Big oil profits from uncertainty. (By the Numbers).

Not surprisingly, the war in Iraq, a three-month general strike in Venezuela and political turmoil that has halted production in Nigeria are all playing havoc with world oil prices and production levels. The only mild surprise is that the upheaval could actually boost profit margins of major oil companies.

In February, crude oil prices hit $36 per barrel, their highest level since October 1990, according to the Energy Information Administration (EIA), a division of the U.S. Department of Energy. Consumers are feeling the pinch at the pump; the average cost for a gallon of regular unleaded gasoline has jumped from $1.13 to $1.64 in a year.

The high prices are due largely to the "uncertainty premium" fueled by the war, says Beck A. Taylor, associate professor of economics at Baylor University, now teaching at Harvard.

But despite price hikes, America's thirst for oil only grows stronger. The EIA predicts that demand will grow by 2.5 percent in 2003, or about half a million barrels per day. Meanwhile, domestic oil production is nearing 50-year lows and now accounts for only 43 percent of U.S. consumption.

The bad news for consumers, however, may be good news for major oil companies, whose profits have dropped since 2000's record numbers. Net income for the major integrated energy companies declined 46 percent from 2001 to 2002, says Jon Rasmussen, senior financial economist at the EIA, leaving their return on equity slightly below the historical average of 12.5 percent. But price hikes may help the Big Four-Exxon Mobil, Royal Dutch/Shell, BP and Chevron Texaco-rebound in 2003.

"Higher oil prices tend to favor the bottom line of the majors," says Rasmussen. "But there are so many ways the market could go. With the way things are now, forecasting is tougher than ever."

Still, some claim the Big Four have enough muscle to move markets in any direction they please. "The Big Four are very adept at managing oil prices," says Tyson Slocum, a research director at consumer watchdog organization Public Citizen in Washington, D.C. "When you consolidate fully vertically integrated entities, you have the capability of a handful of players deciding how much supply to provide to the marketplace. They are developing own version of OPEC."

Shrinking Supply, Growing Demand

U.S. Oil Production vs. Demand in Barrels per Day

(in millions)

        Production  Demand

2002       5.8       19.7
2003 *     5.7       20.2
2004 *     5.6       20.7

* projected

Source: Energy Information Administration, Short-Term Outlook March 2003

Note: Table made from bar graph

A Roller Coaster Ride

          Avg. Cost per    Avg. Cost per Gallon
            Barrel *     (regular, unleaded, city)

Feb. '01       $29                 $1.48
Feb. '02       $20                 $1.13
Feb. '03       $36                 $1.64

* West Texas Intermediate (WTI) crude oil spot price

Source: Energy Information Administration, Short-Term Outlook March
2003. U.S. Department of Labor, Bureau of Labor Statistics

Note: Table made from bar graph

Big Oil: Down, but Still Profitable

(in billions)

                    2000    2001    2002

EXXON MOBIL         $17.7   $15.3   $11.4
ROYAL DUTCH/SHELL   $12.7   $10.9    $9.4
BP                  $11.9    $6.6    $6.8
CHEVRON-TEXACO       $7.7    $3.3    $1.4

PROFIT REVENUES

EXXON MOBIL        $232.8  $212.9  $204.5
ROYAL DUTCH/SHELL  $149.1  $135.2  $179.4
BP                 $148.0  $174.2  $178.7
CHEVRON-TEXACO     $117.1  $104.4   $98.8

Source: Annual reports to each Company

Note: Table made from bar graph

RELATED ARTICLE: Oil Gauge

* U.S. oil wells drilled in 2001: 8000

* U.S. oil wells drilled in 1981: 43,600

* % of U.S. oil imported in 2002: 57

* % of U.S. oil imported from Persian Gulf: 20

* % of U.S. oil imported from Iraq: 5

Source: Energy Information Administration; Baylor University Professor Beck A. Taylor