Last Updated May 30, 2011 11:46 PM EDT
Reminiscent of 2008 when their quarterly profits reached nearly $15 billion, Exxon Mobil reported nearly $11 billion in profit for the 2nd quarter that just ended. That's an increase of 69% over the same quarter last year. Taken together, the top six oil companies had a quarterly profit of $38.1 billion. Surprising to Wall Street, these huge profits, even by oil industry standards, happened as the average price for fuel at the pump in the US hit $4 per gallon and reached over $5 per gallon in some places. This is nothing new for the oil industry since the profits of the top five multinational oil companies approached $1 trillion over the first 10 years of the new millennium.
This is just amazing given that oil and gas is basically a commodity product. With no proprietary advantage, commodities typically sell for low prices in open markets. To have control over price, marketers typically position their products as unique (think Apple). The more uniqueness, the more control. If buyers really want or need the product, they have to pay the price because they cannot get the same product somewhere else. Uniqueness, from effective branding, gives marketers a monopoly over the mind-space of buyers. This, in turn, creates an effect similar to that of an inelastic demand curve. With oil, there is very little or no uniqueness - making the high prices at the pump an amazing feat.
Even more amazing â€" continued subsidies
What is more amazing is the fact that the oil companies have been getting tax subsidies from the U.S. government since 1916. In spite of their gargantuan profits, the oil industry has convinced the American public that these subsidies, which currently total $4 billion a year, are necessary to keep their prices lower than they ordinarily would be. If this is not another example of marketing genius, I don't know what is.
How do they do it?
In addition to hiring lobbyists, the oil industry achieves this marketing feat of high prices and profits for a commodity product by doing the following:
- Using the news media. They do their convincing by sending press releases to the news media, which distributes their messages for free via news programs and articles.
- Invoking Supply and Demand. In the press releases, they convince the public that the high prices are the result of supply and demand forces that are out of their control. However, OPEC (an oil cartel) controls the supply and pricing of crude oil so invoking supply and demand, while a clever strategy, is a bit disingenuous.
- Providing believable reasons. They use world events as reasons (cynics might call them excuses) for supply and demand changes and higher oil prices. Typical examples include the following:
- China, India, and other large global users bidding up the price of oil
- Instability in the Middle East threatening supply
- Refinery outages, which seem to occur at the worst possible times
- Seasonal demand factors from heating, air conditioning, and increased driving
- Industrial demand factors from a healthy economy
I know some reading this are thinking that I am oversimplifying a complex issue. Maybe I am, but it is hard to refute that OPEC and their oil company constituents have arranged a symbiotic relationship that has enriched both of them at the expense of those that buy their products. It is not just the pain of paying more at the pump. Oil prices are an economic accelerator. Everything that is made or transported uses energy, and much of that comes from oil and gas. The prices of food, clothing, and just about everything are going up because of the rapid rise of oil prices that has enriched oil companies. The oil companies have said repeatedly that they need high profits to develop alternative energy sources and explore for more oil. They may be doing a lot of the latter but very little, if any, of the former. Meanwhile, consumers all experiencing nasty side effects including...
- Global warming, which more than a few scientists believe is creating strange weather patterns and erosion of US land
- Fracking, a process of extracting natural gas, has caused pollution of rivers, wells and ground water with known carcinogens
- OPEC profits financing terrorism and dictatorships
What do you think about the prices, the excuses, and the resultant higher profits?
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image courtesy of flickr user, azza-bazoo