Oil Companies Booming Thanks to Record Oil Prices

Soaring crude oil prices act like a tax on the economy because so much of the economy relies on oil, not just for fuel but for many manufacturing processes as an ingredient. Unlike a tax, though, the money is not recycled into better schools, sounder pension plans or greater national security. Instead, the money is transfered to the shareholders of the companies that produce crude and its distillates. A rather ridiculous belief has crept into the discussion by those who claim the "poor" oil companies have to pay higher prices charged by OPEC. While it is true that few petroleum producing countries are suffering, the big oil companies are doing quite nicely as well.

Back in the bad old days, the oil companies were known as the Seven Sisters because there were seven of them. Thanks to corporate mergers and takeovers, there are three that really matter and can give a clear picture of what's going on throughout the rest of the industry: British Petroleum, Exxon Mobil and Royal Dutch Shell. Each is doing well, even Shell which has had to reduce its stated reserves. And they are doing well because of these reserves. That is, the oil they own that is still in the ground has gone up in value in the last year or so. They are getting more now when they pump a barrel of oil out of the ground that they did before. The rest is detail.

A quick review of crude prices proves what the world already knows; they have gone up radically in the last few quarters. The spot price for West Texas Intermediate Crude was $33.71 a barrel on January 5, 2004, the first day of trading in the year. On the last day of trading, a barrel of WTI cost $43.36. On March 29, 2005, that same barrel brought its owner $54.26. Using Europe's benchmark, Brent North Sea Oil, the January 2, 2004 price (Europe did business on January 2 that year while the US market was closed) was $29.55 per barrel. At the end of the year, the final trade went through at $40.38. On March 29, 2005, the price reached $51.42.

In their fiscal 2004 year-end filings, the Big Three oil companies all showed increased in revenue and earnings. BP reported 2004 revenues of $15.96 billion up from $10.65 billion in 2003. Earnings per fully diluted share were 70.79 cents in 2004, up from 46.83 cents in 2003. Exxon Mobil's revenues were up less dramatically, at $25.33 billion in 2004 compared to $21.51 billion in 2003, but earnings per fully diluted share soared to $3.97 in 2004 from $2.56 in 2003. Shell had record revenues of $18.5 billion in 2004, a 48% increase from 2003's $12.50 billion. Earnings per fully diluted share were $5.49 in 2004 versus $3.68 in 2003.

These positive earnings translated into higher stock prices across the board. On January 2, 2004, BP traded to an adjusted close of $47.46. By December 31, the price closed at $57.92, and the March 31, 2005 close was $62.40. Exxon Mobil had a similar stock price increase, from $39.47 on January 2, 2004 to $51.01 on December 31, 2004, and $59.60 at the end of 2005's first quarter. Shell's American Deposit Receipts (roughly the equivalent of stock for a non-US firm trading in the US) closed at $42.47 on January 2, 2004, at $50.26 on December 31, 2004, and at $54.36 on March 31, 2005.

For most, it comes as no surprise that higher crude prices make money for the oil companies. However, in the post-factual world of the Counter-Enlightenment, something becomes true if enough pundits say it loud enough and long enough unless contradicted early. The figures clearly show that the oil companies are not being hurt by higher crude prices, quite the opposite. Which is what one should expect when the foreign policy of the US is being mishandled by a failed oilman from Texas.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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