Should the Oil Industry Make a Profit?

April 30, 2008— -- The price of gasoline has never been higher, with many Americans feeling the pinch on their wallets. But not those who own stock in oil companies.

As soaring gas prices have turned into massive profits for big oil, the shareholders of these companies are cashing in. And if you own a mutual fund, that may even be you.

BP yesterday reported a staggering 63 percent surge in first quarter net profit to $7.6 billion, and Royal Dutch Shell posted a 25 percent increase to $9.1 billion. Last week, ConocoPhillips reported a 16 percent rise in net income to $4.1 billion.

The earnings bonanza is expected to continue when ExxonMobil and Chevron report earnings later this week.

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But is there anything wrong with that? Isn't earning a profit the American way?

Robert Strom, director of research and policy at the Ewing Marion Kauffman Foundation, which works to advance entrepreneurship, could not speak directly about oil companies but pointed out that profits are the driving motivation behind most business ventures.

"In a market economy, production is driven by a profit motive," Strom said. "If I'm an entrepreneur and I'm starting a business and there's no prospect of me making a profit, there is little, if any, reason for me to undertake that activity."

The same can be said for existing companies looking to launch new production or make innovations to existing technologies.

For its part, the oil industry concedes that the oil companies are making lots of money, but Rayola Dougher, senior economic advisor at API, the industry's trade and lobbying group, said those companies are also spending billions and billions of dollars.

"That's just one part of the story. They are earning a fortune. That's tens of billions of dollars. But they're spending hundreds of billions getting the product to market," Dougher said.