAs and other personal retirement accounts.
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Putting Earnings in Perspective, a compilation of oil company earnings information compared with that other industries prepared by the American Petroleum Institute.
Distribution of Ownership of U.S. Oil and Natural Gas Companies – A 2007 study by SONECON, an economic research firm, providing data on ownership by classification of the U.S. oil and gas industry.
Oil & Gas Industry Oversight, a site that explains how the Federal Trade Commission keeps an eye on the petroleum industry, including gasoline prices and merger enforcement.
Weekly Update on Gasoline Prices, a report compiled by the U.S. Energy Information Administration.
Investing in the Future, an analysis by Ernst & Young LLP on behalf of the American Petroleum Institute (API) shows that with recent record oil and gas prices, companies have increased investments in new production and capacity, facilities and technology.
Post-Hurricane Gasoline Price Investigation, a summary of the major findings of this extensive investigation, compiled by the Federal Trade Commission.
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