Oil Company Profits

Justin Blum
Washington Post Staff Writer
Friday, October 28, 2005; 10:00 AM

Washington Post staff writer Justin Blum was online to discuss oil company profits, gas prices and proposed drilling in Alaska's Arctic National Wildlife Refuge.

Blum examined Exxon Mobil's $9.9 billion quarterly profit in an article today .

On Thursday , Blum wrote about a coalition of environmental groups that is targeting about 30 members of the House and a handful of senators in a final push to win swing votes to defeat proposed drilling in Alaska's Arctic National Wildlife Refuge.

A transcript follows.

Related Coverage:

Analysis: Oil Industry Seeks to Cast Huge Profits as No Big Deal (October 28, 2005)

Oil Doesn't Want Focus on Big Profit (October 26, 2005)


Justin Blum: Thanks for joining me this morning. There's a lot going on with oil: prices remain high; oil companies are recording record profits; lawmakers are talking about legislative solutions; a final vote on opening the Arctic National Wildlife Refuge in Alaska looms.

What do you think about companies' profits? Should lawmakers do something in response? What? Do you think opening the refuge to oil and natural gas development would be a good thing? Are higher gasoline prices and winter heating costs causing you to consume less?


Laurel, MD: Justin, Why is this even an issue? Shouldn't we be praising these great American companies for doing so well? This is firmly tongue in cheek, but in all honesty, I don't understand why these companies are held to a different standard. They sell a product. There is very high demand for that product and a limited amount of supply. Shouldn't Exxon Mobil and its competitors be able to charge whatever the market will bear? What really irks me is not the companies making big profits, but this attitude of entitlement that we as Americans have. If we as a society are truly bothered by the oil companies huge profits, we would trade down to smaller cars, push our public representatives for more and better public transportation options, use public transportation, and stop buying 5,000 square foot mcmansions for 4 people families. I'm not an environmental extremist. If someone wants to drive a Hummer and live in a huge home that requires a lot of energy to heat/cool, then he or she should stop complaining about the cost. ExxonMobil and the like are businesses. If we really want them to drop their prices, we need to cut our demand of their products. Am I missing something here? Or are we really a schizoid society?

Justin Blum: You raise some issues worth debating.

Consuming less oil products would reduce oil company profits. But many Americans decided to buy SUVs that consume lots of gasoline at a time when pump prices were far lower than they are today. The question is: Will higher gasoline prices cause a lasting change in what kind of cars people choose to buy?


Westport, CT: Hi

1. If higher prices or margins are a result of shortages, do we see evidence of drop in volumes processed/sold by Exxon or US/world market as a whole?.

2. If claim is only that input (crude) cost was higher, then are margins in line with that?

3. Are unexpectedly high expenses/provisions (other than crude costs) hiding even higher profits?

Justin Blum: Exxon Mobil reported a drop in production of oil and natural gas in the Gulf Of Mexico because of the storms. Its refining operations also were impacted.

As for the second part of your question, there are factors other than crude oil prices that impact the price of gasoline: namely supply and demand. After the hurricanes, supply was reduced.

Not sure about the third part of your question.


Shepherd, Mich.: Why is it we can pass a bill that gives out huge subsidies to oil companies to build pipelines, refineries, etc., but we can't pass a bill to give huge subsidies to car manufacturers to build highly fuel efficient automobiles (within our borders!)? The auto industry is legitimately struggling and the oil companies are not. And overwhelming evidence suggests that more fuel efficient cars can do more to balance supply/demand than more drilling/refineries.

Justin Blum: I just wanted to pass along this comment. I don't have an answer for you.


Michael, Washington DC: Simple question: Do the numbers add up? Did the prices at the pump equal the levels to which the price of crude oil rose? If not, why aren't there investigations?

Justin Blum: Oil company profits have generally been in line with analysts expectations based on supply, demand, prices and other factors. Exxon Mobil's profits were sligtly below expectations, actually.


Washington, D.C.: Please help me understand these huge profits and the prices at the pump...which ironically seemed to fall, in anticipation of the announcement of such huge profits!!

Justin Blum: Pump prices are the result of a number of factors. Supply and demand is the biggest. A number of Gulf coast refineries shut down because of the hurricanes. Some sustained significant damage. That reduced supplies of gasoline and other oil products. In the weeks following the hurricanes, the high prices attracted more gasoline imports to the U.S. Also, refineries that were damaged have been gradually coming back online. Those developments have played a role in pump prices easing from their highs.


Washington, DC: I am a little insulted by the oil/gas companies' attempts to downplay their profits and present a 'we're all in this together' message to the public. Unless they are to do something to help lower gas prices, we're nowhere near each other.

Will the 'windfall' tax that Congress is proposing really benefit motorists who may agree with my viewpoint?

Justin Blum: Whether the windfall tax will benefit drivers is a matter of debate. Supporters will tell you that the tax would benefit the country by raising more federal revenue. Oil companies argue that the tax would cause them to spend less on new production--which is disputed by supporters of the measure. If there is less production and demand remains high, that could mean higher pump prices.


Fairfax, Virginia: Exxon still has to pay a lot more for oil as oil prices have risen due to shortages, etc. So if they have to pay more and then pass that on to the public shouldn't that keep down their profit margin unless they are price gouging? Could you explain how their profit is so enormous with some details and facts other than stating the generality, "supply and demand"?

Justin Blum: Exxon does buy some oil on the world market. But the company also produces a lot of it. Exxon's profit from producing oil and natural gas has soared. That is a result of crude oil prices set on world markets. Oil traders have been pushing up prices because of increasing worldwide demand and supplies that have not kept pace.

Exxon's profit in its chemical division was down last quarter compared to the same period a year ago. The reason, analysis said, is that the chemical unit has had to pay higher prices for petroleum products used to produce the chemicals.

You raised the issue of gouging, which is difficult to define. What would constitute gouging?


Fairfax, Virginia: Doesn't "profit" mean the amount taken in after expenses for the oil itself? So in addition to the higher price oil which is already included in Exxon's expenses, what accounts for the difference, i.e. the "profit"? Explain why it isn't price gouging pure and simple.

Justin Blum: Let me try to expand a little on the previous answer. Exxon produces oil around the world. When commodity prices rise on world markets in response to supply and demand, the company benefits. Its product is suddenly worth more money. That happened last quarter. Oil traders sent prices higher than they were the same period a year ago.


Washington D.C.: While I understand supply and demand, the oil companies have virtually no incentive to expand refining capabilities in light of the fact they can make record profits with decreased supply.

Justin Blum: Just wanted to pass along this comment.


Gaithersburg, MD: If Congress imposes a windfall profits tax on oil companies, would the oil companies simply pass the tax cost on to consumers at the pump?

Justin Blum: Any oil company executives reading this chat who want to offer an answer?


Louisville, KY: With such massive profits why does the oil industry need the 20 billion in tax credits for expansion? It would appear that perhaps the energy industry like utilities companies should perhaps come under some federal oversight, which would force them to justify cost increases. The small cartel of companies that controls production, refining and distribution are perhaps creating artificial shortages and profiting at the expense of the nation.

Justin Blum: Supporters of tax breaks for the industry argue they are needed to encourage more production and, ultimately, bring down prices. But opponents raise concerns similar to yours and question whether mergers in the industry have created an environment in which there is little incentive for domestic refinery expansion.


Arlington, VA: I spend more on coffee than gas. I think prices of coffee are too high and Starbucks is making too much profit. Yet, the media basically ignore this travesty.

Justin Blum: Anyone else agree?


Cheverly, MD: One more question -- Isn't this headline --"Oil Industry Seeks to Cast Huge Profits as No Big Deal" -- a tad misleading, seeing as the entirety of the article seems to demonstrate that the oil industry's profits ARE NOT a big deal. It's not simply a deceptive spin. Profits are high but by no means over the top when compared to other industries. How 'bout those banks?

Justin Blum: I don't write the headlines but will pass along your concern to the people who do.


DC: If finding more domestic oil and lowering fuel prices means drilling in Alaska's Arctic National Wildlife Refuge, would Americans do it?

Justin Blum: Would developing more domestic oil lower fuel prices? Would opening the refuge to drilling lower fuel prices? It remains to be seen.

If the refuge resulted in more worldwide supply, the answer may be: yes, lower prices. But what if OPEC decided to reduce oil production by the same amount that was produced in the refuge? In that case, it would be hard to see how prices could come down.


Washington, DC: The coffee comparison is a bit off. Oil is a necessary commodity in our economy and society. At the end of the day coffee is a pleasure and the consumer has the option to buy coffee. On the other hand, oil is not an option for the large majority of Americans, it is a necessary and vital product for survival.

Justin Blum: That's true. There are many people who have to get to work and have little choice but drive. The question becomes whether higher energy prices will impact the decisions people make about where they live in proximity to work and how much they drive outside necessary trips.


S. Arlington, VA: Justin,

The reader from Laurel discusses McMansions and SUV's, but the higher price of gasoline and heating oil will only change those McMansion-SUV loving folk just a tad.

The issue is those in the US in lowest 20% of income/assets in our population. They are barely eking by as it is, and they have to buy gasoline and heating oil and a 30% or greater increase in prices is very difficult for them to absorb. This is also true for retirees on fixed incomes.

Finally, although Americans should cut back on consumption to ease demand, it seems to me that with these profits, the oil companies have little or no incentive to build refineries, or search for more oil when they can pass along the costs (or more) to consumers. What about a government-chartered oil/gas company that would have non-profit or non-for-profit status? While it would cost a few billion in start up costs (that could be recouped), this non-profit/not-for-profit entity could keep the price of oil and gasoline lower than the big oil companies. This would also give big oil some competition and incentive to keep the price down - something they have no incentive of doing now.

Justin Blum: What do people think of this idea? Should the government get into the oil business? Should the government compete with Exxon Mobil as a way of generating more supplies and keeping prices down?


Kensington, MD: How poor a job has the media done in educating the public that we can only expect 6 months of our national oil needs from ANWR if we drill? That was the mean estimate of the USGS study there a few years ago. Some people I talk to seem to think we can live off of ANWR.

Justin Blum: What do people think of this idea? Should the government get into the oil business? Should the government compete with Exxon Mobil as a way of generating more supplies and keeping prices down?


Arlington, VA: I have a hard time believing that today it is .38 cheaper to produce a gallon of gas than it was on Sunday. As for the person who posted re coffee prices I think that speaks for itself. Our economy runs on oil - when we are getting ripped off (like now for example) that has broad effects for the whole world. It is not simple supply and demand nor is it just any other commodity in the market. When will Congress act?

Justin Blum: The markets that help determine wholesale prices for oil and gasoline have been really volatile. Small and large events worldwide can cause markets to surge one day and plummet the next. The changes in the market prices are not a reflection of changes in the cost of production but rather a reflection of market conditions.


Alexandria, VA: Although of course I don't like paying more for gas any more than anyone else, the reality is that world-wide demand for oil is going to continue to go up. Gradually increasing prices I think are actually good in the long run because it will, again in the long run, encourage innovation in energy-efficient technology and alternate energy sources. The alternative is for our government to do what others around the world do and artificially keep oil prices low. However, if we do that, we're still paying the higher prices, just in taxes rather than at the pump. It's not a solution, it just hides the problem. Oil prices will rise, and will rise a lot, as China and India and others become consumers on the same scale as us. Better that it start now and rise gradually, giving us time to adjust, than 10 or 15 or 20 years from now we suddenly find ourselves with not enough oil and no alternatives.

Justin Blum: One result of higher oil and gasoline prices could be more rapid development of alternative sources of energy. That remains to be seen.


DC: I don't understand why people are so outraged by oil company profits. Oil companies are businesses and are free to charge whatever they like without having to justify it, just as is any other business. What about $200 jeans and thousand dollar handbags? I realize that oil is much more of a necessity but I think that if you don't want to pay such prices get a hybrid and downsize your house. The press seems to feed into this entitlement attitude. I am not one of those people who thinks the media is a big liberal conspiracy but I do see a very liberal slant on this issue.

Justin Blum: What do people think of this? Should oil companies be free to charge whatever they like without having to justify it?


Ocala, FL: This would be the ideal time to put a $1 a gallon tax on gas because then people might actually begin to change their habits. The revenue (amazingly 140 billion) could be used to assist the lower income individuals and put money into alternative energy research. Sadly, no politician, especially those that come from the oil industry, would ever have the courage to do this.

Justin Blum: This is a politically unpopular solution. Lawmakers don't want to be blamed to increasing gas prices. But you could make the following argument: In the long term, higher gas taxes would reduce demand and decrease oil company profits. But such taxes can be difficult to afford for people with low incomes who have little choice but drive to work.


Price Gouging, Refinieries and US Oil Inc.,: Two things- It is important to note that the hurricanes have had a very small impact on overall oil prices. Oil is priced on a world market, not a domestic market, and the world market prices have been rising because of increases in demand, not decreases in supply. China is voraciously demanding more oil to feed its economic boom, thus putting a relentless upward pressure on price. What a government owned oil company could do to change this fact is beyond me.

There are few incentives for the industry as a whole to build more refineries, but there are huge incentives for individual companies to build refineries. That is how free markets work in any industry.

Justin Blum: Here's one response to the suggestion that the U.S. government get into the oil business.


Arlington, VA: I'm "the coffee" guy. No, actually I am -addicted- to coffee and must have it, so for me it is not a choice. I blame big coffee for taking advantage of me and the government for not doing anything. I walk to work, so the gas thing is not such an issue.

Justin Blum: With this comment, I'm afraid I have to wrap up this chat. Thanks for all of the questions. Sorry I haven't been able to get to them all.


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