[ex-snook]

The puzzle to be investigated is that when costs go up profits are expected to go down. But when the cost of a barrel of oil is around a record high and profits are at a record high inquiring minds would like to know the economics here so their firms can do likewise.

[pgkdan]

But when the cost of a barrel of oil is around a record high and profits are at a record high inquiring minds would like to know the economics here so their firms can do likewise.

That's because prices are set at replacement cost. If you have tanks full of product that cost you $40.00 to buy and your costs go up to $60.00 a barrell you have to price that $40.00 a barrell product high enough to replace it with $60.00 product. When you do that your profits will be huge, temporarily. Conversly when you have tanks full of $40.00 product and the market goes to $10.00 a barrell you take a bath on that $40.00 product. That happened to "Big Oil" 2 years ago...I didn't see Arlen Spectre looking to help out profit starved Exxon Mobile back then.

[Phantom Lord]

Here is one component of profits rising with costs rising. It is costs $3 a barrel for extraction of the oil and it is selling on the market for $15, then there is a $12 profit. The market price for a barrel jumps to $70. But the cost of extraction does not rise. Profits immediately rise.

Also, if the company maintains the same profit margin their profit goes up as well.

If Company A has expenses of $1MM to produce their product and has a 10% profit margin, they profited $100K. Now due to market conditions, the expense to produce the same product goes to $2MM and they maintain their 10% profit margin, their profit is now $200K.

[Spirited]

Oil companies who run at about an 8% margin should copy Microsoft and run a roughly 30% margin without getting called on it.