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Sorry for taking so long to respond to your question:

How much does it cost "big oil" to buy its oil?

The oil companies I cover typically don't do much hedging. When they do, they hedge the selling price rather than the purchase price. Hess has lingering hedges on its books that result in it selling at prices that now look ridiculously low:

The company has 24 thousand barrels of oil equivalent (mboe) of daily production hedged at costs between $25.56 and $26.90 until 2012. To date, expired hedges have had a cumulative after-tax deferred cost of $2.1 billion...

Some of the independent exploration and production companies hedge (e.g., Chesapeake Energy hedges material amounts of its natural gas production.)

There does appear to be a bit of a misconception in the question following your comment though. Big oil companies don't sell any oil to us. The oil business actually has two primary segments -- upstream and downstream. Upstream refers to exploration and production (E&P) activities. Downstream refers to refining and marketing (R&M) activities. There is also a smaller part of the business that's not referred to all that frequently -- midstream.

More specifically, E&P refers to searching for and finding oil and extracting it from the ground. R&M refers to refining oil (essentially boiling it and cracking the related molecules) and marketing (your local gas station).

Big oil companies are referred to as integrated companies because they have upstream and downstream operations. There are some companies that are only in the upstream segment and some only in downstream. Some downstream participants only have refining operations.

It's important to note that integrated oil companies (IOCs) do not necessarily refine the oil they produce. Since it can cost a lot to ship oil, refiners try to minimize costs by refining oil that's closest to their physical location. In the present environment, IOCs are generating lower returns from their downstream business because they are paying market prices for oil and realizing only a small "crack" spread. Some of the smaller IOCs hedge prices but I haven't come across references indicating the larger ones I cover hedge.

Refiners can also profit by refining lower quality oil. They pay less than the price we see quoted for such oil (The $130+ WTI you read about in the news every day.) There is a bigger capital investment required to refine such oil, so you earn a better return to help compensate for that, as the byproducts are relatively similar under either process.

As for your comment about Southwest, I read recently that it is still benefiting from its hedging activities. It has a much stronger balance sheet than most (if not all) other airlines, so it has been able to keep fuel costs down by hedging its future needs.

I hope this is helpful. Let me know if there are more questions.

Phil
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