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Oil industry boom shows no letup

Sat., April 30, 2005

SAN FRANCISCO — Pumped up by persistently high energy prices, the oil industry maintained its streak of massive — and growing — quarterly profits this week, aggravating motorists and amazing financial analysts.

“I have been following this industry for 18 years and I have never seen anything like this,” Oppenheimer & Co. analyst Fadel Gheit said Friday. “It’s like they’re printing money.”

The results of the world’s four largest oil companies illustrates just how well the industry has fared lately. Since the end of 2003, Royal Dutch/Shell Group of Cos., BP Group PLC, Exxon Mobil Corp. and ChevronTexaco Corp. have earned a combined $97 billion, including $23 billion during the first three months of this year.

Although crude oil future prices retreated below the important psychological threshold of $50 per barrel Friday, Gheit and other industry analysts expect the industry boom to continue, largely because the demand for energy is expected to grow faster than the supply.

“As far as you can look out, things look pretty rosy for (oil) refiners,” said Tom Kloza, chief energy analyst for the Oil Price Information Service in Wall, N.J.

The bottom line for consumers: U.S. gasoline prices seem likely to stay above $2 per gallon through the summer — traditionally the time when more drivers are hitting the road for vacations and burning up more fuel.

That’s unwelcome news for motorists like Henry Shin, who already has been cutting corners so he can afford to fill up his sports utility vehicle at $50 per tankful.

“It bugs me big time,” said Shin, a 19-year-old college student from San Ramon. “I feel like all my money is going straight into the gasoline tank.”

Gasoline prices have climbed even higher since the oil industry closed the books on its first quarter, reaching a national average of $2.28 per gallon for unleaded regular grade earlier this month, according to the daily surveys of the AAA.

The national average stood at $2.24 per gallon Friday, a 24 percent increase from $1.81 at the same time last year, the travel association said. In California and Hawaii, motorists are paying more than $2.50 per gallon.

Those high prices threaten to cause a backlash against the oil industry because of its “Caligua-like” profits, Kloza said, referring to the decadent reign of a famous Roman emperor.

“It really causes people’s blood pressure to rise when they see gas prices going up like they have,” Kloza said.

Although the sheer numbers are large, the oil industry’s profit margin — the amount of money pocketed from each sale — isn’t huge.

In the first quarter, the oil and natural gas industry’s profit margin averaged 8.5 percent, according to figures compiled by the American Petroleum Institute. The average profit margin for all industries so far is 9.2 percent, according to Business Week’s calculations. The figure for all industries is expected to decline as more companies report first-quarter earnings during the next few weeks.

Last year, the profit margin for the oil and natural gas industry averaged 7 percent, slightly below the 7.2 percent average for all industries. Computer software and services had the highest profit margin at 15.6 percent.

“We understand consumers are concerned about gasoline prices, but those are largely a function of the marketplace,” said David Fogarty, a spokesman for the Western States Petroleum Association, an industry trade group.

A sharp increase in crude oil prices is the main reason motorists are paying more at the pump.

Analysts also blame an inadequate supply of U.S. oil refineries to quench the country’s ever-intensifying thirst for gasoline and heating oil, a problem that’s exacerbated whenever a plant curtails production for routine maintenance or other unforeseen circumstances.

President Bush this week suggested building more oil refineries on closed military bases to help increase future production.

Even as the oil industry announced its hefty profits, this week offered motorists some hope for modest price relief at the pumps.

Oil prices have fallen during the past week after Saudi Arabia pledged to increase oil production and a government report of slower U.S. economic growth, a phenomenon that often foreshadows a drop in energy demand.

Several of the major oil companies already seemed to be preparing for a possible price reversal.

Exxon Mobil, ChevronTexaco and Royal Dutch/Shell curbed their first-quarter oil production by a combined 474,000 barrels a day, according to the companies. The downturn offset a 500,000-barrel-per day production increase by Organization of Petroleum Exporting Countries, or OPEC.


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