“Some folks will ask the question, ‘Is this more evidence of big oil taking an enormous windfall and retaining all the riches?”’ said Mel Fugate, assistant professor for Southern Methodist University’s Cox School of Business. 1

In 2006, Exxon CEO Lee Raymond retired with a compensation package worth an estimated $398 million. 2 This was cited by House Speaker Nancy Pelosi as a factor in high oil prices. The Current Exxon Chief Rex Tillerson receives about $21.7 million per year in compensation. 3 This has been similarly decried as as a cause of high oil prices. The broad claim is that oil prices are high because the money is pocketed by oil company executives. It isn’t just Nancy Pelosi and the Democrats who make the claim. Fox News’ Bill O’Reilly has been as outspoken as anyone about the huge payouts. 4 So how much are we paying at the pump that goes to these rich guys?

Let’s start with the sum of $21.7 million per year paid by Exxon. No matter how it is sliced, that is a lot of money. No doubt about that. The question is how large a factor it is with respect to the price of oil. If, say, it were 25 cents or 50 cents of every gallon purchased was going to the fat cats, I think many people would agree there was reason to be upset.

Exxon earned $40.8 billion in 2007. In the second quarter of 2008, profits were $11.68 billion on revenue of $138 billion. 5 That means they are making 8.5 cents on the dollar. In early August the pump price for gasoline in the U.S. was about $4.05 while the spot price was about $3.10. The spot price is the international price for bulk shipments. The difference includes taxes, distribution costs, and the retail markup. Exxon owns gasoline stations, but most of the stations with the Exxon name are franchised out, and Exxon plans to sell the rest. Gasoline stations mainly make money from the mini-marts, not the gasoline.

Exxon is making its gasoline profits on the $3.10. They make money on other petroleum products as well, everything from plastic feedstocks to heating oil to asphalt. A 42 gallon barrel of oil produces only about 19 gallons of gasoline. I cannot find data on how much of the profit comes from gasoline. At one point recently there was more profit in diesel fuel than in gasoline. We’ll get in the ball park by supposing that the profit margin is the same on all products.

A payout of $21.7 million per year is $5.45 million per quarter. That is 5.45 / 11,680 = 0.0047% 0f profits. The pay for the CEO is therefore 8.5% x $3.10 × 0.0047% = $0.0001229 per gallon, call it $0.00012. That is a little over a hundredth of a cent a gallon.

Ex-CEO Raymond’s payout was about $100 M in cash, about $0.00056 per gallon over a year. The rest came as stock options and as such will stretch out over many years.

A common mistake is to argue that something has been left out, without going on to argue that what was left out affects conclusion. For example, the drilling in ANWR will occupy the relative space of a postage stamp on a football field. But, hah(!), that doesn’t count all the roads. If the roads were counted, who knows, it might be two postage stamps. Here, we only counted the CEO, while there are other executives on the gravy train. If someone would like to research that and tell me what they all make, great. In American companies usually the top guy makes a whole lot more than anyone else, so it is unlikely that will change the conclusion. If the total were to double or triple or increase by a factor of ten, it would still be a negligible contributor to the price of oil.

Everyone is nonetheless free to be outraged about the high executive salaries if they wish. Salaries are set by Boards composed of executives who may be predisposed to place too high a value on executive talent. Maybe, maybe not. What the calculations show is that any such arguments should be prefaced by, “Even though the price of gasoline is not significantly affected, ….”


1. Reported by Fox News.

2. ABC News, Oil: Exxon Chairman’s $400 Million Parachute

3. Reuters, Exxon CEO pay up nearly 18 percent in 2007

4. Bigwigs at Big Oil Make Big Bucks, “The O’Reilly Factor,” April 17, 2006

5. David Ellis, CNNMoney.com, Exxon shatters profit records