Oil Companies Experiencing Record Profits

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Strong global demand for energy combined with tight supplies has resulted in record oil company profits. Some politicians are crying foul, especially after Katrina. But most analysts say it's the market at work.


Sky-high gasoline prices are rattling consumers' confidence. According to AAA, the average price of gasoline nationwide is more than $2.81 a gallon. That's short of the peak price set just after Hurricane Katrina, but it's still almost a dollar higher than last year. And North Dakota Senator Byron Dorgan is calling for a Senate investigation into what he calls possible price gouging by the major oil companies. NPR's Scott Horsley reports on what's behind the rising price of gasoline.

SCOTT HORSLEY reporting:

Long lines, soaring prices, panicky motorists trailing fuel trucks in search of gasoline--sound like Houston in the last week or so? Try Phoenix in the summer of 2003. When a pipeline ruptured July 30th of that year, Phoenix was suddenly left with 30 percent less gasoline than it normally gets. By the time the pipeline was repaired weeks later, the price had jumped nearly 60 cents a gallon. That's assuming you could find the gas to buy. A report from the Federal Trade Commission concluded there was simply not enough gasoline to meet demand in Phoenix that summer, and that's why the price rose. The FTC's John Seesel says Phoenix was a dress rehearsal for what the whole country is going through now.

Mr. JOHN SEESEL (Federal Trade Commission): The kinds of things we've seen in the wake of the hurricanes are the kinds of lessons that the Phoenix experience would have taught you to expect.

HORSLEY: The hurricanes disrupted supplies of both crude oil and refined gasoline, driving up the cost of both. Even before the storm, the cost of crude oil had risen sharply. Oil was selling for more than $66 a barrel on the Friday before Katrina, more than double the price of two summers ago. Like homeowners who bought just before a real estate boom, oil companies are enjoying those higher prices, but they certainly cannot control them, says Bill Veno of Cambridge Energy Research Associates.

Mr. BILL VENO (Cambridge Energy Research Associates): Oil's a global commodity, and the price of crude is set not by an individual company, not even by the large, multinational integrated companies. But they're set by basically supply and demand conditions.

HORSLEY: Unlike crude oil, most gasoline in the US is refined here at home, much of it along the Gulf Coast. Rita and Katrina temporarily idled many Gulf Coast refineries. But Veno says companies have every reason to get those plants up and running quickly.

Mr. VENO: If you don't get your supply back online, the guy who you're competing with will, and he's going to be able to sell his product more readily, you know, if it's available sooner than yours is.

HORSLEY: Of the refining capacity knocked out by Hurricane Katrina, half was back in service within two weeks. That doesn't satisfy North Dakota Senator Byron Dorgan, who complains that oil companies are reaping windfall profits.

Senator BYRON DORGAN (Democrat, North Dakota): There's no free market. That's all nonsense. What there is is a market that takes an enormous amount of money out of the pockets of American consumers and sticks it in the treasuries of the major oil companies.

HORSLEY: Major oil companies have earned huge profits over the last year and a half, and they're not reinvesting all of that in new supplies. ExxonMobil, for example, spent more money buying its stock back in the first three months of this year than it did on exploration.

Meanwhile, refining has been something of an investment backwater. No new refineries have been built in the US in almost 30 years, and while existing refineries have expanded, they haven't been all that profitable. But Cambridge Energy's Bill Veno says that's now changing. By one estimate, profit margins for refiners along the Gulf Coast have more than doubled since 2003.

Mr. VENO: We think for the next couple of years we should expect to see some fairly significant increases in refining capacity in the US.

HORSLEY: The other half of the supply and demand equation is how consumers respond to high prices. According to the Energy Department, there was a small drop in demand for gasoline immediately after Katrina, but that may have simply reflected consumers' inability to find fuel. A survey by the market research firm GfK NOP finds about one in three Americans will cut back on driving when the price of gas tops $3 a gallon. Vice President Cary Silvers says the price has to hit $4 before a majority of drivers are willing to make major changes.

Mr. CARY SILVERS (Vice President, GfK NOP): The real question is: When do consumers switch from coping strategies with their existing vehicles and what they can actually control to the tipping point, which would be, `I've got to replace my vehicle with a more fuel-efficient vehicle'?

HORSLEY: The average price of gasoline today is still well below that $4 tipping point. But with both crude oil and gasoline supplies still constrained by hurricane damage, Silver says Americans are starting to pay more attention to the letters M-P-G. Scott Horsley, NPR News.

MICHELE NORRIS (Host): You're listening to ALL THINGS CONSIDERED from NPR News.

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