As the strength of product demand began to weaken in the latter stages of the year, responding to high petroleum product prices as well as a possible slow down of economic growth, refinery margins began to narrow, suggesting that the companies were less able to pass through the increased cost of crude oil to consumers. This report analyzes the industry's profit performance in 2007. Integrated Oil Company Profits

Integrated oil companies operate in both the upstream (exploration and production) and the downstream (refining and marketing) segments of the industry. Revenue growth among the integrated oil companies in 2007 was driven by increases in the price of crude oil, especially in the last two quarters of the year. Even though five of the nine companies experienced a decline in oil production, and one of the nine experienced a decline in natural gas production, as shown in Table 2 , their revenues increased on average by 7.1% in 2007. Their net incomes, however, were approximately 15% of the net incomes of the integrated companies. Independent Refiners and Marketers

Valero is the leading firm among the group of independent refiners and marketers. The difference was that these companies produce no crude oil and therefore were not positioned to take advantage of the increases in the price of crude oil during the second half of 2007. Not only was the cost of crude oil rising for the independent refiners, but relatively weaker demand conditions made it harder for the firms to quickly pass cost increases on to consumers. 2008 Profit Outlook

Crude oil prices spot prices reached $110 per barrel in the first quarter of 2008. Should the price of crude oil remain at, or above, $100 per barrel for large portions of the year, the profits of oil producing firms should be high. These lower quality crude oils are more readily available than high quality oils and sell at a price discount relative to the reference oils, West Texas Intermediate, for example. Conclusion

The oil industry, in general, continued to generate high profits, as it has since 2004. While demand growth, political uncertainty, the weak U.S. dollar, tight spare capacity, and other factors make it likely that the price of crude oil will remain high in 2008, the weakening U.S. economy, coupled with the demand reducing effects of higher prices, may make it more difficult to raise petroleum product prices.
Increases in the price of crude oil that began in 2004 pushed the spot price of West Texas Intermediate (WTI), a key oil in determining market prices, to nearly $100 per barrel in the third quarter of 2007. Tight market conditions persisted through the remainder of 2007, with demand growth in China, India, and other parts of the developing world continuing. Uncertain supply related to political unrest in Nigeria, Venezuela, Iraq, and other places continued to threaten the market and contribute to a psychology that pushed up prices.
The decline of the value of the U.S. dollar on world currency markets, as well as the investment strategies of financial firms on the oil futures markets, has also been identified by some as factors in the high price of oil.
The profits of the five major integrated oil companies remained high in 2007, as they generally accounted for approximately 75% of both revenues and net incomes. For this group of firms, oil production led the way as the most profitable segment of the market, even though oil and gas production growth was not strong. The refining segment of the market performed relatively poorly.
Independent oil and natural gas producers are small relative to the integrated oil companies, and their financial performance was weaker, with more than half of the firms reporting declines in net income.
Independent refiners and marketers also experienced a difficult year that was reflected in profits in 2007. The combination of high crude oil prices that raised their costs and the inability to quickly pass cost increases on to consumers lowered refining margins, resulting in generally declining profits.
The potential volatility of the world oil and financial markets, coupled with the weakness of the U.S. and other economies, makes any profit forecast for 2008 highly speculative. While continued high oil prices are likely—the price of oil reached $110 per barrel in the first quarter of 2008—the ability of the industry to pass those prices on to consumers of gasoline and other products during 2008 is uncertain due to possibly weakening demand.