Oil industry awash in record levels of cash

John W. Schoen Senior producer • Profile • E-mail

When major oil companies report their quarterly profits next week, they're once again expected to post record numbers. With crude trading around $60 a barrel, the oil industry is enjoying one of the biggest windfalls in its history. But as the industry looks for places to put that cash, it's finding it harder and harder to put funds to work finding new deposits of oil and natural gas.

By just about any measure, the past three years have produced one of the biggest cash gushers in the oil industry’s history. Since January of 2002, the price of crude has tripled, leaving oil producers awash in profits. During that period, the top 10 major public oil companies have sold some $1.5 trillion worth of crude, pocketing profits of more than $125 billion.

“This is the mother of all booms,” said Oppenheimer & Co. oil analyst Fadel Gheit. “They have so much profit, it’s almost an embarrassment of riches. They don’t know what to do with it.

The reason for the boom is simple. Much of the investment in finding that oil -- and developing the wells and pipelines needed to produce it -- has already been made. So an oil field that was profitable with oil selling for $20 a barrel is much more profitable with oil trading around $60.

That’s left the industry with a happy problem -- what to do with enough cash to fill a supertanker. Many publicly traded oil companies have been busy buying back their own stock, which helps drive up the price of the rest of the shares left on the open market. Since January 2002, stocks of major oil companies have gained 88 percent; during that period the Standard and Poor’s 500 index has gained less than half as much.

Oil producers have also given investors a raise by gradually increasing the dividends paid out to shareholders. And they’ve paid down their debts to record low levels. ExxonMobil, for example, is virtually debt-free -– with a cash pile of more than $25 billion.

All of this industry good fortune has not escaped the notice of consumers, whose anger at higher gasoline prices has been rising in lock step with the price of crude. The energy bill recently enacted by both houses of Congress provides little relief for U.S. energy consumers. But a continued rise in prices could bring increased political pressure to find ways to lower the cost of energy, according to Tom Kloka at the Oil Price Information Service.

"This is something that Americans regard as their birth right," he said. "If gasoline prices are still north of $2.25 (a gallon) when we reach the midterm election, there's going to be an awful lot of outrage."

Even as their overall profits have soared, major oil companies are earning a relatively modest 8.7 percent profit margin -- the portion of the sale of each barrel that hits the bottom line. Major banks and drug makers, for example, enjoy profits margins that are twice as big.

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