In this report, the focus is on total profits and the growth of profits within the oil industry andthe likely uses of profits by the industry, specifically the potential ability of the industry to invest inoil supply related projects. Major Oil Company Profits in 2004

Oil industry profits are widely identified as related to world oil price levels. If the profit performance of the oil industry wasbased, or related, only to the price of oil, given normal lags in the production chain betweenproducing crude oil and distributing petroleum products, it might have been expected that profitsmight have risen late in 2004 and into 2005. The productionresults for natural gas are even more uniform. The recent record of the major integrated oil companies in expanding production of crude oil and oil products may be the result of several factors. It is possible that because of limitations on the ability of the firms to investin additional oil and gas production in the short term, profits have been returned to investors in theform of dividends, or the buy back of shares to enhance the market capitalization of the companies. Independent Refiners and Marketers

Independent refiners and marketers are typically only involved in thedownstream activities of the oil industry. This performance, coupled withthe downstream profitability of the major integrated oil companies, gives somesupport to the viewpoint that, in addition to high oil prices, conditions in thepetroleum product markets, especially gasoline, decoupled from their traditionallinkage to crude oil and generated independent market tightness and higher prices. Key profit indicators in the refining industry are the gross and net refiningmargins. Use of Oil Profits

		Refinery Investment

An expansion of refinery capacity in the United States might alleviate theportion of petroleum product price increases not due to the high price of crude oil. Individually, they are able to accomplish thesegoals through mergers and acquisitions. Conclusion

Since oil price increases began in 2004, the oil industry has earned increasedprofits. Historically volatile prices and profit levels coupled with a tightregulatory environment contribute to industry uncertainty. As a result of significant time lags that tend to occur in the oil industry, it maybe too soon to know whether or not investments in the industry, if taken, will resultin the increased supply of oil and petroleum products needed to reduce prices andconsumers' costs. Another key factor in the profit calculation is how easily the increase in thecost of crude oil can be passed on to consumers in the form of higher prices forgasoline and other refined products without suffering a more than proportionatedecrease in sales. All stakeholders in a company do not necessarily have an interest in the sameconceptual definition of profit.
High prices for crude oil in 2004 and into 2005 have reduced consumers' purchasing powerand raised costs for businesses while providing billions of dollars to the oil industry and oil exportingcountries. The industry's increased revenues have led to record profit levels. As the 109th Congressengages in oversight of recent broad energy legislation which aims to increase the domestic supplyof crude oil to mitigate oil price increases in the longer term, another key factor in determiningincreased supply is how oil companies decide to allocate their profits between shareholder returnsand investment in oil production. This report is written in response to a number of requests fromCongress concerning profits in the oil industry. This report provides background informationconcerning the level of oil industry profits, the sources of those profits, and a discussion of thepotential uses of profits.
In response to the increased price of crude oil since the fall of 2004, profits of virtually allfirms in all segments of the oil industry have increased. However, the greatest increases have beenin the downstream, or refining and marketing, segments of the industry. These increases in profitare apparent whether the major integrated oil companies, the independents, or refiners areconsidered, lending some credence to the viewpoint that industry profits are the result of factorsbeyond the elevated price of crude oil. Historically, the current combination of high oil prices andhigh profits have been seen before, and periods of low prices and profits tended to follow.
The relatively high profit levels earned in refining and marketing suggest that conditions inthe petroleum products markets, including the gasoline, diesel, and jet fuel segments, contributedto earned profits above and beyond the effect of higher crude oil prices. Key factors in these marketsincluded tight refining capacity and low inventory levels. Mergers, acquisitions, and asset sales mayalso have changed the relative profit positions of many firms in the industry. All of these factorshave been influenced by investment decisions in the oil industry.
Firms in the oil industry are likely to use their recently earned profits in a variety of ways. They are holding record cash balances, buying back their shares and increasing dividends. Mergerand acquisition activity in the industry again appears to be on the rise. In addition, the major oilcompanies are investing in a variety of energy related projects, although not necessarily oil, includingliquified natural gas and gas-to-liquids technologies. These projects tend to be international inscope. In the longer term, investments in exploration, production, and refining capacity are likelyto be needed to mitigate the high prices of 2004-2005.
This report will not be updated.