ROBERT SIEGEL, host:
ExxonMobil and other oil companies are reporting big profits this week. Earnings in the second quarter of this year for ExxonMobil were over $10 billion. That's a 36-percent increase over the second quarter last year. Royal Dutch Shell jumped 40 percent for quarterly profits, over $7 billion. Conoco Phillips says its earnings were a measly $5 billion, but that represents a 65 percent jump over last year.
NPR's Scott Horsley joins us now to talk about oil prices. Scott, why is 2006 proving to be such a great year for oil company profits?
ROBERT HORSLEY reporting:
Well, the biggest reason, Robert, is the high price of crude oil on the world market. Ultimately the money these companies make is coming from you and me when we fill our gas tanks, but about two-thirds of Exxon's profit came from the exploration and production side. Exxon and the other oil companies invested in a lot of these oil fields back when oil was selling for $25-$30 a barrel. These days it's selling for more than $70 a barrel, and so the difference is gravy for them.
The oil companies are also making money, though, in their refining segment. Refining has not always been a great business for them, but in the last few years it's been very profitable. And right now if you're paying three dollars a gallon for gasoline, about 66 cents of that will go to the refiner.
SIEGEL: But we should clarify here, though, these are highly vertically integrated companies. So when we say the refiner as opposed to the explorer or the distributor, in the case of ExxonMobil, it's ExxonMobil all the way, isn't it?
HORSLEY: That's right in the case of ExxonMobil, but there are also pure players who only explore for crude oil, for example, or only operate refineries, for example.
And in the case of crude oil, you know, the price is really set by a world market in which, as big as it is, Exxon's a relatively small player. So they are a sort of a price taker when it comes to what they can make from their crude oil, just like a wheat farmer or a corn farmer is a price taker. And when the price is as high as it is right now, Exxon and anyone else who's sitting on crude oil stands to do very well.
SIEGEL: There have been complaints of price gouging, but I gather the federal government has said that it's looked into it and found no evidence of that.
HORSLEY: Yeah. It's just as regular as the sun rising. Whenever we have high oil prices like this, there is grumbling. There are calls for investigation. The Federal Trade Commission and the Justice Department trot out and do their thing and they always come back and say it's, well, it's market forces.
The bottom line is we're buying all the gasoline that these companies can produce right now. We're buying a little more than the refiners are churning out this summer and importing the rest or taking it out of storage. And as long as American consumers will buy gas for three dollars a gallon, it's probably naive to expect the companies to give it away for $2.75 or something else.
In fact, the Energy Department said we're going to probably have three dollar gas through Labor Day.
SIEGEL: But if companies are seeing increases in their profits of 30, 40, 65 percent over last year, obviously they could be charging a lot less for a gallon of gasoline and still have earnings that represent a significant increase over what they made last year. P.T. Barnum may be invoked here -there's a consumer of petroleum born every minutes.
HORSLEY: Well, what we need to do is get into some of those clown cars and carpool. You know, the Energy Department noted this week that the price of gasoline is still below its all time peak back in 1981. I looked it up. Back then, the average new car got 20 and a half miles to the gallon. Today, after a quarter-century of innovation, the average new car gets 21 miles to the gallon.
SIEGEL: That's progress for you. Well thank you very much for talking with us. Well, thank you very much for talking with us.
HORSLEY: My pleasure, Robert.
SIEGEL: That's NPR's Scott Horsley, talking with us about oil prices. He's in San Diego.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.