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How do oil companies make profit?

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Quick Answer

Oil companies make a profit by selling oil for a higher price than it costs to produce it. In financial terms, this means the total revenue of oil companies is higher than the expenses necessary to run their businesses and extract oil from the earth.

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How do oil companies make profit?
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Full Answer

Some oil companies make additional money from sources other than oil, such as investment in stocks and real estate. Specific oil company expenses include the cost of exploration to find oil reserves, drilling costs and the costs of turning oil into salable products such as gasoline.

Recently, oil company profits have declined due to falling oil prices. According to Bloomberg, a series of factors has led to a larger supply of oil than there is demand for it, forcing companies to sell oil at a lower price. In the United States and Canada, production has significantly increased following technological advances, such as hydraulic fracturing. At the same time, demand for oil in Europe and Asia has been stagnant. Disruptions of oil production in the Middle East due to political unrest have not been as severe as predicted, as of April 2015.

Despite the lower price for oil, most oil production remains profitable, according to CNBC. At $40 a barrel, only 1.6 percent of oil production does not return profits. However, companies have cut other expenses, such as starting new extraction projects, until prices return to higher levels.

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