Why Big Oil Isn't Cheering Higher Oil Prices

U.S. stock markets are in a gradual decline today, with the Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.6% in late trading as traders sold equities and bought gold and oil. The shiny metal was up $10 in afternoon trading to $1,305 per ounce and oil was up to $102.19 per barrel.

You may think higher oil prices would have Big Oil cheering today, but Dow components ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) are respectively down slightly and up 0.6%. There's good reason why they aren't terribly happy about the price of oil.

Offshore oil rigs like this one are becoming more prevalent in oil drilling, meaning higher costs for explorers. Source: ExxonMobil.

Big challenges facing Big Oil
For drillers that simply extract oil and sell it to the energy markets, higher oil prices are great. But ExxonMobil and Chevron are more integrated vertically, with operations including refining and marketing oil.

Higher oil prices mean higher margins in their massive upstream operations, but if gas prices don't also rise it means lower margins in refining and marketing oil. It's like taking money from one pocket and putting it in the other.

The chart below shows that over the past decade the trend has been for higher oil prices with gasoline not keeping pace. Recently, the problem has been made worse by falling demand for gasoline domestically, a new phenomenon in American energy.

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price data by YCharts.

The long-term challenge is that oil is becoming harder to find and more expensive to extract every year. Half of the new reserves found last year were in ultra-deepwater, and much of the other oil was in shale that's also expensive to drill.

On the demand side, consumers have shown the capacity to reduce gasoline demand as prices have gone up. More efficient vehicles reduce demand, public transportation is more prevalent, and people take fewer vacations.

Long term, these trends result in lower margins for Big Oil. That's why you're not seeing investors jump for joy today as oil climbs. They know that higher oil doesn't necessarily mean higher profit, and that's not good for Big Oil stocks.

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  • Report this Comment On May 15, 2014, at 12:41 AM, greenknight32 wrote:

    Fuel prices are already near the limit of what the market will bear. Thew only new oil supplies are so costly to extract that it can't be done profitably without higher prices.

    This is what peak oil looks like. The petroleum era is nearly over.

  • Report this Comment On May 15, 2014, at 7:50 AM, btc909 wrote:

    Musk knows oil is toast. The money isn't in the cars, it's in the batteries.

  • Report this Comment On May 15, 2014, at 1:58 PM, AHuston wrote:

    MRO beat earnings handily for Q1 2014 and expects continued growth for 2014. Peak oil is not here and niether is peak gas.

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