The Wall Street Journal and various other outlets today are reporting that ChevronTexaco Corporation announced “roaring profits” as a result of high oil and natural-gas prices. Its fourth-quarter net income nearly doubled.
I don’t see it, though. If market forces (e.g., OPEC, etc., etc.) determine the price of crude oil, and if the refining process has a fixed cost (and a scary amount of obsoleting fixed assets for Chevron, but that’s another topic), how is it that an increase in the cost of crude can translate into greater profits for oil companies?

I mean, Chevron has results that other companies would sell their grandma to achieve: their fourth quarter net income rose 98%, to $3.4 billion, from $1.7 billion a year earlier. For all of 2004, net income rose 84% to $13.3 billion (which works out $6.28 per share, if you’re curious).
Maybe I’m looking at this wrong, but when an increase in crude prices results in such a percentage increase in net revenues for an oil company, there’s just no way that they can reasonably state that gas prices are based on the market price. This kind of result comes from two bad forces in business: monopolies and price fixing.
If the strategic plan for the firm was “we’ll always charge 117% of the price of crude on the world market” then we’d see a proportionate increase in net income, but to achieve a 98% increase year-to-year in the fourth quarter would imply that the cost of crude would have jumped that much commensurately. And you know that it didn’t.
I’m sure that Dave O’Reilly, CEO of ChevronTexaco Corporation, would have an interesting explanation for this, one that might superficially make sense, but here’s what I think really happens…
Chevron buys 50 million barrels of crude at, say, $45 barrel. It then takes a few months for all this oil to be sent to the Chevron (or Chevron contracted, or so-called production shared) refineries and converted into sweet crude, gasoline, etc. From contract to trucking the very last gallon to a gas station might take, say, four months. In the meantime, they have to keep signing new contracts to keep their pipeline full – quite literally – and if the price of crude keeps going up, they exploit the situation by jacking up the price of the oil already purchased under the previous contract and in the processing stages.
With me on this? Otherwise, how could it be that OPEC raises the price of crude and the very next day gas stations have raised their prices across the board. Obviously, the gas in their tanks, the gas on the trucks supplying the stations, the crude being refined throughout the US, and even the crude that’s already on supertankers being shipped across the World’s oceans haven’t been affected by the price increase. But we, the consumers, get the shaft and end up paying for what seems to be blatant profiteering from these companies.
But perhaps I just don’t understand the oil business. Tell me, then, oh dear reader, what am I not factoring in that really shows the oil companies in a better light?