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Minyan Mailbag: How Much of the Increase in Margins is Due to Oil?


...higher oil prices, which benefit oil companies, are also passed to the U.S. corporations, depressing their margins...

Dear Vitaliy,

How much of the increase in margins is due to the increase in margins at commodity producers? Is it possible that the increase in margins is concentrated in one sector and the rest of the economy is really operating at normal levels? Kind of like the P/E of the S&P looking high in 2000 because of the elevated level of tech stocks.

Minyan Jeff


I would agree with you, except higher oil prices, which benefit oil companies, are also passed to the U.S. corporations, depressing their margins. How many times have you heard on a conference call management blaming lower margins for higher oil prices (I probably own the wrong stocks but I hear that a lot)? Take Kimberly Clark (KMB) for instance, I wrote the following couple of weeks ago:

Costs rose by a full $110 million in the quarter. Of that amount, $45 million went to pay higher raw-materials costs (a lot of polymer resins, which are a byproduct of oil production, go into Huggies diapers), $30 million went toward paying for energy (it takes a good deal of power to convert polymer resins and pulp into those cute little Huggies), and another $30 million covered higher distribution costs (the trucks that deliver those Huggies don't run on water).

I guess the argument comes down to: is it a zero sum game or not? If a U.S. oil company sells oil to a foreign company, that should benefit U.S. corporate profit margins as we see only the benefit from higher oil prices, not the cost of it. However, we do buy a lot of foreign oil and we do buy plenty of foreign made goods.

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