	Background

Periods of high oil prices are usually associated with reduced economic growth, a deteriorating foreign trade balance, and rising prices. However, for companies involved in the oil industry, high oil prices generally result in expanding revenues and cash flow, and in some cases, record profit levels. While the oil industry is composed of hundreds of firms of various sizes doing business in different aspects of the oil supply chain, many characterize the industry through the performance of the five major integrated oil companies: ExxonMobil, Chevron, BP plc, Royal Dutch Shell plc, and ConocoPhillips. They are also very large relative to the rest of the industry, and large even when compared to the economy as a whole; in 2011 their revenues were equivalent to over 10% of U.S. gross domestic product. Table 1 shows these data for the period 2007-2011. The price of oil declined in the later months of 2008, and remained generally lower than 2008 levels through 2010, reflecting both consumers' response to the high prices of 2008 and the recession which began in December 2007. Tables 3 and 4 show the production of crude oil and natural gas for the five companies for the years 2007 to 2011. For example, the companies could be making exploration and production decisions based on an internal planning price which might be different and more stable than the market price. Each business segment of the companies' operations contributes to the total. Tables 7 and 8 show the upstream, exploration and production, and downstream, refining and marketing, net incomes of the five major oil companies. Some evidence of transition in the U.S. market has been observed. Dividends are a direct distribution of earnings on a per share basis. Stock repurchase programs enhance shareholder value by reducing the number of shares outstanding. The capital expenditures of the companies have not succeeded in increasing their production of oil and natural gas. To the extent that high oil prices can be expected to continue, the five major oil companies are likely to remain profitable and able to carry out their business plans.
Periods of rising oil prices can result in reduced economic growth, rising prices, and reduced disposable incomes for consumers, as well as a deteriorating trade balance. For the oil industry, periods of high oil prices generally imply increasing cash flows and higher profits. While some view the improvement in the industries' finances under these conditions as a business return no different than those earned in other industries, others view it as a windfall, a direct transfer from consumers, without any significant additional activity attributable to the industry. Although the U.S. oil industry is composed of many firms, to many the face of the oil industry is represented by the five major firms operating extensively in the U.S. market. These firms are ExxonMobil, Chevron, BP plc, Royal Dutch Shell plc, and ConocoPhillips.
Over the period 2007 to 2011, oil prices were volatile. They increased to a record peak in 2008, declined rapidly at the end of 2008 and early 2009, and increased through 2010, and remained high during 2011. The total revenues and net incomes of the five major oil companies followed a similar pattern. However, the companies' production of both crude oil and natural gas, their two key products, remained largely unchanged in the face of volatile prices, suggesting that for these firms, market price and the production of key products are not closely related.
During the period 2007 to 2011, the five major companies' upstream activities of exploration and production contributed more to the total profitability of the firms than the downstream activities of refining and marketing.
During the period, capital budgets were more stable than the price of oil, and the companies' exploration and production activities did little to increase their ability to produce oil or natural gas. The companies used their profits to carry out a number of activities, to include the distribution of dividends to shareholders, the repurchase of shares on the market to enhance investor holdings, and to carry out business strategies.