Business Blog: Hoover’s Business Insight Zone

Today’s Company of the Day is Chevron.

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It’s been a good few years for the oil business. On the one hand, rapidly growing economies in China, India, and the Middle East have generated booming demand for petroleum. On the other, adverse geopolitical events (the Iraq war, unrest in Nigeria) and even the weather (Hurricane Katrina) have put a lid on how quickly the world’s oil supply can grow. The result, straight out of Economics 101, is hardly surprising: oil prices that have broken through one price barrier after another. But even $85 oil is no guarantee of growing profits for oil producers, as Chevron revealed last week. Without offering specific numbers, the California-based oil major warned investors that its profits would be down substantially for the third quarter of 2007.

Not to worry. If Chevron’s Q3 numbers turn out looking at all weak, that will be only by comparison to the record $5.4 billion in profits the company racked up in the second quarter. A key reason for the record earnings then, and the less-than-record earnings now, is refining margins. Usually, gasoline prices reflect changes in crude oil prices — not immediately or perfectly, yet within an easily understood range. But earlier this year a variety of temporary conditions, including low gasoline inventories and pinched refining capacity across the US, led to a short-term disconnect that favored big refiners like Chevron. Now crude oil is more expensive than it was, but gasoline is less expensive, and that combination cuts into Chevron’s refining margins.

Even with all these quarterly fluctuations, Chevron is still on pace to break its own profit record for the fourth year in a row. Longer-term problems could loom, especially if concerns over global warming lead to increased carbon regulations, or if it turns out that worldwide oil production has permanently peaked. For now, though, Chevron can attest that it’s a very good time indeed to be an integrated petroleum company, making money up and down the chain of production.

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