Lower Prices Punch Oil Giants

May 6, 2008

So much for the argument promulgated by major oil companies that they profit marginally from higher oil prices.

Chief executives at some of the largest supermajors testified before Congress back when oil was soaring above $147/bbl last summer, spouting that their margins don’t improve as oil prices rise above a certain cost per barrel. The case these oil execs were trying boiled down to the idea that for each barrel of oil, after factoring in drilling, exploration, and refining costs (along with hefty taxes), margins are maximized when oil prices are in average range.

So when Chevron (CVX) reported a 64% drop in profits on Friday, May 1st, on lower commodity prices, one has to question if those oil magnates were stretching the truth. Net income for the world’s third largest oil firm was $1.84 billion, or $0.92/share, dropping steeply from Q1 2008 earnings of $5.17 billion, or $2.48/share. Revenues were nearly halved from $65 billion in the year-ago period to $35 billion last quarter.

Chevron’s results came a day after Exxon Mobil (XOM) posted a 58% drop in profits. Shares of the world’s largest publically traded oil company plunged Thursday on Exxon’s big miss. Net income for the Irving, Texas-based oil giant dropped to $4.6 billion, or $0.92/share, compared with $10.9 billion, or $2.02/share, last year. Exxon’s revenues stumbled 45% to $64 billion from $116.9 billion last year.

At this point last year, oil prices were barreling deep into triple-digit territory, helping oil majors earn record-breaking profits. After bottoming out near $30/bbl this winter, the front-month crude contract has stabilized dramatically. As of May 1st’s close, oil trades at $52.78/bbl.

During 2008 - a record-setting year for commodity prices – Exxon Mobil reported $45.2 billion in profits, the most ever for any U.S. company.

Fellow oil supermajors were crushed by lower oil prices as well. ConocoPhillips (COP) net plunged 80%, BP PLC (BP) earnings dipped 62%, as did Royal Dutch Shell (RDSA). Marathon Oil (MRO), the fourth-biggest integrated U.S. oil firm, realized a 61% drop in quarterly profits.

There can be no doubt that the likes of Exxon, Chevron, and the rest of the oil patch are pleased to see petroleum prices bounce off their near-term lows. When the next round of commodity inflation begins, will the public swallow oil executives’ rationalization that they do not want oil prices as high as possible?