The average spot market price for West Texas Intermediate (WTI), a reference grade of U.S. crude oil, was up 9.5% in 2007 compared to 2006, while the New York Mercantile Exchange (NYMEX) futures price for WTI approached $100 per barrel (p/b) in December 2007. Refinery capacity utilization rates approached 90% or more for much of the year, while oil supply disruptions from Nigeria, Venezuela, and the Persian Gulf remained both a threat and a sometime reality. As the strength of product demand began to weaken in the latter stages of the year, responding to high petroleum product prices as well as a possible slow down of economic growth, refinery margins began to narrow, suggesting that the companies were less able to pass through the increased cost of crude oil to consumers. However, even in the face of uncertainty and weakening markets, the oil industry enjoyed record revenues and profits in 2007. In 2007, the oil industry recorded revenues of approximately $1.9 trillion, of which 78% was accounted for by the five major integrated oil companies. Profits for the industry totaled over $155 billion, 75% of which were earned by the five major oil companies, with the largest, ExxonMobil, earning over 25% of the total profit. Although the financial results for the industry were at record levels, the performance of different sectors of the industry varied, as did the performance of individual companies within those sectors, leaving some firms as relative under-performers compared to the industry leaders. This report analyzes the industry's profit performance in 2007. While recent profit levels in the oil industry are of interest to policy makers, investors, and analysts, among others, the financial results of 2007 should be put in a longer term perspective to understand the performance of the industry. For example, as recently as 2002, the financial picture in the oil industry was far different, with declining earnings in key sectors, such as refining. The oil industry historically has been cyclic, with periods of high earnings often followed by sharp declines, driven by movements in the world price of crude oil. For this reason, projections of future industry performance, based on current performance, are unlikely to be reliable. Integrated oil companies operate in both the upstream (exploration and production) and the downstream (refining and marketing) segments of the industry. Among the integrated oil companies listed in Table 1 , the five largest companies are usually identified as the major oil companies, or the super-majors. ExxonMobil is the largest such company; its profits in 2007 were over 90% of the profits earned by both of its largest international competitors, Royal Dutch Shell and BP. Revenue growth among the integrated oil companies in 2007 was driven by increases in the price of crude oil, especially in the last two quarters of the year. Even though five of the nine companies experienced a decline in oil production, and one of the nine experienced a decline in natural gas production, as shown in Table 2 , their revenues increased on average by 7.1% in 2007. With output declining, it is likely that revenue growth was based on increasing prices. Two profit rates, return on sales and return on equity, are presented in Table 1 . In a report that appears periodically, most recently after the oil companies announced their third quarter earnings in 2007, the American Petroleum Institute (API) compared the returns earned in the oil industry to other American industries. The API comparisons are based on returns on revenue. They found that the oil and natural gas industries earned 7.6 percent on revenues, compared to 5.8 percent for all U.S. manufacturing industries. Although this result implies a 31 percent margin over the returns earned by all U.S. manufacturing industries, it is less than the 9.2 percent earned by all U.S. manufacturing industries excluding the automobile and auto parts industries, that had a negative 26 percent return for the third quarter of 2007. Calculating return on revenues dilutes the effect of growing total profits of the oil industry due to higher prices and growing revenues, another standard percentage measure of profitability, return on equity, is presented in Table 1 . This measure indicates the success of the companies, and industry, in earning profit by utilizing the invested capital of the owners, i.e., the shareholders of the company. This measure is widely used by investors and financial analysts in evaluating the performance of firms seeking access to capital markets. By this measure, the integrated oil companies returned 22.7% in 2007, over twice the return on revenue. The industry leader, ExxonMobil, earned 33.4%. These rates of return are likely to assure these firms', and the industry's, position as a desirable investment as long as the price of oil remains high. Table 2 and Table 3 separate the upstream and downstream performance of the integrated oil companies in 2007. Table 1 and Table 2 show that upstream net income growth led overall corporate net income growth for most of the companies, and they earned almost 80% of their total net income from upstream activities. Oil and gas production declined for each product, almost 3% in oil, and less than one half of one percent in natural gas. Four of the five largest oil producers had declining output. In natural gas, only BP and Shell experienced declining output in 2007. Table 3 presents financial results for the downstream activities of the integrated oil companies for 2007. Net incomes declined by more than twice as much as product sales, suggesting that profit margins per barrel of crude oil refined had declined. In the fourth quarter of 2007, only ExxonMobil and ConocoPhillips were able to produce positive net income growth, with all the other firms showing negative net income growth, or in the case of BP, financial losses from downstream activities. Crude oil prices increased rapidly during the second half of 2007, and reached over $110 per barrel in March 2008. During this period gasoline price increases were thought by many to have lagged behind crude oil price increases. A potential weakening of the demand for gasoline in the United States was thought to be responsible for the lag. With a perception of weakening demand, passing through cost increases to consumers was not thought to be economically feasible. The result was a decline in refining margins. Table 4 presents data for 2007 for the independent oil and gas producers. Although they are large companies, with revenues of more than $10 billion in 2007 for the industry leaders, their total revenues are only about 5% of the integrated oil companies. Their net incomes, however, were approximately 15% of the net incomes of the integrated companies. Although all of the companies in this category experienced increases in revenue, six out of ten experienced negative net income growth. All of the companies, except Andarko and Newfield experienced increases in production of oil and natural gas, or both. With prices for both oil and natural gas rising late in 2007, these companies seemingly should have performed better with respect to net income growth. A possible explanation for the declining net income experienced by some companies might be the large outlays the companies made investing in unconventional oil asset exploration and development. Many of these companies are involved in shale oil work in Texas, Arkansas, and South Dakota. Valero is the leading firm among the group of independent refiners and marketers. Valero accounted for over one half of the sector's revenue, and two thirds of its net income. Valero is the largest refiner in the United States, with a total capacity of over 2.2 million barrels per day, approximately 13% of the total U.S. capacity. Independent refiners experienced the same pressure on refining margins as the integrated oil companies. The difference was that these companies produce no crude oil and therefore were not positioned to take advantage of the increases in the price of crude oil during the second half of 2007. The severity of the economic pressure on refiners in the fourth quarter of 2007 is shown in Table 6 . Although revenues for the group grew by 53.4%, net incomes declined by two thirds. Four of the seven companies in the group not only had negative growth in net income in the fourth quarter of 2007, but generated losses from business operations. Valero, the sector's leading firm, earned 53% of the revenue, but fully 97% of the earned net income. Not only was the cost of crude oil rising for the independent refiners, but relatively weaker demand conditions made it harder for the firms to quickly pass cost increases on to consumers. Valero was able to remain profitable because it was able to purchase and utilize lower cost heavy, sour crude oil at its refineries. Crude oil prices spot prices reached $110 per barrel in the first quarter of 2008. Should the price of crude oil remain at, or above, $100 per barrel for large portions of the year, the profits of oil producing firms should be high. However, the economic conditions will likely be difficult for firms that refine crude oil, but do not have their own supplies. It is likely that a greater effort will be made by refiners to adapt technologies that allow them to use heavy, sour, oil stocks. These lower quality crude oils are more readily available than high quality oils and sell at a price discount relative to the reference oils, West Texas Intermediate, for example. Another key factor in the industry's profitability is whether demand for petroleum products continues to grow in the United States and the rest of the world. U.S. gasoline demand is arguably beginning to weaken as a result of high prices. Some projections see $4 per gallon gasoline in the second and third quarters of 2008. While prices at that level might allow refiners to recover the cost of crude oil, they might also reduce demand, putting downward pressure on price. Demand for petroleum products outside the United States remains strong, and will likely remain strong as consumers in developing nations use their higher incomes to fuel additional consumption. A world-wide economic slowdown is the most likely factor that would lead to slower demand growth.