Why do oil companies make more when prices go up?

Reading about the record $19 billion in quarterly profits by exxon and shell. The wsj and congress are starting to bring up the question of what a ‘fair’ profit is. Something seems a bit wrong for companies to profit from disasters, wars and the general social misery of higher oil prices.

Putting that aside I still don’t get why a company in the business of oil refining or distribution makes more profits when prices go up. Obviously reserves will increase directly and that could explain some.

I’m an investor in valero which I started liking about 2 yrs ago as a great way to bet on oil price increases as they refine sour crude at a cost of $12 and sell at market, an insulated way to bet on price increase.

It these profits are merely from the increased spread on their own costs of drilling and refining reserves I get that. If, however, companies are taking the opportunity created by short term shortages to increase their margins on distribution, that seems like profiteering. I’m not sure why the two seem different.

And conversely I wonder how it would be fair for congress to force companies to sell their reserves at below market prices simply because they’re based in the US. Do certain industries have a social responsibility beyond others?
Sent wirelessly via BlackBerry from T-Mobile.

2 thoughts on “Why do oil companies make more when prices go up?

  1. MHO, the recent inflation in the price of gas (blamed on Katrina) was no different than the California energy crisis earlier. It was a scam. They blamed refining capacity, but the U.S. government released crude from their strategic petroleum reserve. That doesn’t add up.
    OK, it does add up. The VP is a petroleum industry insider and has a lot more friends today.

  2. Sitting beside an oil trader on a flight from Vancouver to NYC last month, I posed some related questions: Why are oil prices so high, what’s going on fundamentally, and who’s profiting?
    His answer: Fundamentally, demand has not increased significantly, and supply has held steady or increased. The rise in prices is not due to a disconnect between supply and demand. Nor is it due to an increase in production costs.
    What’s really going on is an increase in involvement by Wall Street such that the market for oil has become increasingly driven by speculators. Sure, there are catastrophic natural disasters, wars, the rise of China, etc. Yet more important to the price of oil than the fact of those events is the *use* of those events by speculators. Oil has become a media event.
    The (free) media coverage of catastrophic natural disasters, wars, the rise of China, etc., help fuel the speculation.

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