Big Oil Profits Don't Add Up

While my college economics is a bit rusty and possibly outdated, I fail to comprehend the market forces at work in this period of economic turmoil and new record high crude oil prices that continually lead to atypical profit figures for the world's big oil companies.

Is there any other industry that directly benefits from the cost increases of their raw materials? I think not. Typical forces as a result of increases in material cost result in lower margins, at least temporarily before prices can be increased, as concurrently, marginal supply quantities are reduced or dropped off due to the new (higher) cost prohibitions for these supply sources; also driving up prices to a new equilibrium of supply and demand quantities. These higher prices force consumption cutbacks by consumers, investment in alternatives and the like, which add the the pressures of lowering demand - which in turn must (you would think) also effect profits negatively [at least in the short term].

So while I have no specialized insight into the petroleum industry and their ability to "print money" in a logically suppressed economic scenario, I still am troubled by how - even logically this increase in raw material cost, not only has no ill effects, but that it results in the opposite anticipated effect. Additionally I would love to be able to apply this "inverse cost effect" to other industries, there's a fortune to be had in consulting fees alone.

So let us over simplify the model; at $3 a gallon, let's assume that $1 a gallon is material and $1 a gallon is processing and overhead, for a net profit $1 (way over simplification, but hang with me). If my material cost instantly go up to $1.25 and my processing and overhead remains the same - they have some variable cost here, but not THAT variable in the short term [less than 6 months], so my profit is directly reduced by that $0.25 increase. Even if I could directly tie my pricing to my material cost and immediately charge $3.25 a gallon, that would leave my profits identical only assuming the demand was the same. Which in aggregate seems unlikely.

So in this simple model how do I get my profits to rise, when material costs increase, and make up for the lower sales (however small that may be)? Logically - and mathematically, if I have this right - I would have to IMMEDIATELY increase the price by a greater amount that the increase in my material cost. Isn't his price gouging? This of course only works in a product with a very inelastic demand curve - such as gasoline.

But there is something inherently 'wrong' about this from a society perspective, there is certainly no incentive for the big oil companies to work to negotiate lower material costs (unless they maintain the higher pricing levels - which increase their profits - that is gouging, isn't it?), nor are they incentived to increase efficiency or develop alternate raw materials or sources...they're already making RECORD PROFIT.

My economic understanding has passed the way of the rotary phone. Man I wish I owned a oil company.