How oil majors are affected by crude prices—and why refining is a different business

When drivers see gasoline prices climb at the pump or read headlines about crude oil surging, they often assume every company in the energy sector is making a windfall. In reality, the oil and gas industry is divided into specialized layers that react very differently to commodity price swings.

The largest Western energy companies, Exxon Mobil (XOM) and Chevron (CVX), are known as integrated majors. Unlike pure-play drillers that only pump crude out of the ground, or oilfield service firms like Schlumberger (SLB) that get paid to help drill and maintain wells, integrated majors own the entire supply chain—from deepwater oil fields to oil refineries and petrochemical plants.

Upstream vs. downstream: A built-in hedge

To read an energy company’s financial statements, it helps to break the business into its three traditional parts: upstream, midstream, and downstream.

• Upstream (Exploration and Production): This division finds and extracts crude oil and natural gas from underground reservoirs, such as the Permian Basin in Texas or offshore fields in Guyana. Upstream profits are directly tied to global oil and gas prices. Once a well is drilled, the ongoing cost of pumping barrels is relatively fixed, so every extra dollar in the price of crude flows mostly to the bottom line.
• Midstream (Pipelines and Storage): This segment moves raw oil and gas from fields to processing plants via pipelines, tankers, and liquefied natural gas (LNG) terminals. It acts like a toll road, earning steady fees based on volume.
• Downstream (Refining and Chemicals): Refineries buy crude oil and heat it to separate it into gasoline, diesel, jet fuel, and feedstocks for plastics. Because crude oil is a refinery’s main raw ingredient, higher crude prices actually raise a refinery’s input costs.

What the crack spread tells you about refining

Because refineries buy crude oil and sell finished fuels, their profitability does not depend on the absolute price of oil. Instead, it depends on the crack spread—industry shorthand for the price gap between a barrel of raw crude and the refined gasoline and diesel

Sometimes crude oil is cheap, yet a shortage of refining capacity keeps gasoline and jet fuel prices elevated; in that environment, Exxon Mobil’s and Chevron’s upstream drilling divisions might struggle, while their downstream refineries generate massive cash flow. Conversely, if crude oil spikes because of geopolitical tensions while consumers cut back on driving, refining margins get squeezed even as the upstream drilling business booms. Owning both sides helps smooth out earnings over a full economic cycle.

Capital discipline and the breakeven price

Oil and gas extraction is a depleting business. Every barrel pumped out of a reservoir reduces the remaining reserves, forcing companies to spend billions of dollars on capital expenditures (CapEx) each year just to keep production flat. During past oil booms, energy companies frequently overspent on expensive mega-projects, leaving them saddled with debt when oil prices inevitably crashed.

Today, investors judge companies like Exxon Mobil and Chevron primarily on their breakeven price—the price of a barrel of oil required for the company to cover both its capital spending on new wells and its cash dividend to shareholders. By concentrating on lower-cost shale basins, deepwater discoveries, and automated drilling technology provided by partners like Schlumberger, majors aim to keep their breakeven costs low enough to protect their dividends even during global recessions.

When analyzing an oil major, look beyond the daily price of crude. Check the company’s cash flow statement to see how much free cash flow remains after capital expenditures, how well its refining and chemical units are offsetting upstream volatility, and whether debt levels remain conservative enough to weather the next downturn.