Even with calls for probes and legislation, analysts see supply, demand issue.
Sacramento Bee (California)
If you own something that’s in great demand, it often doesn’t matter what it costs you to make it. Just ask Exxon Mobil Corp.
The world’s largest oil company reported $8.4 billion in profits Thursday, the fifth-highest quarterly profits ever for a publicly held company. The announcement came on the same day that gasoline prices hit a record average $3.18 a gallon in California, and generated further official and unofficial outrage, from Sacramento to Washington. It also provided a vivid demonstration of the law of supply and demand.
Exxon Mobil’s profits, covering the January-March quarter, prompted charges of “oil company profiteering” from the Foundation for Taxpayer and Consumer Rights in Santa Monica. And although he didn’t mention Exxon Mobil’s quarterly report, California Attorney General Bill Lockyer announced Thursday he would subpoena documents from the state’s 21 oil refineries to see whether the companies “are profiteering and gouging consumers.”
Meanwhile, Congress considered legislation that would impose $4.3 billion in additional taxes on oil companies over five years. Senate Republicans unveiled a proposal to give taxpayers $100 rebate checks, while Democrats talked of suspending the 18.4-cent federal gas tax for two months.
Oil prices fell 96 cents a barrel Thursday, the fourth straight decline, settling at $70.97 on the New York Mercantile Exchange. But gas prices continued climbing, hitting a record $3.08 a gallon in Sacramento for self-serve regular, AAA said. At a record $3.27 a gallon, Santa Barbara continued to have the most expensive gas among the 25 urban markets surveyed by AAA.
Analysts said gas prices are about to hit their peak. “I don’t think we’re quite there yet,” said petroleum consultant David Hackett of Stillwater Associates in Irvine. “But we’re not far from the top. The end’s in sight.”
Hackett and others said Exxon Mobil’s profits showed market economics at work. The price of oil has risen 35 percent this year, largely because of relentless increases in demand coupled with oil traders’ anxieties about supply disruptions — actual and potential — in Iran, Nigeria, Venezuela and elsewhere.
The actual cost of pumping oil out of the ground, estimated by Hackett at $15 to $20 a barrel, hasn’t gone up. But the price has, “because somebody will pay it,” said Hackett, a former executive at Exxon Mobil’s predecessor, Mobil Oil. “You can go to Nymex, the New York Mercantile Exchange, and somebody will pay you 70 bucks for a barrel of oil.”
As a major oil producer, Exxon Mobil obviously benefits when the price of crude goes up. “They make oil and they own oil, and the price of oil has gone up,” said Severin Borenstein, director of the University of California Energy Institute in Berkeley. “Every barrel of oil they make is worth more.”
The company said its average sale price for crude in the United States jumped to $55.99 a barrel from $42.70 a year earlier. With prices now over $70, it’s likely Exxon Mobil’s profits in the second quarter will be even greater.
Borenstein said Exxon Mobil is like a homeowner in a hot market. It can sell its products for more, “in exactly the same way you can make more money selling your house if the price of housing has gone up,” he said. “You didn’t pay more for your house.”
Exxon Mobil and other oil companies also make money at the refinery, producing gas from crude oil. Even though the price of the raw material — the crude — has risen, the price of gas has gone up even faster. The crude component of a gallon of gas has jumped about 40 cents this year, while the actual price of gas has risen more than 80 cents, according to California Energy Commission statistics.
The widening spread is due to a fundamental, chronic shortage of refinery capacity in California and around the country, experts say. That’s been exacerbated in part by Hurricane Katrina, which knocked some Gulf Coast refineries out of commission and forced others to postpone their annual winter maintenance until this spring.
The nation’s refiners usually operate at more than 90 percent of capacity this time of year, Hackett said. Right now the figure is closer to 85 percent. The result: higher gas prices and more profit for every gallon refined.
“(When) demand goes way up and supply does not match… yes, the price goes up,” said Joe Sparano, president of the Western States Petroleum Association, a Sacramento lobbying group. “That’s the way a free-market, honest system works.”
With more drivers on the road, he said, demand in California has increased two to four times faster than supply. California for the past several years has been a net importer of gasoline because its refineries, despite expansion projects, haven’t been able to keep up with demand, according to the Energy Commission.
Sparano said he understands motorists’ anger but believes Lockyer’s subpoenas won’t turn up any wrongdoing. Noting that Lockyer has investigated oil and gas prices sporadically for the past seven years, he said: “I’m a little disappointed that the attorney general has chosen to make this look like there’s something wrong.”
Even before Thursday’s earnings report, Exxon Mobil was already a target for consumers’ and elected officials’ anger. In January it reported the highest quarterly profits in the history of publicly traded corporations: $10.71 billion.
Ironically, Thursday’s announcement, in which profits came to $1.37 a share, was a disappointment to investors. Wall Street was expecting $1.47.
Exxon Mobil’s stock price fell 68 cents a share, to $62.42, on the New York Stock Exchange.
Exxon Mobil Corp. announced it had recorded the fifth-highest quarterly profit in business history. The most profitable quarters Exxon Mobil has recorded four of the top five most profitable quarters for any public company worldwide in normal operations.
REVENUES* / PROFITS IN $BILLIONS / QTR
$88.298 / $10.71 / Exxon 4Q 2005
$88.571 / $9.92 / Exxon 3Q 2005
$76.44 / $9.03 / R.D. Shell 3Q 2005
$73.830 / $8.42 / Exxon 4Q 2004
$88.98 / $8.4 / Exxon 1Q 2006
*Revenue in billions does not include net excise tax.
Source: Standard & Poor’s
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The Bee’s Dale Kasler can be reached at (916) 321-1066 or [email protected]
The Associated Press contributed to this report.
