Oil Industry Profits: Analysis of Recent Performance

Publication Date: August 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Energy

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Abstract:

High prices for crude oil in 2004 and into 2005 have reduced consumers' purchasing power and raised costs for businesses while providing billions of dollars to the oil industry and oil exporting countries. The industry's increased revenues have led to record profit levels. As the 109th Congress engages in oversight of recent broad energy legislation which aims to increase the domestic supply of crude oil to mitigate oil price increases in the longer term, another key factor in determining increased supply is how oil companies decide to allocate their profits between shareholder returns and investment in oil production. This report is written in response to a number of requests from Congress concerning profits in the oil industry. This report provides background information concerning the level of oil industry profits, the sources of those profits, and a discussion of the potential uses of profits.

In response to the increased price of crude oil since the fall of 2004, profits of virtually all firms in all segments of the oil industry have increased. However, the greatest increases have been in the downstream, or refining and marketing, segments of the industry. These increases in profit are apparent whether the major integrated oil companies, the independents, or refiners are considered, lending some credence to the viewpoint that industry profits are the result of factors beyond the elevated price of crude oil. Historically, the current combination of high oil prices and high profits have been seen before, and periods of low prices and profits tended to follow.

The relatively high profit levels earned in refining and marketing suggest that conditions in the petroleum products markets, including the gasoline, diesel, and jet fuel segments, contributed to earned profits above and beyond the effect of higher crude oil prices. Key factors in these markets included tight refining capacity and low inventory levels. Mergers, acquisitions, and asset sales may also have changed the relative profit positions of many firms in the industry. All of these factors have been influenced by investment decisions in the oil industry.

Firms in the oil industry are likely to use their recently earned profits in a variety of ways. They are holding record cash balances, buying back their shares and increasing dividends. Merger and acquisition activity in the industry again appears to be on the rise. In addition, the major oil companies are investing in a variety of energy related projects, although not necessarily oil, including liquified natural gas and gas-to-liquids technologies. These projects tend to be international in scope. In the longer term, investments in exploration, production, and refining capacity are likely to be needed to mitigate the high prices of 2004-2005.

This report will not be updated.