Why Big Oil Isn't Cheering Higher Oil Prices

Oil is up today, but Big Oil isn't cheering. Here's why.

May 14, 2014 at 3:30PM
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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.

Xom Deepwater Image

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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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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