[Tatze]

Thanks! That did explain a lot.

Now, tell me where I am wrong with these scenarios. I’m using hypothetical numbers to ask the question.

Oil Market Price of $20/barrel
Company X spends $18 to drill 1 barrel of oil, sells it at $20/barrel. Profit = $2/barrel or 10%

Oil Market Price of $100/barrel
Company X still spends $18 to drill 1 barrel of oil, sells it for $100/barrel. Profit = $78 or 78%.

Granted, these scenarios are very simplified and do not take into account when the company has to buy additional oil from other sources. But what it does say is that whomever is drilling is making some serious profits. So I’m not so sure I buy the oil companies line that they are only making 8-10% in profit.

If they are drilling, their profit margin has increased because their cost to drill does not change with the market value. I think they are using some creative accounting to show the same 8-10% profits.

And I concede that they are beholden to the world market price, or else they throw off the supply and demand and the price of their product would just be bid back up to world prices.

For the record, I am not trying to suggest any punitive actions against the oil companies. They are entitled to charge and profit whatever they can. That is capitalism! I am just trying to get a better understanding of the process. It is not quite as simple as making a product and selling that product. There are other variables and forces at work.

[Koblenz]

So if a company bought property with a lot of oil, or it signed a long term contract to pump oil at a fixed price, and the price of oil rises sharply, then yes, the oil company is doing well. In your scenario, it would be making significant profits. Of course, the same would apply if the company simply bought a lot of oil when it was cheap and put that oil in storage tanks.

Oil companies, however, buy a lot of crude or pay a commission based on the current market price.