Friday, April 29, 2011

Oil Companies Raking In Profits With Reduced Refinery Production and Increased Exports Amid Rising Domestic Demand

It's hard to defend big oil if they adopt market positions that appear completely against consumer interests. There's an economic logic to trends, even economic necessity. Yet the bummer is that massive oil company profits feed the progressive left's demands for higher corporate taxes, and hence demands for ever larger spending initiatives. See Los Angeles Times, "Oil companies are making more money and less fuel":
Gasoline prices are skyrocketing — and so are oil company profits.

Exxon Mobil Corp. earned nearly $11 billion in the first three months of the year, a rollicking 69% increase over its performance for the same period last year. That's on sales of $114 billion.

It's the same story for the other big oil companies. Royal Dutch Shell turned a profit of $6.3 billion in the first quarter, and BP — despite lingering costs from the Gulf Coast oil spill — made $7.1 billion.

What they aren't making is fuel, at least not in normal quantities. And that's a key factor in their reinvigorated financial performance.

Despite increasing demand, refiners are producing less gasoline and diesel in the U.S. than usual for this time of year. They're also exporting more to foreign countries.

Add rising oil prices, and you get the kind of sticker shock at the gas pump that some analysts say could challenge 2008's all-time highs — with regular gas already averaging about $3.88 a gallon in the U.S. and $4.22 in California, more than a month before the summer driving season kicks in.

Motorists and consumer advocates are outraged at high pump prices and say refineries need to increase gasoline supplies to reduce fuel costs.

"This is a page torn right out of the handbook of gouge-onomics," said Charles Langley, senior gasoline analyst at the Utility Consumers' Action Network in San Diego. "We call it the law of supply and demand: They supply less product and demand more money for it."
RTWT.

Companies are playing close to the margin of production versus demand, as they don't want to flood markets after recently recovering from a business trough. But those exports on the side are simply efforts to maximize profits, and while perhaps justifiable internally, consumers won't be pleased and we'll have all kinds of jawboning from politicians. Again, until the demand flattens out a bit after the peak summer travel season, it's going to be easy pickings for the communist left's attacks on big oil.

RELATED: At ExxonMobile's blog, "Gas prices and industry earnings: A few things to think about the next time you fill up," and "ExxonMobil’s earnings: The real story you won’t hear in Washington."

7 comments:

Dennis said...

Not to question too much, but how many refineries are in this country? How many various grades of gasoline do they have to refine in order to meet the requirements of each of the states? How do all the federal and state rules for operating a refinery affect its ability to refine? Just what do you expect will be the affect of another tax on oil companies? This is just basic economics. What happens when something is taxed? What are the oil companies profits compared to other corporations and businesses especially with the same logistics problems?
Let us not get too wrapped up blaming the oil companies when the Obama administration energy policies are the cause of the vast majority of problems we face in this country. Want to lower the price then cut both the state and federal taxes.
If one cannot see what the real game is then one is not paying attention to the states who now want to penalize those who bought electric and fuel efficient cars.

Bruce Hall said...

It would seem that if you wanted more of the domestic production to stay in the U.S., you would simply revise the tax structure to incentivize oil and gasoline production that stays here and place a hefty export tax on domestic production that goes elsewhere.

The key is profit per barrel or gallon. If marginal profit from exporting is significantly lower than selling domestically, then the incentive is to sell as much as possible domestically. Of course, there is an upside limit [called demand] that restricts domestic profits. And then there is the government which is unwilling to forgo its huge taxes.

So the marketplace factors in where the profits are and the oil and gas flow there. As long as someplace else is willing to produce and sell oil more cheaply to the U.S. than the U.S. cost structure allows, why produce here? As long as each extra gallon of gasoline refined here decreases overall prices and overall profits, why produce more?

That would be like a baker producing excess bread that drives down prices and increases waste.

Dennis said...

What I find interesting is how easily the public is duped by government. The government knowingly creates a problem, shifts the blame to the businesses and then the public clamors for more government further exacerbating the problem.
Just how many times can people be played for fools before they start asking real questions about who is responsible for what. Is it any wonder that those who would be our masters think we are dummies? They keep playing the same game over and over and over............
One cannot solve problems until they ask the right questions.

Dennis said...

What would those profits be in constant dollar? Remember that the Fed has printed so much money that the dollar has lost a lot of purchasing power.

richard mcenroe said...

How much refinery capacity should they keep open when their drilling permits are being pulled right and left and the supply of crude from overseas is becoming progressively more dubious?

And right now the federal and state governments make more per barrel of oil in taxes than the oil companies make in profits.

Donald Douglas said...

Hey, guys, I'm no economist, but it's gotta be tough public relations with this kinda profit. Some call it price gouging. We'll see.

Dennis said...

Thomas Sowell has a very well written book on "Basic Economics" that is available on Amazon for the KINDLE. Sowell writes in language that the average non economist will understand.
It is well worth the read for anybody who wants to have the wherewithal to understand and make informed decisions about the issues that have a profound affect upon our lives.