Thursday, April 10, 2008

The Oil Bubble: Mergers Ahead?

From the WSJ's Deal Journal blog:

For months now, the high price of oil has been causing a problem at oil companies: record profits but soaring costs.

The oil industry is inefficient right now. Oil companies are paying $100 a barrel for crude oil, which squeezes the profit they can earn by refining it into usable products like gasoline, heating oil and asphalt. Couple that with falling demand, as cash-strapped consumers cut back on their gas use and heating oil while a mild winter leads into a milder spring.

The result is that oil companies have cut back on how much oil they are refining. Fitch Ratings recently wrote that refineries are running at around 82% of capacity; Valero Energy’s gasoline-making units were running at just 73% of capacity. And BP, for one, told attendees at last month’s Bear Stearns oil-and-gas conference that it will restructure to reduce overhead costs by an estimated $1.5 billion a year....MORE