NCPA - National Center for Policy Analysis

Putting Oil Industry Profits in Perspective

August 18, 2000

For more than two decades, oil company profits have lagged those of other industries, analysts report. But recent increases have brought oil's bottom line into greater equilibrium with the rest of American business. From the standpoint of encouraging greater production, this should be good news for consumers -- rather than a cause for complaint, as some critics have seen it.

  • From 1977 through 1999, net income in the oil industry was only 9.7 percent of net investment -- as opposed to 11.5 percent for all of American industry.
  • From 1994 through 1998, oil company profits averaged 7.2 percent -- or about half of the 14.2 percent average for all the companies in the Standard & Poor's list of 500 industrial stocks.
  • Even in the first quarter of this year, oil companies' profit margin was only 5.9 percent compared with 7.3 percent for all industries -- and 13 percent for such favored businesses as banks, publishing, broadcasting and electronics.
  • In the second quarter of 2000, however, most oil companies had profit increases, some well over 100 percent, due to the rising price of crude oil -- which only had the effect of putting them on a par with profits in other industries.

Oil industry analysts expect that over the next couple of years, profits should level out on a plateau compatible with earnings for the rest of the companies in the S&P 500. But that will depend upon OPEC policies.

The cost of producing crude oil is somewhere between $7 and $12 per barrel. Oil industry insiders say that a considerable chunk of the difference between production costs and the barrel price will have to be devoted to exploring for oil and drilling and developing in deeper and more hazardous regions. The companies will also have to commit huge sums to develop synthetics and find new sources of natural gas.

Source: Robert A. Mosbacher (Mosbacher Energy Company), "Oil Profits Are Finally Where They Ought to Be," New York Times, August 18, 2000.

 

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