5/9/2004

Big Oil Making Record Profits

Who is profiting from high gas prices might come as a surprise.

The typical gas consumer seems to have the impression that it’s all OPEC’s fault and they’re cashing in. OPEC is the organization of oil producing, primarily Arab, countries.

The impression is that OPEC chokes off some of the supply, the demand pushes the price up, and they reap the windfall. Actually only half of that is right, and then only partly right.

OPEC did not tighten up on supply which has been fairly constant. What has driven the price up lately is primarily the growth of Chinese industry and their demand for oil. Demand has gone up but production and refining has not.

So are the OPEC countries profiting? Well yes, but so are the big oil companies. Companies like U.S. based Chevron and Exxon are having huge jumps in income, in one case setting an all-time record for any U.S. publicly traded company. In the 4^th quarter of last year Exxon broke the record for profit at $8.42 billion for the quarter. That’s billions, and that’s just for that quarter.

Yes demand has gone up. Yes production to meet that demand is largely influenced by OPEC. But the big oil companies go along for the ride. Do they lower the price of their oil and gas so they still get a healthy profit, yet meet demand without taking the windfall? No. Do they go ahead and sell more at the same profit margin and get some increased income but without sticking it to consumers? No. They take it as their chance to make an extra large killing.

I know, it would be un-business like of them not to take whatever the market will bear. But there’s no upside to this. It’s not as if they’re making a huge profit because they’ve added something of new value to the market. They’re just cashing in on higher demand at the expense of consumers and other parts of the economy.

To quote a couple of reports, it is “...spurring cost increases for everything from military tents in Iraq and weed killer in Iowa to shoes and Barbie dolls in China." And “Germany, Italy and Japan...have seen their economies contract...Many developing countries also are struggling with higher oil bills.” I’m sure you’ve seen your economy contract too.

Actually there is one upside. It may spur more serious efforts at alternative sources of energy. Congress and the President are working on an energy bill. It doesn’t do much to solve the problem though. It does provide $8 billion in incentives to the oil companies to do more exploration. Oh, that’s been the problem. They haven’t had enough money to explore with. Right.

To Bush’s credit he wants to steer less incentives to the oil companies to explore and more toward working on alternatives. So far he hasn’t made much effort to follow through though. When congress completely turned those priorities around he’s done little to try to fight for his plan.

I don’t know that the incentives would make any difference anyway. The oil companies may not want to produce more because that may reduce prices. Just recently OPEC increased its output to try to stabilize prices, but three big oil companies reduced their output by an almost equal amount.

In the meantime the numbers are truly amazing. In the 2^nd quarter of last year analysts expected oil earnings to go up 3%. Instead they went up 62%. In the 4^th quarter they went up 101%. One analyst said “I have been following this industry for 18 years and I have never seen anything like this. It's like they're printing money." Another noting that prices won’t come down anytime soon said “Gas prices tend to go up like a rocket and come down like a feather”.