Bigger is better

The number of big US oil companies has shrunk in the past five years. But for the survivors, life is terrific.

As crude oil traded at more than $42 a barrel yesterday, near a 21-year high, Exxon Mobil Corp., the world's biggest publicly traded company, reported record profits. Its second-quarter earnings of nearly $5.8 billion were up 39 percent from a year earlier. Royal Dutch Shell Group, the world's number three oil company, reported a 16 percent increase in second-quarter net income yesterday.

In a break with most historical precedents, Exxon also managed to not only reap booming profits from producing oil but also from refining and selling gasoline at service stations.

Despite pump prices above $1.90 a gallon in most of the United States, consumer demand for gasoline continues to rise, keeping industry profit margins high. Another reason, critics say, is that industry consolidation over the past five years has enabled the now larger companies to exert more oligopoly-like pricing control in the market.

''These guys are getting too big for their own good," said Tyson Slocum, research director for energy programs at Public Citizen in Washington, D.C., the Ralph Nader-founded consumer advocacy group. ''Energy prices are far higher than they would be if we had adequately regulated and adequately competitive energy markets."

For instance, Exxon Mobil was formed by the $87 billion merger of the country's number one and number two oil companies in 1999. Likewise, the predecessors of ChevronTexaco Corp. joined in October 2001, 10 months before two other rivals merged as ConocoPhillips Inc.

The result is big players control far greater market share. Over the past 10 years, the percentage of US gasoline refining capacity controlled by the top five companies has grown to 52.2 percent from 34.4 percent, helping refinery owners that hold back supply to crank up prices, Slocum said.

Last year, the five biggest US oil companies controlled 63.4 percent of the country's retail gasoline market, up from 46.2 percent in 1997, according to an industry trade publication, National Petroleum News.

ConocoPhillips, which this week reported a 75 percent increase in second-quarter earnings, acknowledged it could have made considerably higher profits had it avoided unplanned shutdowns of refineries in Louisiana and Pennsylvania. ''We did not realize the full potential of our assets in a high-price and high-margin environment," said James J. Mulva, president and chief executive.

Historically, high oil prices have often led to bigger profits for the part of companies that produce and sell oil. But the refining and marketing parts of the business usually suffer, because refineries have to buy high-priced oil and can't always pass those added costs on to consumers. It's unusual for companies to reap sharply higher profits for both parts at the same time.

Exxon Mobil spokeswoman Prem Nair declined to comment on whether the company has greater pricing power because of industry consolidation. But she noted that Exxon Mobil operates just 7 refineries in the United States and 35 abroad.

She cited Capitol Hill testimony this month by Red Cavaney, president of the American Petroleum Institute, an industry trade group, who said that ''refiners have dramatically increased the efficiency and utilization of existing refineries" but have been hamstrung in expanding refineries or building new ones because of low returns on investment and ''massive expenditures to comply with environmental requirements."

Edward Galante, senior vice president overseeing Exxon Mobil's refining and marketing business, said in a Bloomberg News interview the company is not counting on refining margins remaining high. ''Who knows what next quarter will bring?" Galante said.

But he said the company has been able to closely coordinate operations of former Exxon refineries in Louisiana and Texas with two former Mobil refineries nearby in both states, cutting overhead and improving efficiency.

Exxon said it increased its refinery output in the first half of the year to 1.82 million barrels per day, up from 1.75 million in the 2003 first half.

Robert Goodof, a portfolio manager at Loomis Sayles & Co. in Boston who owns Exxon shares, said, ''We may finally be in a cycle where refining can be a good business, and a lot of folks will think they earn excess profits, but they leave out a lot of years like 1999 when profits weren't so hot."

Jim Burkhard, director of oil market analysis with Cambridge Energy Research Associates, said, ''When we see high gasoline prices, sometimes there are people who see conspiracy theories, but the most important reason why gas prices are high is demand. It's a very simple concept," Burkhard said. ''There's no evidence that $2 gas or high gas prices have affected driving habits in the US."

Peter J. Howe can be reached at howe@globe.com.