Big Trouble for Big Oil

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Not long ago, integrated oil companies were basking in the glow of record profits. In the third quarter of 2006, for example, Exxon reported the second-largest quarterly profit ever for a U.S. company. Also last year, Exxon set a record for the highest ever annual income, with earnings of $39.5 billion.

A New Era for Integrated Oil?

Some analysts say the golden era of sky-high profits could be over for integrated oil companies. A combination of factors, including higher material and labor costs, increased competition from national oil companies, and potentially falling oil prices could dim future prospects for oil majors. The market cap for Chinese national oil company PetroChina (PTR) hovers at $446 billion, threatening some day to top ExxonMobil ($491 billion) as the world's largest oil player by market value.

With national oil companies coming on fast, U.S. energy leaders are calling on the government to take action. ConocoPhillips CEO James Mulva has joined other leaders in the industry calling on the U.S. government to create a more robust energy policy (BusinessWeek.com, 10/26/07) to help U.S. oil companies compete with national oil companies. "We don't have a national energy policy," says Mulva. "The Chinese have a very coordinated strategy that allows them to support economic growth and their standard of living."

Other analysts warn that the golden era for oil majors' profits may be in the past because oil prices could drop. "For now we're just seeing a normal seasonal wiggle and jiggle, but at some point Exxon's profits will decline, decline, decline," says Cameron Hanover's Beutel. "Ultimately this [oil] market will peak, and prices will start to move lower. Refining margins will provide some relief, but profits won't be the extraordinary ones we've seen."

Exxon: The A Student

Despite the gloomy earnings news, Exxon's vice-president for investor relations, Henry Hubble, was upbeat on a conference call with analysts and investors. "These results highlight the fundamental strength of our business and our ability to deliver superior performance," said Hubble. "We are well positioned for demand growth and continue to create value for shareholders."

Analysts like Gheit agree. He says that even when trouble arises, the world's largest oil company will be positioned to compete. "Exxon has no control over commodity prices, but it will always be the best-prepared student for whatever test comes its way," says Gheit. "It doesn't matter how difficult the test will be—it will always be at the top of the class."

Herbst is a reporter for BusinessWeek.com in New York .