Gasoline Price Changes - Federal Trade Commission

GASOLINE PRICE CHANGES:
Profitability in the oil industry varies depending on industry segment as well. Crude oil
production accounts for a large portion of the overall profits for FRS firms. In 2003, FRS firms’
net income from crude production was $44 billion out of total petroleum net income of $59
billion. The FRS companies have benefited from higher oil prices caused by the increase in
world demand. As oil prices have increased, their exploration and production operations have
become much more profitable.
In essence, companies with exploration and production operations are in a position
analogous to that of a homeowner who bought a house in a popular area just before increased
demand for housing caused real estate prices to escalate. The homeowner would not expect to
sell the house based on the price paid for it, but rather based on what the house was worth in
today’s market. Similarly, the fact that an oil company could profitably produce its crude oil at
$30 per barrel does not mean that the firm should expect to sell its crude below what increased
demand for crude oil has made it worth in the world market today. 65 Indeed, even if a firm were
inclined to sell at a price based solely on production costs (and not on supply and demand), that
would not reduce crude oil prices. Rather, savvy oil traders would flock to buy the cheaply
offered crude oil and then resell it at the higher market price.
Domestic refining and marketing represents a much smaller source of net profits for the
FRS companies. In 2003, this segment accounted for $7.4 billion in net income, or $0.032 per
gallon of refinery throughput. This was a substantial change from 2002, when refining and
marketing were responsible for $1.4 billion in losses for the FRS companies as a whole. From
the data available so far, the year 2004 appears to have been more profitable than 2003 for
refining and marketing. 66 Based on recent company financial data for the six selected oil
companies, their net income from domestic refining and marketing increased from about $3.8
billion to $8.3 billion between 2003 and 2004, or from $0.032 per gallon of crude oil processed
to $0.064 per gallon of crude oil processed. 67 For these six companies, the increase in net
income from their refining and marketing operations per gallon of refinery throughput was
roughly 10 percent of the $0.28 per gallon increase in retail gasoline prices between 2003 and
2004. 68
In sum, as noted in Chapter 1, high prices may signal profit opportunities that draw
additional resources to where they are needed. Similarly, high profits throughout the oil industry
may signal opportunities for increased investment in exploration and production, as well as in
refining and marketing. In the long run, increased investments may lead to more crude oil
production and refining capacity, which could help ameliorate high prices. Nonetheless, because
opening new crude oil fields or adding new refinery capacity takes years to complete, firms will
base these investment decisions on profit prospects over the life of those investments.
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FEDERAL TRADE COMMISSION, JUNE 2005