Oil companies may be posting record profits, but how much of the increase in those profits is eaten by the decreasing value of the dollar? How much is eaten away by inflation? What is the distribution of profits amongst the various divisions of the company?

“So you’re saying that it’s by accident that record profit is accidental even though the correlation between record prices and record profit is so apparent?”

Not necessarily by accident, but even if there is a direct correlation between the record oil prices and the record profits (which you’ve not shown, or given any indication about availability of data, you’ve simply stated it) how much of that is driven by factors I’ve mentioned above, or others than don’t immediately come to mind without actually having to think about the question?

Also, while capex for oil production is high, don’t ignore costs such as transport of product, which may not be low at all.

Profits in isolation also don’t necessarily mean much. What is the actual change in cash in the company? They may be making record profits, but how much is going back into the company? The balance sheet would show how much cash is floating around. Yes, this is subject to manipulation, but that sort of thing can be investigated and checked. If their cash in hand is simply growing with those profits then they’re just hoarding money. On the other hand, that cash could be spread between r&d and dividends or used for acquisitions. A statement of the magnitude of profit also says nothing about what the profit margin is. From the information you’ve given I get the impression that oil company profit margins must be at least 50%. A look at their 2007 financial results shows that their margin is actual just over 10%, hardly a huge margin. It also shows an r&d spend of 2% of net income.

Yes, the oil companies make large profits, but off huge revenues. Could oil be cheaper? Perhaps it could, but these profits don’t necessarily make a case for it. There are all sorts of reasons to dislike companies like Exxon – they’re hardly friends of the environment – but huge profits isn’t necessarily one of them.

Finally, all your ranting ignores what the post is actually about, which is the bad effects of binding price ceilings.

http://news.yahoo.com/s/ap/20080523/ap_on_bi_ge/money_in_the_tank

In response to being able to cut prices by 50% and still generate monster profits, that is fundamentally true if they were able to control the market price of oil. 80% of the worlds supply is controlled by state run entitities. 20% is in private hands (most of that oil is found in the US and Canada). Those nations that produce oil sell to the highest bidder and if you don’t like it, they will take it elsewhere. (See Hugo Chavez and Venezuela). Exxon, Marathon, BP, etc… only control the price of oil that they explicitly own. So what does the cost of a barrel of oil become. The marginal cost of the last barrel produced in order to satisfy world demand. So if the last barrel of oil sucked out of the ground to meed world demand costs $135, then they all do. This is a fundamental of commodity pricing. Now it is true that the actual production cost is currently lower than $135 per barrel for every barrel produced. This is due to the risk of supply disruption, which is priced into a barrel of oil. Let’s say that the last barrel out of the ground cost roughly $85 to produce… The rest of it is some type of risk premium or expectation of demand spike in the near future and other issues too numerous to explain (like a falling US dollar). I acknowldge that some of that premium is currently pretend and some of it is real (This is what is known as a bubble folks…) Eventually, the pretend premium will be driven out of the market.

Now here is the fun part. Let’s get back to the argument that Exxon, Marathon, etc… could cut prices by half. Let’s say that they did that… They could only do it for the oil that they control explicitly which is roughly 40% of the US’s supply. The rest they have to buy at the market price. It certainly would give the American consumer some breathing room at the pump. But wait… There’s more. If they did that, you can bet that within hours high priced lawyer would file a class action lawsuit against the oil companies for failing in their fiduciary duties to their investors by dumping gasoline at less than its full market value. How much would they be liable for do you ask? The answer is the full amount that they just manipulated the price below what the market dictates. This would then have to be built right back in to the price of gas in expected lawsuit payouts that big oil would end up having to pay in lost shareholder value. If you want proof of this, why do you think that the government is always bringing in the oil execs about high prices and nothing ever happens. It’s because at the end of the day there is nothing the oil companies can or should be forced to do. They are earning appropriate profits on a product that they sell. Even if they go ahead and enact legislation criminilizing the manipulation of oil prices, no one will ever go to jail over it. Why??? Because it is already illegal. If people could be prosecuted for it, they would have been already by the SEC.

For the entire market with people arbing it, you’re definitely correct.

So you’re saying that it’s by accident that record profit is accidental even though the correlation between record prices and record profit is so apparent?

Well think about this, if Exxon were to cut prices by 50%, what do you think would happen? They would still post record profits of over $5 billion every quarter. they would still earn a larger profit/quarter than any company in any other industry.

The difference between the oil industry and other industries when it comes to profit is that all other industries have fluctuating cost that oil companies don’t have, thus oil companies are able to keep larger portion of their revenue in profits. other industries invest in r&d, they don’t and they should…