High fuel prices are windfall for Big Oil

When oil prices spiked — and oil profits soared — 26 years ago, virtually every newspaper intern in America (including me) was dispatched to gasoline stations to collect quotes from irate motorists. Big Oil was viewed as public enemy No. 1: Congress convened hearings to skewer oil industry execs, regulatory agencies investigated pricing, and some news organizations rented helicopters to scour the waters (in vain) for signs of oil tankers floating offshore just waiting for prices to climb higher.

In recent months, oil company profits have soared again as international crude oil prices hit new highs. Yet public reaction has been more muted. And that has probably emboldened Congress — which, instead of investigating oil companies, just handed them (by various estimates) anywhere from $1.4 billion to $4 billion in tax breaks in the new energy bill.

Isn't there something wrong when firms profit so richly from the misfortune of the U.S. economy and American consumers?

There's no question that the drain on the average American's pocketbook has been a gusher for the big oil companies. Just look at the financial statements issued at the end of July. Exxon Mobil Corp.'s second quarter earnings climbed 35 percent from the second quarter of 2004 (after excluding special items) to $7.64 billion. BP PLC, the world's second-largest publicly traded oil company, said its net income increased 29 percent, to $5.59 billion. At Royal Dutch Shell PLC, second-quarter profits rose 34 percent to $5.24 billion. ConocoPhillips, the third-largest U.S. oil company, reported an eye-popping 51 percent jump in earnings, to $3.14 billion.

What's behind those numbers? When oil prices rise, petroleum companies that have long-term contracts or own oil reserves get a huge windfall. After all, they may have invested and developed those oil fields when prices were anywhere from $10 to $25 a barrel. Suddenly prices spurt upward and the companies are awash in profits.

Prices for North Sea Brent crude oil averaged $51.63 a barrel in the second quarter of this year, 46 percent more than the $35.32-a-barrel average a year earlier, BP told investors last month. In the United States, crude oil prices have been running about five times as high as 1998 levels, according to Energy Department statistics.

OK, but what about the companies that refine crude oil and market gasoline? If their raw material (oil) costs more, shouldn't that squeeze their earnings? That's often the case, but not this year. Americans haven't really altered their driving habits, and that has made it easier for firms to raise pump prices for consumers without worrying about losing business.