David Feldman

Myths of Energy – Oil Companies Make Obscene Profits

Blog Post created by David Feldman Champion on Jan 26, 2017

You haven’t been hearing this as much the last few years because the price of oil has created huge losses compared to huge gains.  But with some of the appointments for the new administration, and some of the recent executive orders Donald Trump has signed, it’s starting to crop up again. 

 

In general, the people that advocate this myth are either 1) NOT an equity investor and just repeating something they heard on TV or read online. Or 2) they have something to gain by influencing the public against oil companies. 

 

The reality?  Oil companies have a profit margin roughly half of pharma and tech.  Around 6.5% of sales overall.  So why do they get all the bad headlines? 

 

The reason is, major oil companies are among the largest corporations on the entire planet.  This is how the myth promoters get all of the gaudy numbers to flash up on TV screens.  A small percent of a giant number looks pretty big on its own.  Especially when taken out of context. 

Conveniently, this claim fades into the background in rough times (like the last few years) when the numbers are equally huge, except this time, they have a minus sign in front of them. 

 

The truth is, the oil and energy industry have a much lower profit margin compared to other industries.  A quick Google search for the most profitable industries in 2016, and Oil doesn’t even make the list of the top 15!  Here’s a chart of the top 10 most profitable industries according to Factset. 

The lesson learned:  investing in Pharmaceuticals is probably a better bet than investing in the “obscenely profitable” oil companies.  (Disclaimer: That’s not investing advice.)

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