Is Corporate Greed Behind High Gas Prices?
Is Corporate Greed Behind High Gas Prices?
There is a meme floating around social media that seems to prove greedy corporations – specifically oil companies – are the root cause of inflation.
How does this meme stack up to reality?
Short answer — it doesn’t.
The meme tells us that ExxonMobil earned $5.5 billion in the first quarter of 2022 compared with $2.7 billion in Q1 2021. The meme goes on to conclude “We’re not paying for gas, we’re paying for greed!”
This meme is a great example of the fact that trying to draw conclusions based on a couple of numbers pulled from any context will likely lead you to the wrong conclusion.
The meme uses ExxonMobil’s net income as the basis for its assertion.
If you look at the company’s income statement, you will find the data is correct. The company reported a net income of $5.48 billion in Q1 of this year and $2.73 billion in Q1 2021.
First, it’s important to understand exactly what these numbers represent. Net income accounts for revenue minus all expenses, including operating expenses. taxes, interest, debt service, etc. This number is highly susceptible to accounting manipulation. This number is often reported as “profit.”
So, the meme is correct, right?
ExxonMobil is enjoying big profits right now compared to last year. That proves rising gas prices are the result of greed.
Well, not so fast.
The two numbers may be accurate within rounding error, but that doesn’t mean the meme-creator draws the correct conclusion. In fact, it’s nearly impossible to evaluate the performance of a company based on two arbitrary data points. We need more context.
Let’s step back and look at ExxonMobil’s annual net income over the last four years.
2018: $20.8 billion
2019: $14.3 billion
2020: -$22.4 billion
2021: $23.0 billion
And here is the quarterly net income data for the last 5 quarters.
2021 Q1: $2.7 billion
2021 Q2: $4.7 billion
2021 Q3: $6.8 billion
2021 Q4: $8.9 billion
2022 Q1: $5.5 billion
When you look at the numbers in context, it’s clear that ExxonMobil’s $2.7 billion net income in Q1 2021 was the anomaly, not the $5.5 billion the company reported in the first quarter of this year. In fact, net income was down in Q1 of this year compared to the previous two quarters (Q4 and Q3 2021).
Putting the numbers into a broader context, during Q1 2021, ExxonMobil was recovering from an abysmal 2020 in which it lost over $22 billion. The reported $2.27 billion net income in Q1 2021 that the meme uses as a baseline was actually far below average.
This raises a question that the “corporate greed” people never seem to entertain. If companies can willy-nilly raise prices to feed their greed, how do they ever lose money? Why didn’t ExxonMobil simply raise prices in 2020 in order to avoid billions in losses?
People always scream about price gouging when gas prices rise. But they never seem to wonder why gas prices drop. They certainly don’t complain about it. If “big oil” can gouge you, why doesn’t it happen all the time? How did gasoline fall below $2 a gallon in 2020? Did corporate greed disappear that year?
This narrative doesn’t make sense. But it plays on the emotions and that gives it traction.
Back in February, political blogger John Nichols wrote an article for The Nation leveling the greed accusation at BP. He pointed to a headline reporting “Oil giant BP reports highest profit in 8 years on soaring commodity prices,” as proof of corporate greed.
But again, taking a single data point out of context doesn’t tell us anything. And while the headline creates an impression, it lacks any real substance. It could very well be that BP charted low profits or even losses in the seven years prior to this “windfall.”
In fact, as we see in ExxonMobil’s income statement, the oil sector struggled in 2020 when the price of oil tanked to $20 a barrel. BP revenue (income before expenses) was $298.8 billion in 2018. That plunged to $180.4 billion in 2020 and dropped again to $157 billion in 2021. BP’s operating income was $16.3 billion in 2018. In 2020, BP charted an operating loss of $573,000. It rebounded to a $10.5 billion last year. In context, BP’s performance last year wasn’t particularly noteworthy.
The whole corporate greed narrative doesn’t stand up to data analysis. And it doesn’t make any sense intuitively.
One simply has to reason through the claim to uncover the absurdity. If corporations can willy-nilly raise prices and enjoy “excessive” profits, again, why don’t they do it all the time? Did corporations suddenly get greedy in 2021? And why did the Federal Reserve spend a decade fretting about inflation (price increases) being “too low” as it struggled to hit its 2% target? Was there not enough corporate greed before coronavirus?
It’s pretty clear there has to be something else going on. But corporate greed is a convenient explanation, and the narrative continues to grow because the average American doesn’t understand inflation or basic corporate accounting. That includes a lot of the people writing about inflation in mainstream and left-leaning corporate media and most meme-makers on social media.
Thu, 06/16/2022 – 06:30