It may seem that business is hard for oil companies right now. Heavy media coverage of recent oil spills has affected the public’s trust. High gas prices, both at the pump and per barrel, generate less than positive regard for oil companies, and stringent environmental regulations that dictate where and how crude can be recovered limit the growth and profits of the industry. All this would seem to show the oil companies losing ground and money. In actuality, the industry is still booming.
Access to Natural Resources
Following the Deepwater Horizon spill, the U.S. government placed a six-month moratorium on deepwater drilling on the Outer Continental Shelf that shut down drilling on a number of offshore oil rigs. After the moratorium expired, new permits to drill were issued at a much lower rate than before.
While drilling on federal land has become more difficult and limited, drilling on privately owned land has increased. Government red tape is not as big a barrier on privately owned land, and oil companies continue to drill and recover crude from deposits like the Bakken formation. This access to natural resources has helped to offset losses incurred by government bans.
Changes in Demand
High gas prices in the United States, Great Britain, and Europe have encouraged many people to buy less gas. In fact, some government officials in America have even stated their desire to see gas prices go even higher to get more people to use alternative fuels. Fewer people buying gas has not hurt all oil companies.
As demand for oil decreases (or levels off) in certain parts of the world, it is increasing steadily in other countries. Increased urbanization and industrialization in China, India, and developing countries is creating a greater demand for oil, and oil companies are there to meet their needs.
Profits and Revenues
Another factor that could potentially hurt the oil industry is its low profit margin when combined with a desire by some government officials to increase taxes and regulatory fees on oil companies. The oil industry has a fairly low profit margin. A profit margin is the percentage of revenue left after all expenses are paid (expenses include taxes, operating costs, etc.). It’s the actual profit compared to how much money is coming in.
Only 6 to 7 percent of every dollar in revenue the oil industry brings in is profit. Compare that to the near 20 percent profit margin of the cigarette industry. Even with a low profit margin, the oil industry is making a lot of money. Business is good as long as taxes are not dramatically increased.
Even with government bans on federal land, access to drilling sites is stable. The demand for oil keeps rising regardless of higher prices per barrel, and profits are increasing as well in spite of low profit margin and high expenses. Indeed, business is up for oil companies and the industry despite all the factors that could bring it down.