SAN RAMON, CA — Chevron Corp. rocketed to record quarterly profits of $5.98
billion, the oil giant reported Friday, but analysts warned that the
San Ramon firm’s profit gusher may ebb if sky-high oil prices morph
into a temporary oil bubble.

Profits for the second quarter
jumped 11 percent from a year ago, Chevron said. Yet the per-share
profit of $2.90 fell short of Wall Street’s expectations of $3.03.
Chevron’s shares fell 25 cents, or 0.3 percent, to finish at $84.31.

Still, analysts were pleased about the report overall.

"These numbers were great," said Robbert Van Batenburg, head of research with Louis Capital Markets.

Chevron
said a sharp increase in crude oil prices bolstered profits for
upstream, or exploration and production operations, yet produced a loss
for downstream, or refining and marketing operations.

"The higher
cost of crude oil used in the refining process was not fully recovered
in the price of gasoline and other refined products," said David
O’Reilly, Chevron’s chairman and chief executive.

Over the year that ended in July, crude oil prices jumped 66 percent, while U.S. gasoline prices rose 38 percent.

"When
oil prices are really high, that’s good for exploration, but not good
for refiners," said Robert Sweet, an equity analyst for Horizon
Investment Services. "Chevron has to be concerned about downstream
operations."

Chevron’s downstream lost $734 million, of which $682 million was in U.S. downstream operations.

"People are driving less," said Lloyd Avram, a Chevron spokesman. We lost money selling refined products." 

Chevron said it is being jolted by its exposure to the Western U.S.

"California
has been disproportionately hit by the housing and credit crisis and
this has created what we feel is a negative consumer sentiment that’s
causing people to do less discretionary driving," Stephen Crowe,
Chevron’s chief financial officer, said during a conference call with
analysts. "Long-term, we’re very bullish about California."

A
planned outage of a Chevron refinery in Mississippi also eroded
downstream profits. "We have no major maintenance planned for the
second half of this year," Avram said. That includes Richmond.

Some industry watchers pilloried Chevron’s profits.

"Chevron
brought us less oil this quarter and still made all-time record
profits," said Judy Dugan, research director for Consumer Watchdog.

Yet
as oil prices have risen, Chevron’s pacts with foreign nations, where
it produces crude oil overseas, have forced Chevron to share with the
host nations a greater percentage of the oil it extracts.

Chevron profits may falter if oil prices retreat, said David James, senior vice president with James Investment Research.

"Oil
companies will be very profitable, but not as much as they are now,"
James said. "We are reducing exposure to energy stocks in our
portfolio."

The price of crude should drop to around $75 a barrel or even lower, James predicted.

"Oil is in a commodity bubble," said James. "Usually you see oil drop 50 percent from its highs in an economic downturn."

Analysts worry about Chevron’s lagging production. The company on Friday vowed to boost oil production levels.

One
prize Chevron field is Agbami, off Nigeria’s shore. That field should
produce 250,000 barrels a day. This would be about 10 percent of
Chevron’s daily production of 2.57 million barrels. Chevron’s target is
2.65 million barrels if oil prices fall to $70.

Reach George Avalos at 925-977-8477 or [email protected]