Impact of International Oil Price, and Its Volatility on Profitability of Top Oil and Gas Companies: The Role of Exchange Rate, Governance Institutions, and Human Development of Their Origin Country

Abstract

In the current era, according to the floating industrial ratings, the topmost industry in the world is the Petroleum Marketing Industry. This sector has been able to earn high returns over the investment which has created more interest to determine major factors that are needed to be focused on while evaluating the profitability of the Oil Marketing Companies. This study explored whether this high return is due to the rise in oil prices or not. This would further establish if the rise is due to supply-side factors like the higher cost of production, or demand side, as supply-side factors would not lead to profitability. We also explore the role of other factors like volatility in oil prices and origin country institutional quality, human development, and exchange rate. Other factors such as GDP and stock market return of origin country were also taken as control. For this, the dataset of 24 oil and gas companies were taken for the year 2000 to 2018 from their annual reports. For regional comparative analysis, these companies are divided into 3 regions (Asia, Europe, America). The measures of profitability i.e. Returns on Equity (ROE) and Return on Asset (ROA) were taken as the dependent variable. Results from the panel regression showed oil prices seem to have a significant and positive impact on profitability (ROA), regional analysis also shows a strong and positive effect on both ROA and ROE in European and ROA of American based companies. Human development also seems to significantly predict ROE, overall, as well as both ROA and ROE of Asian based companies. Surprisingly, American-based companies seem to have a significant negative effect on human development. Other striking findings were the quality of institutions, which have a significant negative effect on profitability (both ROA and ROE) in Asian origin firms, however, this relationship was significant and positive in the overall sample. The exchange rate also seems to be negatively impacting both ROA and ROE overall as well as in the American sample, whereas it has a positive impact on the Asian sample. Lastly, the effect of oil price volatility on profitability remained inconclusive. The study confirms that the rise in oil price seems to be demand-driven, causing spikes in profitability, moreover, this profitability was conditional to the quality of institutions as well as human development in their country of origin.