Oil giants reap sky-high earnings

Two of the world's biggest oil companies yesterday reported record profits, even though this summer's hurricanes shut down their facilities and cut into their production of oil.

Exxon Mobil Corp. earned almost $10 billion in the third quarter, 75 percent more than it earned a year ago; Royal Dutch Shell PLC made a profit of $9 billion, a 68 percent gain. The Exxon Mobil profit was the greatest ever for an energy company and one of the highest ever for an American corporation.

But instead of celebrating, the oil companies are explaining -- or at least trying to explain -- why they made so much money and why their behavior doesn't amount to taking advantage of powerless consumers. Senate Majority Leader Bill Frist, generally a probusiness Republican from Tennessee, yesterday became the latest official to demand that oil company executives come to Washington to explain themselves.

''If there are those who abuse the free-enterprise system to advantage themselves and their businesses at the expense of all Americans, they ought to be exposed, and they ought to be ashamed," said Frist in a statement.

Mark Zandi said the outrage is misplaced. ''What is going on here isn't gouging," said Zandi, chief economist at Economy.com, a Pennsylvania forecasting firm. ''This is the normal functioning of the market."

Economists, analysts, and energy companies say there is a fairly simple explanation for the record profits at Exxon Mobil and the other big oil companies: In times of sharply rising oil prices, an oil company's revenues climb much faster than its expenses.

Crude oil yesterday sold for just over $61 a barrel, up from $46 a barrel a year ago. Oil firms immediately reap the benefits of those higher prices. On the other side of the ledger -- the cost side -- the change is more modest. Put another way, it doesn't cost an oil company more to pump oil out of an existing well, just because the market price of oil has soared. ''A lot of the big costs are fixed," said John Dorfman, a Newton money manager who invests in energy stocks.

Mark Boudreaux, a spokesman for Exxon Mobil, offered the example of Kizomba B, a major oil production project in Angola in West Africa. Exxon Mobil began pumping oil there this summer. But the company first explored the area in the late 1980s and signed a contract for production in 1994. ''We make investments over the long term," Boudreaux said. Those investments -- and the costs associated with them -- don't rise and fall with the fluctuations in the price of oil, said Boudreaux.

Oil company profits got an extra boost in the third quarter from refining, the process of turning crude into products such as heating oil and gasoline. Especially after Hurricane Katrina, the price of gasoline rose swiftly, to more than $3 a gallon. Crude oil prices climbed too, but not as quickly, which meant that the spread -- the gap between the price of crude and the price of gasoline -- got wider. Gasoline prices have since fallen to an average of $2.57 a gallon, according to the American Automobile Association, which suggests refining profits may shrink in the future.

The American Petroleum Institute, a trade group for the oil industry, points out that oil company profit margins historically have been in line with the average for all American industries.

So far, the oil companies are not winning the battle for hearts and minds in Washington. Earlier this week US Senator Hillary Clinton of New York became the latest Democrat to call for the government to collect more money from oil companies -- she suggested $20 billion a year -- to be spent on consumers and energy research. US Representative Edward J. Markey, Democrat of Malden, yesterday laid the nation's energy problems at the feet of the Republicans. ''GOP used to stand for Grand Old Party, but now it stands for Gas and Oil Party," Markey said in a statement.

But Republicans are also critical of the oil firms. Tuesday, House Speaker J. Dennis Hastert called on oil companies to ease the burden on consumers and use more of their profits to boost production.

Oil firms have increased their spending on exploration, said Zandi, but the payoff from those investments could be years away.

In the case of oil companies, politicians appear to be in step with their constituents. In October an opinion survey by the Pew Research Center found that 72 percent of those polled had an unfavorable view of oil companies. That was up from 65 percent in March and 58 percent in 2001.

Charles Stein can be reached at stein@globe.com.