Saturday, 14 May 2011

Gas Prices - Fooling some of the people all of the time...

When it comes to the big oil companies, gas prices and profits, only part of the truth is being told.  While the oil companies would have you believe their profit is only 3% of the price you pay at the pump, as any business owner or accountant will tell you, profits are calculated net of taxes.  Theoretically, this means their real net profit is actually 4.6% (base upon the numbers on the pie-chart), still a reasonable number - profits that can be distributed to their shareholders.  What the oil companies are not showing you is that additional profits are hidden in the actual crude costs.  If you look at Suncor’s 2010 financial statements you will see they had gross revenues (less royalties) of $31.26 billion and a net profit before income tax of $4.25 billion, which equates to 13.6% - a long way from the 3% they show on the pie-chart stuck to their gas pumps. With gas at $1.32/l Suncor makes 12.2 cents.  When they pushed it up to $1.41/l earlier this week they made 21.2 cents.

Is this all bad news?  Well, if you own Suncor stock, probably not.  Hundreds of thousands, if not millions of Canadians own Suncor shares either directly or through their pension plans.  In December 2010 one share in Suncor cost approximately $35.  The dividend paid out on one Suncor share last year was $2.29, an approximate return to the shareholder of 6.5%.  An unreasonable return, probably not – certainly a lot better than a bank savings account.

The media, in general, does a very bad job of communicating the true picture.  They loudly assail the oil companies, banks and other large targets for making billions of dollars in profits.  But this is an irrational response.  When companies have tens of billions of dollars in sales it is reasonable to assume that their profits are also going to be measured in billions.  What is unreasonable is for these companies to exploit volatile situations that affect the majority of the populace when they have a virtual stranglehold on the market, e.g. gas prices being 10-cents higher per litre in Toronto than out smaller centres like Peterborough where distribution costs are logically higher.

Ultimately, it is up to you, the shareholder, to let these companies know that you are willing to give up some of your dividend and RRSP income in order to have more reasonable prices at the pump.  It’s a tough choice, isn’t it?

Does all this have a spiritual application?  I'm still thinking on that one.