how do the oil companies make record profits if input costs are rising?

Discussion in 'Trading' started by dsq, May 23, 2008.

  1. dsq


    ive seen the ceo's complain that since they mostly process and sell refined oil that they have to buy it and pay the same increases as well.Well then how is it that they are making record profits if they are seeing record costs?

    Im sure millions of small business owners would like to know how record expenses can be converted to record profits.
  2. Please do some "homework" before posting . . .

    The integrated producers have a refining operation ( typically known as "downstream" ) that has great difficulty during high feedstock ( crude oil ) prices.

    Meanwhile, these same companies are making a TON of money from their "upstream" operations . . . ie.) Crude Oil production.

    They produce MORE oil than they have to purchase on the spot market to refine . . . Hence, huge profitability.

    Your question appears to naively assume nothing in regards to volumes and profit-margins throughout the entire portfolio of refined products . . . from aviation fuel, to diesel - - - which I might add is enjoying very high profit margins right now due to lack of imports from Europe.

    P.S. You might wish to post this subject in another Forum. It has nothing to do with TRADING.
  3. My guess is that the profit in absolute terms are rising since it is easier to stuff them in when input cost is rising. In addition, operating cost is decreasing in relative terms. Therefore profits should be rising in absolute terms.

    If cost of oil goes to infinity, then their business becomes like a broker (difference between sales price and buying of oil price). It is then a good business as long as demand does not decline, and better if demand is rising.

    Do not be fooled by the arugment of the CEO. To journalits he will tell one story, to the shareholders he will tell the other story. This does not mean he his lying, but he simply gives the view relevent to that audiance.
  4. Razor


    Total Revs 100
    Cost of Goods sold 50
    Fixed Costs 25

    Net Income 25

    Above assumes 100% markup or 50% gross margin on the 'input cost'. Lets assume the same markup / margin on higher 'input cost' as you call it:

    Total Revs 150
    Cost of goods sold (input cost) 75
    Fixed Costs 25

    Net Income 50

    See how easy that is :D
  5. Something of a curiosity and interesting thought - the big integrated oil co's are not necessarily making out on crude price skyrocketing if indeed they never get a chance to actually sell crude at these high prices.

    Since they *are* the market for gasoline and other products, and lose money by halting refineries (minimum fixed costs) if margins are zero or negative on the refining side, the integrated refiners never actually receive revenues reflective of crude, only reflective of final products being delivered. The cracks are considerably healthier than this at the moment, but it tells of an interesting story of how a crude supply crunch (ie peak oil - geopolitical conflict?) accompanied with collapsing product demand (gasoline/diesel) due to rejection of high prices could result in integrated producers receiving only the cost per barrel on products, reflective of negative cracks.

    This is a great time to be an independent E&P. Their revenues are levered to commodity price, whereas the XOM/BP's of the world are levered to product price.
  6. If the Oil co. is drilling and finds "pay", sucks it up and sells it to Refin. they make money. If the Oil company refin. the Oil itself, it may bite a little off the profit.

    If you could sell widgets at 1 dollar, how many widgest would you have to sell to make a decent profit?

    Now, take that same widget and sell it at 135, with production cost rising slightly and how many to you have to sell to make a decent profit?

    Oil Drilling cost have not risen by much. What is even better is that the Techonolgy is more advanced, with Symic Data/3D. Also, prior prospects that were not worth drilling, when oil was at 8 are definitly worth drilling now....Huge Profit Upside.

    So, 5 years ago, Oil Companies had to find X now, with today's prices, only 1/6 of X has to be found to make it profitable.

    Major Oil companies let millions of miles in the US alone, sit untapped. They went in, found oil but just not enough to justify the cost when oil was at 8. Now those same prospects are being drilled.

    Majors are now drilling fast and furious in exploritory bids world wide....because now the Risk is far less than the Reward. Base hits will add up. Small driling co's are going into those "proven areas" and finding 400 to 1000 b. and 1.4 2.7 million cubic feet of gas. You talking 26 million a year alone for just 600 barrles a day going to market at say, 120. 1.2 Cubic Ft of gas is around 1. million a year at gas at say 8, (Take the 1.2 million divide it by 1000 and X it by the price of Natural Gas).

    Oil companies are making huge profits and they should. Nobody came to their aid when oil took a bath in the 80s.


    So, suck it up and deal with it. There are more Millionairs in the "OIL INDUSTRY" than any other. Best place to be right now.

    Just as it was a great but short lived run to be in TECH back in 99.
  7. By the way, look for Oil companies to be "Splitting" off their Refnrs. as Valero just did.
  8. dsq

    dsq here s another question then...Why do the oil companies say we need to open anwar and offshore drilling then.They are not suggesting that that would reduce the price of oil or how much consumers are paying for oil product are they.Because they certainly arent charging american consumers less than foreign consumers right?

    I have heard them argue about how we need to explore in this country etc but that would never result in a drop of price because there isnt enough to make a dent in world prices and opec would just cut supply accordingly to keep prices high.

    Never mind that i think china has become the top oil consumer and india will surpass the usa as well.
    According to boone pickens supply is 85mil bbl/day and demand is 87 million.That imbalance is only going to grow with china,india growth.
    I think the usa demand and impact on prices will always be substantial but will also diminish rapidly in the future.

    This is what is probably most troublesome,the usa will now be competing with india and china which have combined have 10X our population and are at the beginning of their growth phase.
  9. What's needed is a government tax system which would aim to keep gasoline prices 'high', like say, Europe.

    This 'tax' would go into a special fund. The 'tax' rate would be higher when oil is cheap and lower when oil is expensive and maybe no tax or rebated when it's very expensive.

    But it would keep gas prices artificially high causing the nation to PERMANENTLY search out ways to become more energy efficient and less dependent on foreign oil.

    It 'stabilizes' the gas price and removes these oil shocks and gluts that come around every 10-20 years and making people switch from monster gas guzzlers to minis/priuses and back to hummers again. 25-30 years ago people were installing solar panels on many houses. Then most were removed eventually because energy became 'cheap'. Now it's back in vogue until the next bust.

    Instead, the Fu%^*ng politicos in washington pander to the masses of asses and their SUV's and oil industry scumbags and no decent energy policy results! Dumbfuck Bush and dumbass Cheney are both happy indirectly pocketing $millions by socking it to the public for being stupid by voting them in. Yeah, a 'cheap' $ is good for the economy, sucker!

    The monster McMansions built in the last decade also don't help. While some insulation/windows are better than 20-30 years ago, the net result is $billions wasted on heating/cooling empty space. And people complain about crowded China/India instead? Fuck, tax the shit out of those who waste resources to begin with!
  10. loik


    No free market?
    #10     May 24, 2008