Oil Industry Profit Review 2005

Publication Date: April 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Energy

Type:

Abstract:

The increase in world oil prices that began in 2004 and continued into 2005 led to increasing revenues and net incomes for all sectors of the oil industry. In 2004 and continuing into 2005, increasing world demand, led by China, India, and the United States, created a tight market in both oil production and refining, at a time where spare capacity was already at historically low levels. In addition, in 2004 and 2005, world political events including the war in Iraq, political unrest in Nigeria, and the political climate in Venezuela, among others, contributed to a market psychology that pushed up prices.

In the U.S. domestic market, the effects of hurricanes Katrina and Rita continue to be felt both in oil production and oil refining. The hurricanes also contributed to the profitability of the oil industry in the U.S. market. However, while profits were high, the oil market demonstrated its ability to supply consumers as feared shortages associated with the hurricanes were very limited.

The profits of the five major integrated oil companies accounted for three quarters of all the profits earned by the integrated oil companies. In this group, oil production led the way as the most profitable segment, even though production of oil and natural gas generally declined.

On a percentage basis, the percentage growth in profits for the independent oil and gas producers was even higher than the integrated oil companies. Their total profit, however, was only about 15% of the profit of the integrated companies.

Independent refiners and marketers earned a 92% profit increase in 2005 compared to 2004. Valero, the largest firm in this group and the largest refiner in the United States, led the way with a 99% increase in profit and earned almost two thirds of the profit of the group as a whole.

High levels of profit, coupled with declining growth rates for profit, appear likely to continue in 2006. The potential volatility of the world oil market leaves any forecast for the industry uncertain.

This report will not be updated.