Marketing Tips from Big Oil

Last Updated May 30, 2011 11:46 PM EDT

Even though you might not think that oil companies have huge marketing muscles, they must be marketing geniuses for their ability to, once again, raise prices and create outsized profits at a time when the country is still emerging from the worst recession since the Great Depression.

The numbers

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.

Amazing record
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:

  1. 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.
  2. 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.
  3. 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
Reality or Oversimplification?
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...
Some of this is out of my area of expertise. What is within my purview is that the oil industry has done an amazing job convincing enough people to allow them to keep this going for a very long time. This is nothing short of marketing genius or consumers falling asleep at the wheel.

What do you think about the prices, the excuses, and the resultant higher profits?


Ira Kalb is president of Kalb & Associates, an international consulting and training firm, and professor of marketing at the Marshall School of Business at University of Southern California (USC). Follow him on Twitter.
image courtesy of flickr user, azza-bazoo
  • Ira Kalb

    Ira Kalb is president of Kalb & Associates, an international consulting and training firm, and professor of marketing at the Marshall School of Business at University of Southern California. He has won numerous awards for marketing and teaching, authored ten books and created marketing inventions that have made clients and students more successful. He is frequently interviewed by various media for his expertise in branding, crisis management and strategic marketing. Follow him on Twitter at @irakalb