Book Description

In this policy paper, we present several empirical tests using publicly available data from the U.S. Department of Energy and the Securities and Exchange Commission to examine the relationship of oil company profit margins to retail gas prices. After review, we find that the accounting profitability of the major, integrated oil companies is actually lower on average during periods of extremely high gas and oil prices (and, in fact, are even lower than in times of extremely low gas and oil prices). Large oil companies are most profitable during periods of moderate gasoline prices. yet, small vertically integrated oil companies and firms primarily in the business of refining purchased crude oil exhibit a consistently inverse relationship between profit margins and retail gas prices -- as gas prices increase, these firms become less profitable. We find no evidence that the accounting profitability of oil companies (measured using gross profits) increases during episodes of very high retail gasoline prices. Our findings are consistent with the notion that high gas prices are primarily a cost-driven phenomenon, rather than just a consequence of demand shocks or collusion. While we do not attribute any altruistic motivation to the oil companies, the evidence intimates that the burden of gas prices is partially shouldered by the industry, thereby reducing the burden on the consumer.