- The Washington Times - Wednesday, April 26, 2000

Profits for three of the largest U.S. oil companies soared in the first three months of this year because record-high oil prices drove up their income from production.

Exxon Mobil Corp.'s profits more than doubled to $3.48 billion from the first quarter of 1999, the company reported yesterday, while Texaco Inc.'s profit increased 188 percent to $574 million. Conoco Inc. reported net income of $399 million, up from $83 million a year earlier.

The oil companies credit the high price of crude oil about $15 more per barrel over the comparable period last year for the upswing in profit.

"Earnings are good so far, but they have to be put in the context of the growth rate over the year," said John Felmy, economist at the American Petroleum Institute.

During the first quarter of 1999, oil companies' profits were comparatively small because world oil prices for both crude and refined oil were low. That meant that they were being paid only about $11 per barrel that they produced instead of nearly $30 per barrel earlier this year.

Refineries which convert crude oil into gasoline pay market prices for each barrel of oil, determined by international supply and demand. When the Organization of the Petroleum Exporting Countries, which controls about 40 percent of the world's oil market, cut back production a year ago, the cost of the world's limited oil supply tripled.

Since then, prices of crude oil have risen above the cost of production, allowing the oil companies to profit from the high prices.

However, companies that do not produce their own oil are expected to have weaker profits this quarter than those that do.

"Integrated" oil companies, which do everything in the oil process from find and produce the oil to market and distribute it at the pump, can make money in all different segments of the oil process, depending on a barrel's market price.

For example, Texaco and Exxon Mobil find crude oil, pull it out of the ground and sell it to other companies around the world or refine it themselves.

The gasoline at a Texaco pump may come from its own oil supply or from another oil company. That's because oil has different levels of chemicals, depending on its source and some refineries cannot handle it.

"It all depends on distribution," Mr. Felmy said. "The oil companies make the economic decision to use it themselves or sell it."

Once crude oil is sent to a refinery where it is converted into gasoline and other products it is shipped to gas stations. In general, the "upstream" segment of the oil industry, the exploration and production of the crude oil, increases as supplies are tight and the price is high. The "downstream" segment, which is the refining and marketing portion, falls because the oil companies are paying for that higher-priced crude oil to run through a refinery, Mr. Felmy said.

"While the higher crude oil benefited our upstream operations, for the downstream they meant higher costs, which were not fully recovered in the marketplace," Texaco Chairman and Chief Executive Peter I. Bijur said in a statement. "With the recent leveling off of crude-oil prices and lower product inventory levels, downstream margins began to improve in the latter part of the quarter and this trend is expected to continue in the upcoming months."

Marketing margins suffered because pump prices did not increase as much as supply costs, the company's first-quarter earnings report said.

Exxon Mobil also reported lower downstream earnings compared with last year. But margins began improving at the end of the first quarter, as oil prices began to fall in anticipation of OPEC's decision to raise production.

This is the first earnings statement for the merged Exxon Mobil.

It's hard to tell if oil companies are taking advantage of consumers.

"Oil companies are looking for rates of return to stay in business," Mr. Felmy said. "It's hard to make a case that they are gaining too much from consumers."

Locally, gasoline prices rose as high as an average of $1.57 per gallon for self-serve regular unleaded at the beginning of the month 55 cents higher than a year before, according to AAA. Prices began to drop slightly after the March 27 OPEC meeting, when oil-producing countries agreed to increase production by 7 percent.

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