Crude Oil Prices and Oil Company Profits
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The rapid and significant increase in the world price for crude oil which followed Iraq's invasion of Kuwait in the summer of 1990, coupled with the massive increase in profits reported by the major integrated oil companies for the fourth quarter of 1990, in the words of Value Line, "aroused journalistic (and consumer) concern about excess profits."1 The oil companies and their apologists, both within and external to the industry, of course, were quick to deny any connection with higher prices and higher profits. The oil company managements apparently think that the general public is so simple minded that it will accept the proposition that oil companies pass on to the consumer only the actual amount of cost increases to them for crude oil, and that they, of course, pass on to the consumer all reductions in the price of crude oil. Over the long term, price change in crude oil are eventually reflected in consumer prices. It is widely suspected, however, that oil companies typically anticipate crude oil price increases, and often factor such anticipated increases into consumer prices before the price of crude oil is actually increased. By contrast, however, oil companies are also widely suspected to be typically lethargic in passing along crude oil price decreases to consumers; preferring in this latter instance to wait until the cheaper crude oil is 1Value Line Investment Service, "Petroleum (Integrated)," Value Line Investment Survey, 5 April 1991, 401.
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ed in dollar values dropped to r = 0.51364 (statistically significant at p<.05), and the correlation between crude oil prices and Exxon's operating profit margins dropped even lower. These results indicated that both the current year and the lagged relationships are meaningful with respect to Exxon, but that the strongest relationship between crude oil prices and Exxon's operating profits is found in the current year, as opposed to a lagged relationship.
Mobil Corp.
The correlation between crude oil prices and Mobil'soperating profits stated in dollar values was r = 0.71826 (statistically significant at p<.05). A 71.8 percent correlation is high, and it indicates that changes in crude oil prices explain 51.6 percent of the changes in Mobil's operating profits stated in dollar values. The correlation between crude oil prices and Mobil's operating profit margins was a low r = 0.13508, which indicates that little relationship exists between crude oil price changes and changes in Mobil's operating profit margins.
When the operating profit data were lagged one year, the correlation between crude oil price changes and Mobil's operating profits stated in dollar values dropped to r = 0.60630 (statistically significant at p<.05)
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Approximate Word count = 4353
Approximate Pages = 17 (250 words per page)
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