Does Big Oil's Apathy Justify Proposals to Tax Windfall Profits? 71 comments
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Crude Oil's relentless march towards the near term spike target of $150 is now threatening to send the Global Economy into a recession. Big Oil companies (Exxon-Mobil (XOM), Chevron (CVX), Royal Dutch Shell (RDS.A), BP (BP) and ConocoPhillips (COP)) are in the thick of the controversy as the rising price of oil has seen their profits sky-rocket. Congress smells an opportunity to cut the Federal Deficit and score election year brownie points, and is pondering legislation to impose windfall taxes on Big Oil companies. As expected these bills did not garner enough support to even get to a vote in the Senate and break the Republican filibuster.
Many conservatives and pro-business commentators are aghast at the thought of taxing excess profits. Big Oil companies have increased their public relations campaign against any windfall taxes. Their supporters point out the following:
1. The profit margins of Big Oil companies are not very high compared to other large corporations. Karl Rove recently published an opinion piece in the Wall Street Journal where he dismissed the claims of excess profits by focusing on the fatter profit margins in the technology industry (between 14.5% and 27.5%) versus those in Big Oil (8.3%)
2. Big Oil companies control just 10% of the world's crude supply. They buy the rest of the crude in the open market and pay market prices.
3. Taxing Big Oil profits will deter them from making future investments in developing new fields which will further exacerbate the supply squeeze.
4. And finally the fundamental principle that in a capitalist society, the government has no business to determine how much profit is too much.
In this article I will explore the broader context in which the oil industry operates with a focus on our Government's energy policies.
Energy Security and International Politics
Energy security is one of the cornerstones of any major nation's military and foreign policy. In the early part of the 20th century the discovery of easy to extract oil within the US, and the adoption of the internal combustion engine, meant that oil became a cornerstone of US energy security. Oil is easy to extract, convenient to store and transport, has a high energy density, and allows vehicles to go hundreds of miles before a fill-up. Americans love their automobiles, and for a long time, the fate of US economy was closely associated with the fate of Detroit's automobile industry.
As the American economy expanded, the gap between demand and domestic production started widening and secure access to foreign sources of oil became a corner stone of our foreign policy. The Middle-East with its vast oceans of oil has been a focus of our foreign policy since WW-II.
As early as 1953, the CIA's station in Tehran, headed by the grandson of President Theodore Roosevelt, Kermit, led the effort to oust Iran's Prime Minister Dr. Mosaddeq, when he threatened to nationalize Iran's oil resources. After the 1970s oil shock and the Islamic Revolution in Iran in 1979, Saudi Arabia flooded the world with inexpensive oil in exchange for our military umbrella. Saudi supply kept oil prices depressed affecting countries like Iran and the Former Soviet Union. The financial shock of oil at $20/barrel helped get the FSU, a major energy exporter to her knees; they could not keep up with President Reagan's strategy to spend big on strategic initiatives, leading to the eventual collapse of the FSU.
Today Indian and Chinese oil companies are jockeying for drilling rights all over the world, often bidding up the price of fields. China has been turning a blind eye to Human Rights violations in many parts of Africa, as they rush in to lock in access to oil and other basic materials.
Worldwide more than 80% of oil resources are nationalized; oil continues to shape the economic, foreign and military policy all over the world. Only the truly ingenuous will pretend that oil trades in a free-market and governments have no role to play in it.
Energy Policy: Captive Market for Oil Companies
Our domestic government policy has created a situation, where Big Oil companies have a secure, captive market for their products. Our policies, heavily favors the use of oil based private means of transport versus public mass-transit systems.
We have a nationwide highway system which brings a huge country together. However, passenger trains are neglected; Amtrak continues to be on life-support depending on Congressional bail out every few years. Unlike Europe where trains are the primary means of travel between cities, we prefer to fly even along the densely populated North Eastern sea-board. Our system is a lot more energy intensive compared to other parts of the developed world.
Congress provides a variety of subsidies, both direct and indirect, to keep our oil based transportation system rolling. Whether it is investments in highways (versus rails) or tax subsidies for oil companies, our policy is focused towards an oil based economy.
In the past there was little government support for alternative energy systems which would wean us away from our oil based economy. California took the initiative to legislate the use of electric cars, but without any Federal support and an unsupportive automobile industry, the initiative died a slow death. Subsidies to encourage the use of photo-voltaic solar cells lag those in Western Europe; the solar industry has to battle it out continue subsidies every year or two.
Though the US was a pioneer in the development of nuclear technology, our policies have not encouraged the use of nuclear power and no major plant has been built over the last three decades. This is in contrast with France which gets about 80% of its electric power from nuclear plants.
Thanks to the decades of government driven investments in the oil based infrastructure, changes in energy usage pattern require will take a lot of time to happen. As oil prices rise, Americans living near metropolitan areas can alter their lifestyle to reduce their use of the automobile. However, rural America will continue to have a dependency on the automobile. Rural areas have a low population density which makes mass-transit unfeasible; plus the distances are vast and require a personal vehicle
Our way of life depends on oil, just as human beings need air, water, and food to survive. As long as Big Oil can find and distribute oil, they are guaranteed to make a profit on every gallon sold. Big Oil's role in the economic landscape is more akin to a grocery store distributing staples, than technology companies producing discretionary items.
Big Oil and Exploration Risks
A major task for Big Oil companies is exploration, and development of new oil fields. However, over the past few decades, Big Oil's share of world-wide oil production has rapidly declined and now stands at 10%. Clearly, Big Oil is in not investing enough in discovering new resources.
A bulk of Big Oil's capital expenditure goes into finding new ways to extract oil from existing oil fields. While soaring oil prices lead to big profits for Big Oil, the total expenditure on exploring new oil fields went up to just $10B in 2006 compared to $6B in 2003 even though the replacement rate of oil reserves has been plummeting and has fallen below 100%.
One reason that Big Oil is unable to invest in exploration is the strong presence of nationalized oil companies which now control the exploration rights. However, many times nationalized oil companies from other major importing nations like India and China, bid for drilling right in foreign lands, and Big Oil rarely, if ever comes into the picture. Even within the US, Big Oil companies are drilling on a fraction of the Federal land they have drilling permits for; only 28% for on-shore permits, and an even lower 20% for off-shore permits.
Big Oil companies are now content in acting as processors (refinery) and distributers of oil based products, rather than pioneering explorers who invest a large amount of resources in finding new fields.
Big Oil: Microsoft or Safeway?
Comparing the profit-margins of Big Oil with those of large technology companies like Microsoft (MSFT) is not fair. After defense, oil industry gets the most assistance from our government. American soldiers put their lives on the line every day in Iraq to ensure our long term Energy Security and help Big Oil. Microsoft loses Billions of dollars due to software piracy but we do not hear any news about our Armed Forces invading another country to prevent software piracy!
Currently Big Oil is operating in the grocery store model where they process and distribute oil, but do not take much risk in the process. Why shouldn't the profit margins of Big Oil be like those of grocery stores (low single digits)?
Big Oil and Alternative Energy
Another area where Big Oil has severely underinvested is the Alternative Energy area. Exxon-Mobil has pledged to spend around $10M/year for the next ten years to spur Research and Development in renewable resources. To put this number in context, Exxon-Mobil spent $31B in stock-buybacks and paid its CEO in excess of $50M last year. Their entire renewable energy budget is five times less than the CEO's annual compensation!
In fact Big Oil is spending more money in ad campaigns which will help build their green credentials, than they spend on efforts to develop renewable energy. The irony of the situation is not lost to a few of Exxon-Mobil's largest shareholders, the members of the Rockefeller family. They recently proposed changes to increase Exxon-Mobil's focus on increasing investments in renewable energy, and lowering emissions, but the resolution failed to pass at the annual shareholder meeting earlier this summer.
Pay-back Time?
As a strong believer in free markets I also agree with those who are aghast at the prospect of the Congress determining profit margins. Though I do find the idea of windfall taxes abhorrent, a deeper look at the structure of the new bill reveals something less ominous.
The proposed Consumer-First Energy Act would create a 25 percent windfall profits tax on companies that don't invest in renewable fuels or electricity production. It also would zero out some $17 billion in tax breaks for the oil industry and use the revenue to help consumers by investing in an Energy Independence and Security Trust Fund.
Big Oil has taken very little initiative to either strengthen our energy security by investing in exploration or pursue alternatives which will reduce our dependency on foreign oil. The bill will force Big Oil to invest in renewable energy resources to reduce our dependency on foreign oil, or lose out on recently granted subsidies and pay a larger percentage in taxes.
It is indeed a sad day when we need Congressional laws to force Big Oil to help alleviate our energy crisis. The US government has spent billions of dollars to help Big Oil function and thrive; our Armed Forces have made immense sacrifices to provide access and security to Big Oil operations; our domestic policies guarantee Big Oil a captive market; government subsidies provide Big Oil with billions in tax breaks. However, even their major shareholders like the Rockefeller's feel that Big Oil needs to do more in return; investing 20% of its CEOs annual pay in renewable energy research is just not enough. By completely ignoring their social and patriotic responsibility, Big Oil has pushed things too far.
Big Oil was asking for it; they are now going to get it.
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This article has 71 comments:
Since when does Congress want to cut the federal deficit? Under Obama the deficit is going to double to $1 trillion: moneynews.newsmax.com/...
Once you start with that kind of 'windfall crap' you will never stop. It will dampen investment in many areas because companies will simply not take on risks only to get later excessively taxed once the money starts flowing. it's very similiar with mining.
but then again, govts are alsways very quick when it comes to collecting money on any grounds. but framing a well-thought energy policy and SPENDING something on it will surely come only very much later.
the price will be paid by the people and by the oil companies which already contribute a mammoth share of tax revenues. what about windfall taxes for farmers who get rich on the ethanol idiocy?
If "Big Oil" has such tremendous power to control oil prices, why haven't they done so in the past?
The world was awash in oil in the 50's. Oil companies were having gas wars, putting air in tires, washing windshields, checking the oil, giving green stamps and free glass ware in an attempt to obtain business. In my graduating class of 132 geology majors, only two were offered jobs in 1958.
The oil bust of the 1980's resulted in over 600,000 people losing their jobs and hundreds of oil related companies going out of business.
Does this sound like something that was being controlled?
The treatment of alternative energy investments by oil companies is slanted by addressing only ExxonMobil. XOM has believed alt energy isn't profitable, so has opted to have only a small investment. Other companies such as Royal Dutch Shell, BP and Chevron are more aggressive. A recent WSJ piece outlined RDS and CVX investments in algae oil production, CVX has a joint research venture with Weyerhauser developing ethanol from wood products waste, the worlds largest geothermal electric plant is run by Chevron.
The claim that oil companies operate in a grocery store model and don't assume much risk is ridiculous. When's the last time Safeway had to worry about Venezuela seizing its assets? When Safeway places a food order, they can expect delivery. Not so when an oil company drills a well.
The author also repeats the latest anti-drilling spin / talking point about oil companies not drilling on the leases they have, but fails to present any information about why those leases aren't being drilled. In many cases, the non producing leases are being explored, in some cases they don't contain economically recoverable amounts of oil and/or gas. In other cases, exploration is scheduled. In still other cases, companies are waiting or fighting environmental groups for the drilling permits. The spin that companies are sitting idle on oil rich leases is simply untrue.
I have no problem with ending government subsidies to oil companies or any other industry. But, recognize that increasing oil company's costs will increase the price and reduce the availability of energy.
A 'windfall profits' tax that doesn't define windfall profits and that tries to direct the business activities and investments of private corporations is horrible policy whether directed at oil companies or any other industry.
Disclosure: Long Chevron
Good Luck!
Cheers!
Given that our economy, our security, our lifestyle, and in fact our very survival is 100% dependent on oil, and given that we're out of oil as a condition of the future, it strikes me that we had better get damned busy, damned fast, figuring out what comes AFTER oil. Yet ALL of our policies, ALL of our tax structures, ALL of our government spending are expressly and purposefully designed to keep us 100% dependent on the very thing that we need to wean ourselves off of.
We can paint all the frosting we want on this pile of horsesh*t, but that's never going to turn it into a cake. Much as I would love to see some sort of perfect capitalist world where the markets take care of all of this, that ain't gonna happen in a world where every economy, including the United States', is centrally planned. So it seems to me that we had better start constructing an energy policy that promotes vigorous domestic exploration & production of oil and that funnels some significant portion of that money into nuclear, solar, wind, geothermal, biomass, and other alternatives for power generation, aggressively subsidized development of alternative fuels for transportation, and a radical re-focusing of urban & regional infrastructure to promote effective, realistic mass-transit.
This is THE national security issue, today, tomorrow, and for the next two generations. If we don't tackle this, starting now, the next two generations are probably the last.
oilismastery.blogspot..../
I'd hardly call 300 trillion barrels of proven reserves a "shortage."
www.nasa.gov/centers/j...
Second and even more obvious is that the author only points out China's ambition to find oil, how about the amount they are using? China and less so India, are at the start of there industrial revolution, meaning that the demand or oil is growing and at a rate much quicker than we can possibly find new supply. The trend over the last decade is increasing demand and decreasing supply- did anyone expect prices to go down? The problem is many other countries are subsidizing their oil imports so the consumers are feeling the impact and therefore not altering their behavior. No matter what we do here legislatively, we will have little impact on the oil price of oil in the world (in the short term).
I do agree that a comprehensive long term energy plan needs to be established and enacted ASAP, and building about 20 nuclear plants should be the start.
thefitzman.blogspot.co...
1. I do not think anyone doubts that it is our government policies which have made us dependent on oil (and Big Oil), and Big Oil has had a big part in shaping them. Further, once we became dependent on oil, we backed Big Oil's international interest with the full faith and power of the United States, and the blood of thousands of our soldiers. How does Big Oil (and their shareholders) compensate the United States for the benefits they get?
2. Some posters have asked why Big Oil should invest in non-oil based resources, instead of looking after their shareholders? The answer is simple: The United States policies ensure tat Big Oil makes a profit on every gallon of gas they sell, or every barrel of crude they process. Big Oil not only understands energy but they also have the capital to develop renewable technologies. I find it ironical that a company like Google is spending tens of millions on dollars to spur development of inexpensive solar power, while Big Oil spends more in ad campaigns to promote their green image then they spend on renewable energy.
3. To the poster who commented about ExxonMobil's taxes: Exxon will not pay more than 35% corporate tax rate. With depreciation etc., figuring out the true tax bill requires an army of accountant and sometimes they to do not get it right (remember Enron?). When it comes to taxes and credits, Big Oil has a sweet deal with a lot of credits, low royalty rates on oil collected from Federal land etc. When was the last time Congress authorized $17B in tax credits for any industry? Read more here:
www.wnbc.com/news/1613...
4. To the posters who commented on how high prices will spur renewable energy development: I completely agree with you. What I (like the Rockefeller's) feel, that Big Oil should play a part in footing the bill for developing renewable energy. They make tons of money thanks to our Energy policy and when that policy is in trouble, shouldn't they help us overcome. Of course, they should have contributed to avoiding that in the first place, but we are talking Big Oil right now; the jet-fuel allowance on ExxonMobil's executive planes will most likely be more than their spending on renewable energy ($10M/year).
In the history of the modern US, I doubt that there has been an industry which has taken so much (from the GOTUS), but given so little back (except to lobbyists and politicians).
To the poster who commented about the taxes which Big Oil paid: a lot of those are royalties paid to the Federal Government for the oil they get to sell.
The average American would have been enjoying better wages, a lower and greener energy bill, and a better quality of life, if Big Oil had supported renewable energy. Big Oil is reaping immense profits from their control over our energy policies, and it is time they pay up.
Toyota DID sell the Rav4-EV to their leasing customers. Those vehicles are still running around mostly in CA. These are fully featured vehicles with heat and air conditioning and a 100 mile range after all these years. Several of them have over 100K miles on the original battery and nobody seems to know when the battery will quit.
Panasonic and Toyota were sued by Chevron to force them to quit building the RAV4-EV batteries after Chevron got the patent and Toyota paid several million dollars in penalties - I think it was $30M or so.
The EV isn't for everyone. It would work for all but two of the people in my family and circle of friends. One expert said that a 100 mile EV would work well for 80% of Americans. Might not work for really cold environments. Might not work for people in large metropolitan areas where their commutes are across three counties. But it would work for alot of people. I have heard all sorts of arguments against EVs. Can't tow a boat, can't survive in Michigan winters, can't go cross country, can't haul six people, can't - - - and the list goes on. Of course there are many cars which can't do some of those things. Nobody pulls a boat with a Porsche 911. Nobody drives a Corvette through the slush, salt and snow of Michigan winters if they can help it. People can't haul all their friends and family on their Harley-Davidson either but we still have the option to buy specialized vehicles like this.
What will happen is right before a grassroots movement takes off the car makers will suddenly arrive with a commercially built version. GM is trying to leap frog the competition with a plug-in but I think even they are starting to see enthusiasts who are building EVs out of quite normal vehicles like Civics and Beetles with good performance, durability, and range. I'm not talking about cars carrying 1500 lbs of lead batteries and powered by a spare fork lift battery. I mean some of the advanced ac propulsion systems with lithium batteries. These people pay a high price for their components but that price would be quickly pushed down with manufacturing economies of scale and more competition between brands but us consumers aren't supposed to notice that. We can travel to the moon, live in space stations, carry cellphones that last for days on a charge, use computers that fit in a person's hand but connect the web, play videos and music but somehow the car makers can't build a 100 mile range EV of a usable size and weight like the RAV4-EV. Hogwash.
We NEED (read MUST) invest in our infrastructure so that solar is on every roof big and small, wind is used wherever is is best suited, and the electric grid can use this energy better. This needs to move from a grassroots campaign to a federal requirement. Use solar so that when our cooling need are the highest and our offices and factories are using the most power, they are being supplemented by rooftop solar. The energy saved can then be used at night to charge commuter vehicles. The federal gov't has stated that they have found that the existing grid has enough spare capacity to charge 20M electric vehicles at night. Of big oil wouldn't want us to do it. Some of the car makers might not like it either when you consider how much complexity would be left out of the average car. Think of how little maintenance would be left for repair shops!
I can assure you that when my boys are grown, if our gov't comes to draft my boys for a war in some far off land to root out "security risks" that are obviously a resource grab in a resource rich country like our current situation in Iraq then they can keep looking for suckers at another address. My boys will not fight for oil, coal, or other resource that big companies want to keep our economy dependent on. I'll leave the country before I'd let our gov't do that b/c we have too many alternatives, too much technology to continue on reliant on oil and taking the lives of young soldiers/sailors/airme... to power our modern suburban lifestyles.
To stanr, I understand that Exxon paid enormous taxes and duties, but it's awfully convenient that they aren't required to pay the full $2.5B settlement to the people of Alaska for the Valdez oil spill nearly 20 years ago, but instead are obligated to only $500M. That's a $2B gift! *rolling eyes* The money that they did spend in clean up and mediocre settlements was a drop in the bucket to XOM, but a huge loss to the Alaskans, IF they are EVER compensated.
XOM and Big Oil in general should be required to put 'x' amount (certainly more than $10M) into researching and producing alternative fuels. They will be able to recoup the profits when the alternative fuel starts being mass produced and the weaning from oil begins.
“Through 1972, Americans had become accustomed to expanding energy consumption with minimal concerns about the constancy of supply or sharp price escalations. In 1973, however, expectations about energy supply changed dramatically. The turmoil started early in 1973, as customers experienced electricity brown-outs and rapidly rising prices for fuels and other necessities.”
From Daniel Yergin’s Pulitzer-winning “The Prize: The Epic Quest for Oil, Money and Power” (1991)
“Yet Hydrocarbon Man shows little inclination to give up his cars, his suburban home, and what he takes to be not only the conveniences but the essentials of his way of life. The peoples of the developing world give no indication that they want to deny themselves the benefits of an oil-powered economy, whatever the environmental questions . And any notion of scaling back the world’s consumption of oil will be influenced by the extraordinary population growth ahead.”
From ExxonMobil’s 2008 Annual Report (“Long-Term Business Outlook 2008-2030”)
“Oil, gas and coal are expected to remain the predominant energy sources with approximately 80 percent share of total energy. These well-established fuel sources are the only ones with the versatility and scale to meet the majority of the world’s growing energy needs over the outlook period.”
Adage
“Those who fail to learn from history are condemned to relive it.”
Secondly, the oil companies face an extraordinary situation at home and abroad whereby all of the leases and contracts are subject to unilateral cancellation and renegotiation. No Government in the world can be counted on to be true to their word or their contracts. Unilateral nationalization without compensation is becoming the rule. Blasting companies for being cautious in this environment shows an alarming lack of objectivity. Even Obama is proposing canceling oil leases currently in effect. No democrat is willing to admit to the amazing technological innovations in the oil business, nearly all of them the result of American corporate efforts (horizontal drilling, offshore technology, more efficient refineries, etc.).
Third, a trillion dollar mass transit or Manhattan project for alternative energy funded by taxing oil companies by necessity involves taking money from poor states with low per capita incomes (Louisiana, Texas, Oklahoma) and giving it to the politically powerful high income states and DC: New York, Pennsylvania, DC, Massachusetts, Connecticutt, Rhode Island, and California).
In fact, no state in the country recieves less per capita than Texas, which ranks 39th in per capita income. New York and California are the richest states in terms of per capita income in the country.
Also a point in fact: Exxon wrote off over a billion dollars in alternative energy projects in the 1980s. Shareholders are very happy that they have not been pressured to jump into the ethanol financial fiasco, whereby the companies are losing money; the taxpayers are being taken to the cleaners; and the consumers are forced to pay more for gasoline than otherwise.
Oil companies are acting very rationally given the likelihood of special taxes just for them and much more subsidies for their competitors. But anyone who has studies history knows that virtually every one of the govt. initiatives will fail. Examples of similar failures include the current ethanol fiasco; synfuels subsidies programs during the 1980s; the Japanese Fifth Generation Project; and the Microelectronics and Computer Technology Corporation (MCC) consortium under Admiral Inman.
Just as Apple Computer, and later Dell, revolutionized computers, some entrepreneurs will come up with the innovations to transcend the piston engine and the use of home heating oil. I actually anticipate that the government will be in the way trying to stop the innovators throughout the entire process with lawsuits, regulations, securities enforcement actions and special taxes.
Feeble argument about US troops in Iraq protecting oil companies...were the Iranians or their Shia allies to take over
Iraq, world oil prices would go up. Wouldn't that be better for Big Oil?
By the way, has any U.S. oil company been seen operationg in Iraq?
Another point, did the U.S. government intercede to help U.S. oil companies whose properties were nationalized in Venezuela or the FSU? Did I miss something?
Did you not watch Harry Reid's speech this week, he and his democrat buddies hate energy. They love that the high prices are discouraging consumption...this was their plan all along. Only they want a cut of the energy profits....profits they helped create by blocking energy development.
For 20 years they have blocked drilling, fossil fuel elctrical plants, refineries and nuclear plants. Now they have us where they want us.
Congratulations Harry.
It is not about Big Oil benefiting from high prices; it is about Big Oil's vise like control over our Energy policy and the disaster it has turned out to be. Our entire Mid-East policy is driven by oil politics; we wouldn't be in Iraq/Kuwait/Saudi Arabia, if we were not dependent on foreign oil. We intervene using the best possible option available: in 1953 we overthrow the Iranian PM, in 2003 we invaded Iraq. The fact that like the Bush energy policy, the Bush military policy has been an unmitigated disaster does not change the fact that oil drives our foreign policy.
Xorthfed:
1. Your argument about wealth transfer from the poorer oil producing Southern states to the North East are bogus. BigOil is owned by its shareholders who are more likely to reside in the so-called rich (sic) states. Big Oil has been paying hefty dividends and buying back shares making these 'rich' owners wealthier. On the other hand, if Big Oil had invested in Research&Developme... of renewable resources, Texas and other energy producing states, could have been the next Silicon Valley, creating a lot of jobs for the average Joe in Texas. How much Sun does Texas get compared to New York?
2. New York already has the most widely used mass-transit system in the country. Houston too would have benefited from an efficient system, instead of the traffic jams.
3. Leases on Federal Land: If the Oil Companies did not feel that those lands were not good prospects, why did they lease them in the first place? Sure, the oil there might have been harder to find, and there would be a higher chance of failure than the easy to find oil of the past. However, that is the risk Big Oil is expected to take, when our policies guarantee them a profit on every gallon they sell. Big Oil refused to take that risk and as a result they are finding their proven reserves falling. They would rather return capital to the shareholders than invest it.
4. I am not aware of all the details of the right-offs which Exxon made in the 80s. The oil-shock in the 70s might have prompted some initiative to invest in renewable energy; the Saudi's pumping oil down to $20/barrel must have bee the excuse to end those initiatives. Clearly the end of those efforts helped increase Big Oil's vise like grip on our energy policy. Perhaps if they had invested with genuine intentions, renewable energy technology would have developed much further, and we would not have been held hostage by the likes of Hugo Chavez and Ahmednijad. Point to ponder: Why did Chevron refuse to license the battery technology for electric cars?
www.ev1.org/chevron.ht...
The author is also irresponsible in perpetuating the whole 'War for Oil' myth...at least that it somehow favors the Big Oil companies. Sure, oil is over $140 now, but if anything the war has had downward pressure on prices by reducing the risk premium from Iraq. If oil jumps $5 every time a few Nigerians attack an oil field, imagine how jumpy the market would be if Hussein still had his finger on 2.5 million barrels of supply! And how exactly does Big Oil benefit from that? The author seems to imply that Big Oil should help fit the bill for the Iraq war. If the U.S. government really wanted to help the oil companies they would have invaded Venezuela. Oil companies have had billions taken away from them in Venezuela....nothing from Iraq.
1. Just like our energy policy has been hijaked by Big Oil, our ethanol policy has been hijaked by Big-Ag. Just read up on Brazil and their sugar cane based ethanol policy which is a significantly better alternative than corn ethanol.
en.wikipedia.org/wiki/...
Our Big-Ag companies have lobbied hard to maintain a large tax on imported ethanol to keep the much more greener Brazilian cane ethanol out. These are the same Ag companies who earn billions from government subsidies (sounds familiar?). Continuing on the theme of killing the alternatives, Chevron bought the patents for NiMH batteries which are a key to electric only cars, and does not license it to other Electrical Vehicle producers.
2. Regarding your comments on Iraq and Big Oil: Over the past 50 years, our foreign policy has been heavily influenced by our dependency on oil, a policy which has been sponsored by Big Oil. We have engineered regime change and invaded whenever we could. Just because we could not get rid of Chavez, does not mean that our government did not try to; Chavez has his friends and they limited our options.
Every calorie of food that we eat requires 10 calories of hydrocarbon energy to produce.
wolf.readinglitho.co.u...
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I think they have their heads stuck someplace other than in the sand.
I disagree with the author/commenters that Big Oil should be taxed or forced to change its operational behavior. I recognize that subsidies exist, but we should look at subsidies in general in other areas (Amtrak, farming, etc.) as stated by other posters to judge their efficacy. For energy companies we are getting a return on that "investment". The subsidies could be removed as suggested, but where do you think these now new 'additional costs' for energy companies would end up? Right back at the consumer. So whether the taxpayer funds the subsidies or is charged more for energy, the energy companies will still try to maintain profits and therefore shareholder return.
I do believe our capitalistic system can and will ultimately fix the energy problem. The fundamental challenge is that alternative energy sources are not real high on energy companies' radar. As long as there's plenty of oil out there, the energy companies will predominantly go for the "tried and true", and with a 40-41% success rate for oil prospects I use "tried and true" loosely.
Energy companies are in business to make a profit. It is absurd to think that if they sense that oil is in short supply, that they will simply "ride it out" and close their doors when it's all done. No, they will begin to invest heavily in alternative energy probably 50 years ahead of time in order to remain viable and most importantly profitable.
I started seeing this shift with the re-branding of 'Big Oil' to energy companies. We may not be happy with the level of investment currently, but believe me, this investment will continue to grow as energy companies begin to see opportunities in alternative energy.
During this transition and with A) growing demand from India, China and others B) continued nationalization and control of oil supplies and C) a speculative climate and hedging the weak dollar, the price of oil will continue to rise and we as consumers will have to pay. Yes, the energy companies will continue to profit from this phenomenon and this will further impede their interest to invest in something else. We are still decades away before energy companies see the need to invest vast amounts in anything other than oil/gas as it will negatively affect total shareholder return - and that is not what they're in business for.
Cheers.
> jack
Fortunately, they are also an invention of the far left media... they do not control enough shares of Exxon (...their inheritance from the former Standard Oil) to win even a single Board seat, much less control the company, thank God.
We've got alot of problems in this country, the Rockefeller and Kennedy heirs (...and even Warren Buffett, who claims he doesn't pay enough taxes and gives millions to far left politicians like Obama) among them.
So far, we've been able overcome these obstacles to our freedom. Although a challenge, we'll eventually get past this nonsense, as well.
Go ahead and tax the oil companies, then watch oil go even higher than you can imagine.
By the way Vickram, any time you want to share in those out sized oil profits, you can buy a shares of Exxon any day of the week for about $90 apiece...quit acting like you and your socialist buddies are somehow excluded.
The world is NOT going to run short of oil and it's derivatives in our great grandchildren's lifetimes. Simply put, the SUPPLY of these products is presently controlled by our own stupidity and a worldwide cartel.
So the choice is clear. We can either demand our government end its boycott on oil and gas exploration, or we can relegate ourselves to the dustbin of history, as yet another once great economic power.
(All this is not to say we shouldn't use electric cars fueled by new nuclear reactors. They may well be a natural consequence of human progress. Time will tell. The problem is government intervention in the marketplace, which bodes no one well.)
1. Political Risk:
As a percentage of their revenue, how much money has Big Oil lost due to the actions of foreign governments (nationalization etc.)? How does that compare to the money lost by Microsoft due to software piracy? What does the GOTUS do to help Microsoft's losses due to piracy or when they continue to be hauled over coals by the jealous EU? How does that compare with the influence of oil in our foreign policy?
2. Capital Risk:
As a percentage of revenue, how much does big oil invest in exploration for new fields (Exxon's total CAPEX was $15B a bulk going towards existing fields; their revenue $389B)? How does that compare to Microsoft' spending in R&D (about 10% or revenue)?
3. Messenger vs Message:
There is a distinct pattern I notice among posters who are opposed to taxing Big Oil: label anyone in support of modifying Big Oil's behavior (including the Rockefeller's) as rabid liberals/socialist. Very few of the comments actually put down real numbers to back their arguments; a bulk of the arguments are ideological.
Let the free market in ideas and technology loose and we will all prosper. This would be the fastest course to reasonable clean energy prices for generations to come.
Just how BIG would so-called Big Oil be if their worldwide reserves hadn't been nationalized out from under them by the OPEC cartel?
WOW!
The last time our politicians instituted a windfall profits tax on oil, the price rose and production fell. What a great idea that was!
Also thank goodness for Little Oil, the group of publically and privately held companites that find 90% of the new discoveries domestically.
As for the constant Demo whining about oil companies not exploring the leases they currently have, that is simply incorrect. The principal exploration tool is seismic and the industry shoots the heck out of it. Why the dems can't understand that it is all about geology and not just poking a hole in the ground anywhere is beyond me. You hear the same whine from Joe Biden to Nancy Pelosi to Rham Emmanual, all noted oil experts.
Some statistics- 7 of the top 20 oil fields in the US are located in the deepwater GOM. The GOM supplies 21% of domestic natural gas production and 30% of domestic oil production and that is from the central and western gulf, not including the over 11 MM acres offshore Florida that is off limits to Exploration. Not bad considering this production comes from the 15% of the OCS that is not off limits to industry. Imagine the potential of the remaining 85%.
80% of the oil reserves have been nationalised. If it was only Aramco that had control over the Saudi fields, they would bve selling the hell out of it NOW. Chavez has taken over his fields - production down over 1mm bbl per day. On and on with the benefits to the market by having allowed nationalisation.
However, one of the nuttiest statements by the author is that the government has "guaranteed the oil companies asured profits from refining and distributing the product." What a load of uninformed BS. Check the crack spread. It has been very tight and is getting tighter. So bad that some refineries might shut down.
The only place that Big Oil is making a profit is from selling the reserves that they have developed. Sure prices are high. But that is thanks to OPEC, not Big Oil. Why should XXX producer headquartered in the USA not be paid the same as Chavez or a Canadian? When they do make a profit here, the govt gets their share in taxes - 30% or so.
Pretty idiotic. Domestic producer invests in oil and gas - price goes up - they get a super extra tax for causing inflation. Joe Shmuck invests in homes 15 yrs ago. Price goes up and causes inflation. Sell with no taxes.
If I were running one of these Big Oil companies I would move the HQ offshore. Sell all US assets. When they asked me to testify in Congress - I would send them a FU message. If you want some energy, send your boat to get it. We stopped making deliveries.
On top of all of this the industry has gone through extraordinary hard times only a decade ago when prices went to $13 and layoffs were huge. Exxon bought Mobil to survive. BP bought Amoco, Arco, and Pennzoil. Today they can't hire enough people and only recently have new college recruits showed signs of being willing to work for a "dead" industry- never mind that it pays incredibly well and we use technology that would make NASA envious. At times the value of the computing power under my desk has exceeded $500,000 if you count the software on my computer. Yet the damage from years of periodic layoffs has left a serious mark on the industry and chased away much of the talent that is needed to find new oil. Never mind that in an experience based business, the next generation will have to learn from increasingly scarce workers who remain. Of course, it doesn't help the majors that some of their best talent gets hired away by the likes of National Oil Companies.
The point you don't seem to get, is that big oil has been failing to find enough new reserves to replace its own production for quite a few years. The Gulf of Mexico is in decline. Alaska has been in decline since 1987. Mexico has been in decline for decades. The North Sea has long been in decline making the Brent marker crude almost an obsolete pricing tool because the trading is too thin.
The future of US oil and gas production is not with the majors. They have the unenviable position of trying to find resources that have "material" value. Too small, and they walk away; they never even drill. Only a few years ago I was told that if my play concept couldn't reach a scope of 3 Trillion cubic feet of gas, it wouldn't get tested. Those elephants are mostly gone. Small independents who are purely producers are the wave of the future. Small independents are happy to drill a $5 M well and find less than 1 million bbls. Some have figured out how to drill a $50K well that may only produce 10K bbls. Majors can't do that. They would never be able to grow the balance sheet, much less keep up. The problem is that $5 M well will probably only produce a 100 barrels a day. We need 180,000 of those. Currently there are 1,921 rigs working in the US. Most of those average one well per month. If half of those wells fail to find commercially viable oil, they might be able to add a little over $1.2 million bbls/day in production to the US. Of course, that is $580 Billion a year at current prices that would not be part of the trade deficit. What would that do for the dollar? As much as $90 billion of that might go straight into state, local, and federal tax coffers. The US oil industry currently is the 2nd largest source of income to the Federal government, with revenues from leasing, royalties, bonus payments, and other taxes. All of that is BEFORE income taxes- it is at the wellhead. In reality, the idea of adding windfall profits tax to the US oil industry is most likely to be revenue neutral because as the production falls, the existing royalties will fall also.
But you would like to tax us. The result: less money for the high risk exploration budget. Job cuts. Lower production in the long run. Fewer new hires. Fewer small independents that are willing or able to raise the millions in capital it takes to drill just one well. And I will just go work for Saudi Aramco or some other foreign company, where even my personal tax burden will be lower. I don't see grocery stores risking $15 million dollars trying to find enough canned beans to stock the shelves next month.
If you want to see what the result of your tax proposal will be, you don't have to look far. The Canadian province of Alberta raised taxes on oil companies last year. Layoffs were almost immediate. Stock prices fell dramatically. Large companies left the province like mice from a sinking ship. Drilling rigs moved south to the US, which was fortunate for the US operators. Production is down already.
I will also take issue with your belief that oil companies are not investing in alternative energy. Shell did key research in developing thin film solar and is part of a joint venture to create the next wave of solar energy. BP is one of the world's largest solar power manufacturers. Shell is one of, if not the largest generator of wind power in the US. I believe they have about 500Kw of wind generation. Chevron is the world's largest geothermal power company. Shell has major investments in cellulosic ethanol and is the world’s largest refiner of biodiesel. None of these enterprises is large enough to attract the attention of stock investors, but none of the alternative energy supplies come close to displacing oil (some like corn ethanol don't even have the capacity to replace oil), so being a big fish in the smallest pond is not very impressive to investors like you. Nevertheless, the oil industry has my bet to dominate the "alternative" energy industry as soon as the economics begin to work.
The oil business is NOTHING like grocery stores. If your suggestions are implemented, I'll be moving out of the US to find a job, unless of course I want to stock shelves.
Subsidizing corporatations never works because the money never leaves Wall Street. There is no doubt that investment firms and insiders are pillaging our economy. It is better to subsidize responsible consumer spending, and reward innovation, then to allow another dime to filter through Wall Street. Stand up to the big investment firms, change the trading rules and capital gains tax structure, and then there will be more than enough money to subsidize alternative energy. If you want a windfall profits tax, than tax wall street and insiders.
The proposal includes:
Targeting oil speculators who buy and sell barrels without ever intending to use them, which Stevens says has inflated gasoline prices. At least it suggests where the feds spend their take.
Trying once again to open ANWR to oil companies, and spending all the federal revenue -- which he estimates could be $300 billion over 30 years -- on alternative energy projects.
Give the state more than a third of federal revenue from offshore leasing and production, with a quarter of that cash going to nearby coastal communities.
Big Oil is not affected by the tighter crack spread since their upstream operations more than compensate for any tightness in their downstream operations; it is the independent refiners who are suffering now. Further, the crack-spread did not tighten till $120+ oil, led to reduced demand in the US. Thanks to our dependency on oil, the demand for oil is relatively inelastic (wrt price) till it reached a tipping point. Demand did not drop meaningfully while gas moved from a buck something to $3/gallon, and the refiners were able to pass on their increasing raw-material costs. It is only when $4/gallon gas started crippling demand, did their ability to pass on the increased costs diminish.
carbonates:
1. Thank you for your wonderful, fact-filled comment, instead of the ideology driven emotive reactions. One aspect which caught me eye was the extremely low risk tolerance used by Big Oil companies to determine whether to develop a field; they want a sure thing (almost like a grocery store). It is reflected in their replacement rates (now below 100%) and the small percentage of revenue they devote to capital expenditure, especially new exploration.
2. The current tax bill is structured as 'an invest or pay tax on profits' bill; it is not like the Carter era bill which was a tax on excess revenues above a certain level.
(a) Companies which are already investing in alternative energy (like Shell/Chevron), will not have to pay new taxes.
(b) Since this is a bill on profits (and not gross revenues), in a perverse way, this might even spur investments in traditional oil exploration: companies have a choice to either pay taxes now on higher profits or invest more now to reduce their profits, and pay lower taxes. Note that the traditional arguments about how high taxes discourage investments falls apart when oil is $100+/barrel; the upside on any success is immense.
user222390: As a member of a minority ethnic group which has the highest average income in the United States (including Whites), I am acutely aware of the tax burden; almost all my financial decisions keep in mind the tax impact since I pay taxes at a marginal rate exceeding 40%. I also have realized how one industry has played a key role in shaping our policies, and its short-sightedness in destroying alternatives, is now threatening the entire global economy, while enriching nations amicable to our national interest.
IF THE GOVERNMENT WANTS NEW INVESTMENT GRANTS LET THEM
RAISE TAXES AND HAVE THEIR NAMES ASSOCIATED WITH MORE
TAXES ON THE PUBLIC.ONE THING FOR SURE,THE GOV ALWAYS
MAKES SURE THEY GET THEIR CUT.
You can't even understand what carbonates is telling you.
Large oil companies by their nature are the onones capable of searching for and bringing to production major finds.
The crux of carbonates argument is that oil exploration is a risky expensive business and any tax on Big Oil will slow that down further worsening our oil crisis. However, almost all the posters here miss the big(ger) picture.
a) Why doesnt Big Oil Invest: I agree with you that 'Large Oil companies ... are capable of searching for and bringing to production major finds'. But are they doing it? Big Oil has an extremely low risk tolerance when investing in new fields. In spite of the huge profits, the total capex spending is less than $20B, with much of it going towards existing fields. Big Oil is so comfortably ensconed in their current position that when it comes to the profits, Exxon returns a lot more to the shareholders than it invests.
norris.blogs.nytimes.c.../
This is where the balance between the responsibility to shareholders versus the responsibility to national interest comes into play? Where is the balance?
b)Big Oil successfully controlled policy to ensure that non-oil based industries do not get a significant boost; plus they have used their financial resources to crush any promising technology which might alter the landscape. Their ownership of the NiMh battery patents, and subsequent lawsuits with Panasonic could not be a better indication of that.
I have not seen many responses which transcend the partisan view point, and actually focus on the numbers. It is very easy to fear Big Government, or taxes, or government spending or even the lack of a cogent Energy Policy in the US. What we forget is that it is the American people and corporate America who are responsible for shaping that policy; and no single industry has the financial muscle and the political support than Big Oil.
You have left me with no doubts, Vikram. If you want to be involved in responsible journalism (if such still exists) then I suggest educating yourself and even engaging informed people (in person, not cyberspace) on subjects on which you would like to opine.
P.S. I can not believe ANYONE would suggest that the oil industry does not take enough risks!!! Just getting into this industry is risky, Vikram.
"Vikram is an electrical engineer by training and has held a variety of roles spanning multiple industries. He started his career in the semiconductor industry in the Silicon Valley, before moving to a proprietary trading desk at a bulge bracket investment bank in New York. Vikram recently founded a new company, Inpatient Solutions, which provides software and services to physicians practicing medicine in inpatient setting.
Vikram also manages investments for friends and families and actively trades in the US equity markets. He uses multiple strategies with a strong quantitative focus, often using equity derivatives to manage risk, gain leverage, and diversify."
Your comments tend to follow the 'you know nothing' line, with no numbers to back it up.
There are various metrics of risk but the obvious financial one is the amount of capital staked in projects with unknown outcomes.
One look at the capex budgets as a percentage of revenues is sufficient to see the degree of risk oil companies are taking. And even the capex budget is tilted more towards exploiting existing fields rather than investing in new exploration.
Instead of pointing finger at my lack of responsibility, it would behoove you to shed some of the ideological baggage, and dig into some financial statements of Big Oil companies. A comparison with the growth (or the lack thereof) of reserves of Big Oil companies versus Indian and Chinese oil companies (who do not have much domestic assets to go after) will also be a good indication of the risk taken by Big Oil.
You say that your "analysis" proves oil companies spend more money exploiting than exploring. That is exactly what you SHOULD expect when the resource in question is non-renewable and all major discoveries have already been made in a 150-year-old business. The low-hanging fruit has been plucked, my friend.
Doubling exploration budgets would not make a dent on the reserve replacement because exploration success rate is only 10% now, and the prospect quality goes down from there.
You claim oil companies are averse to risk. You aparently do not realize that every well that is drilled is a risk. Has your job ever been dependent upon the success of drilling an oil or gas well? I think not, based on your bio. Thus you have probably never examined oil industry risk. I do it every day, and the risks are too many to enumerate.
Commodity prices are a HUGE risk, with major oil projects taking years to develop (as you should know). Thus prices have the opportunity to change dramatically from project start-to-finish. Heck, prices have changed 100% in one year, how can you run economics with that kind of volatility? This is a risk-based industry.
And you want to base your analysis of Big Oil (what does that mean, anyway?) on a comparison to the Chinese National Oil Company (CNOOC)? Every reputable industry analysis (e.g. SPE) has greatly disputed Chinese reserve evaluations as being grossly optimistic. In other words, Vikram, they have inflated their reserves. Using their numbers is folly.
As an oil company, you can not simply double your exploration efforts (even if you had the prospects, which you don't) overnight. You have to hire and train people in technical discipines like engineering and geology. They don't grow on trees. When oil prices go up, so do salaries, but it takes four or more years to train people in these disciplines. People don't think it is sexy to major in petroleum engineering. Thus, oil companies have to play the hand they are dealt.
If you choose to respond, try to do so without using the word ideology, Vickram, since that seems to be your only defense. I have given you no ideology with which to disagree. I have dug into financial statements, and I have seen how oil companies are run every day. I have studied the history of the oil business and know that all of the suggestions you make have been tried and failed.
Time after time the U.S. government encouraged oversees exploration by U.S. majors. And time after time the Justice Department prosecuted the same majors for collaboration. Time after time other governments have confiscated (or at least grossly underpaid for) U.S. oil company assets (Iran, Kuwait, Saudi Arabia, Mexico, Venezuela, Russia, to name a few). No wars were fought or even considered for these transgressions.
The current confilct in Iraq may have its roots in the presence of oil in that region, for without it the Middle East would be an insignificant gnat in global social, political and economic circles.
However, no U.S. oil companies have a measurable presence in the Gulf States (due to the afforementioned confiscations) and, thus, can not benefit economically from the U.S. military presence near these reserves. In fact, it would be better for XOM for the free-flow of oil to be halted by some maniacal rogue states, driving up the price of oil.
It is a shame that you and I agree on only one thing in general, that a coherent energy policy is critical. There is no need to be an ideological battering ram, Vikram. You clearly have an agenda against Big Oil and believe in conspiracies you can not substantiate. Your numbers about exploration on federal lands follow the democratic party line and reveal your own agenda. You should drop the baggage.
Vikram, this statement is not one of a free market capitalist. You seem to get upset at the notion that you might be a socialist. Well, if the shoe fits.... Socialism has a "goal of goal of creating a socio-economic system in which property and the distribution of wealth are subject to control by the community."
I think, perhaps, you are an accidental socialist (i.e. you don't even realize that that's what you are) and that is why you keep harping on the fact that so many of the responses are idealogical rather than numbers based. Socialism vs. capitalism is, at its very core, an idealogical difference; thus your many responses.
As for the content of your article, let's look at a hypothetical. What if oil were to go back to $40/bbl, or even $50/bbl? Not so hard to believe, it was there back in 2004/5. Let's also say that XOM did re-invest all of its profits into alternatives which require $70-80/bbl oil to be competitive. As a share holder in XOM, how would you feel about that? Would you be shocked and outraged that you lost a great deal of your investment b/c an oil company was unable to make money in an industry with which they are not familiar in a declining price oil price environment? Would you also suggest that the government give them back the windfall profit taxes they took along w/ an official letter of apology?
Also, it doesn't seem fair to only count the dollars spent by "big oil" on alternatives. If you are right and there truly is a cost-competitive alternative out there, then all of the dollars that were not spent by big oil have just left an opportunity for other, better suited companies to fill in the gaps and invest; which they have, in a big way.
"The MAC Global Solar Energy Index has a combined market cap of almost $100 billion. The solar sector is growing rapidly, with Melvin & Company reporting a recent annual growth rate for the sector of 47% with a projected growth rate of 40% for the next several years."
There are similar ETF's and such for other energy alternatives.
The point is, there is a huge amount of investment being made in alternatives by alternative energy companies. Rather than propose a socialist agenda, why don't you suggest that your readers invest in oil and gas companies and take the profits they earn and invest them in alternative energy companies?
I can not believe that, even you, believe that the government will be more adept at developing alternative energy than the private sector or that an oil company will be more adept than an alternative energy company at developing alternative energy.
0. First of all thank you for a response which goes into details instead of name-calling.
1. All the numbers I have quoted have links to support them; most of them go to semi-official sites; please click through to verify them.
2. If you believe that foreign governments have been harming the interests of US Oil companies, please cite some numbers. Also do compare them with the total revenues and profits of Big Oil globally and specifically from the resource under question to get a sense of perspective on the magnitude of the loss with relation to the size of their operations. Yes there is political risk involved in oil, but the US has used more military and political muscle to protect Big Oil than any other industry or any other country for that matter.
3. There is still oil to be found out there but it is not low hanging fruit. Search for the Deccan Traps or the major Brazilian off-shore oil fields. Foreign oil companies are now increasing their share of oil outside their home countries. Between 1998 and 2004, Petronas (Malaysia), Statoil (Norway), Petrobras (Brazil) CNOOC (China) and ONGC (India) have seen their percentage of international reserves go to(from) 27(13), 21(16), 4(11), 29(0), 21(0) respectively. This info is from is a Mckinsey study which you can download. At the same time Big Oil's share of the world oil is falling. A part of the reason is that Western Companies are no longer too welcome as foreign partners since they have a checkered history. I am not going to go deeper into that checkered history but the military and political umbrella we provided to BigOil has a lot to do with they getting away with it in the past.
4. I agree with you and carbonates that decades of $20-$30 oil, has dented Big Oil's human expertise when it comes to extracting and exploring for oil. The lack of expertise is itself an indication of the short-sighted approach taken by Big Oil (how come foreign companies ramped up in the same period?). ExxonMobil spending tens of billions to buyback their stock is not going to help find and train experienced engineers either.
keltortruth:
I have written a follow-up article on this issue. It might take time to appear on SA but you can read more at:
multithreader.com/TheI.../
Let's discuss economic risk. The cost of developing a major oil or gas field can run into the tens of billions, partly because most of the easy to get at oil has either been discovered or is under the control of foreign governments. This leaves projects that are so technologically challenging and expensive that the national oil company needs help. Those are the projects that the major multinationals are best suited for. There are all manner of risks -- political, price (projects started today may not come on stream for five to ten years -- what will the price of oil be in ten years?), cost (projects started just a few years ago are running well over budget because of oil industry inflation, as demand for everything from qualified people, to steel, energy and other materials have skyrocketed), geology, health and safety (working with a volatile product can easily cause harm to people, environmental (as much as you try shit happens when mother nature is involved and then you have all the public relations consequences) and political.
ExxonMobil developed one of the Sakklin Island fields in the Russian Far East because it had technology and the money. Projects like Sakklin payout over decades and there is no guarantee oil prices will remain high during the life of the project thereby earning a reasonable return. In addition to oil price risk (oil prices went from $35/bbl. in 1985 to $10/bbl in the late nineteen nineties), there is reservoir risk (the oil that you thought was going to be there is not there, or its there but very difficult to produce due to the geological formation). What you have no idea about is how technological difficult the oil business. I wish you could sit in on a meeting of geologists and reserve engineers and hear them discuss the technical and engineering difficulties developing any geologically complex. I have and its an eye opening experience.
You have no idea what goes into producing oil from thousands of feet below the sea floor in thousand of feet of water in the turbulent and frigid North Sea. It's a technological and engineering feat to behold. Your cluelessness palpable.
To equate the business of running a supermarket with the business of exploring for, finding and producing oil and natural gas reveal a total lack of any understanding of either business.
As a shareholder of XOM, I wish XOM would get out of the retail end of the business (which is not or only marginally profitable -- they have recently announced they are selling all their owned stations, but will still sell to their branded distributors) and only stick to refining (also not very profitable) and exploration and production (very high risk but very profitable).
Then there is political risk. Once you have sunk billions into a project in another country, what is to stop that country from taking over the project and kicking your ass out or changing the terms to make the project unattractive. This has happened throughout the history of the oil business and is happening again today -- Venezuela, Russia, maybe even in our own country, and many others. It took ExxonMobil seven years to negotiate a field development agreement with Indonesia for the Cebu field after it had invested maybe a $100 million buying the interest and doing development drilling.
By the late nineteen nineties, ExxonMobil had sunk over about ten years $250 million into exploring and mapping the Natuna gas field in the South China Sea near Indonesia. The natural gas has a lot of CO2 so it is difficult and expensive to process. ExxonMobil tried to get Japan, China, Korea, or Taiwan to buy the gas on a long term contract basis so financing for the field and its development could proceed. There were other fields also being explored (in Australia, Malaysia, Qatar) that had gas with less CO2 that could offer their gas at a lower price. (You have no idea what a complex technological undertaking it would have been to develop the Natuna field, including the construction of an island for the processing plant -- there is also a dispute as to whose gas it is since China claims most of the South China Sea -- more political risk.) The field has still not been developed and Indonesia, if it could technically, wants to take it away from ExxonMobil. A no risk business like running a supermarket? You got to be kidding. You have no idea.
As for share buybacks, your article missed one really important point when it comes to buybacks versus windfall profits taxes. First, ExxonMobil has no expertise in alternate energy. As a shareholder, I would prefer that they stick to what they know best, which is exploring for, finding and producing oil and natural gas. Share buybacks, if you thought about it beyond the typical knee jerk reaction, puts money back into the private investment system. Most of the buybacks are block trades in the hundreds of thousand to millions of shares. That means that the money is being paid to pension funds, mutual funds, endowment funds and other professional money managers whose expertise is to reinvest those funds in other industries and companies that have good prospects for high returns. No doubt some of that money flows to alternate energy -- so the buyback are funding alternate energy and doing it more efficiently that if ExxonMobil did it. That is what makes the capitalistic system so great at producing wealth. Now if you impose a windfall profits tax on oil companies, instead of the money going to professional money managers investing in the best of breed companies, including alternate energy companies, the money will flow instead into the government and will be used to buy votes, because that is what politicians are expert at. That will not help the country, will not produce alternate energy and subverts the capitalistic system. That is the argument you need to make against a windfall profits tax -- windfall tax money will flow to "alternate energy" companies that have good political connects but not good business prospects. Companies will sprout out of no-where bearing alternate energy names run by people who have good political connections and that is where the windfall profits tax money will flow. There will also be a lot of cons. I see iy happen here in Las Vegas.
There is plenty of venture capital money for alternate energy, and that money is not looking for political favors, it is looking for high investment returns. A politician or government bureaucrat couldn't give a fig about high returns.
I suggest before you write your next article about how easy it is for oil companies to make money and how riskless it is, you take a tour through an oil refinery, go out to a production platform in the North Sea, sit in on some technological discussion regarding the seismic findings for a new field, go to a research lab working on new drilling technology that allows horizontal drilling out seven miles and tens of thousands of feet below sea level. You need to go out to the Rockies to see how companies are using technology to extract natural gas from shale rock formations "tight gas". This technology did not exist a few years ago but is now being used by ExxonMobil and other to tap our natural gas resources in the West.
ExxonMobil and most of the major multinational are above all technology companies, every bit a technology company as Microsoft, Intel and Pfizer and operating in an industry with far greater risk. You just do not appreciate the science that goes into the business nor the risks.
All your points about the risk in the oil business and the technology challenge they overcome are well appreciated. However, when Big Oil significantly reduces investment in exploring & developing new fields, all the talk about risk becomes meaningless.
Consider the facts:
Big Oil's replacement rate is well below 100% now for a few years; this is in sharp contrast with national oil companies of Malaysia, China, India, Brazil and even Norway who are now getting a large percentage of their reserves from foreign countries.
Their capex numbers as a percentage of revenue are quite low;
Even worse the portion of capex devoted to the new exploration is smaller than that devoted to developing existing fields;
To add icing to the cake, the return of capital to a shareholders at a time when oil prices have gone up 4x in 4 years, clearly shows their disdain for the risk associated with new drilling.
Big oil has tried its best to prevent alternative energy from making inroads in to transport section, but as oil started becoming scarce, it decided to dump the nation at the altar since the investment risk associated with new projects was not considered justifiable for its shareholders' interest.
According to Big Oil a majority of the shareholders are so conservative that they prefer a return of capital, rather than Big Oil risking it in new exploratory projects with oil at $140. Why would such conservative investors put their capital in alternative energy where hot money is chasing a few companies and creating a valuation bubble?
It will also help to consider the capital losses taken by Big Oil due to the risk they take in perspective of their annual revenues and profits. A lot of high technology companies invest hundreds, if not billions of dollars in projects which do not go anywhere; Big Oil is not unique in any manner. Big Oil is unique in that there in a situation where they can continue to reap immense future profits by NOT investing in newer fields; I am not aware of any other technology intensive industry where underinvestment can potentially lead to better results.
"Petrobras also said it had 1.09 billion BOE in reserves outside of the country (in 2007), a 14.2 percent drop from 2006." When Petrobras has to compete outside its own borders (on equal footing with Big Oil) it has NOT increased reserves. Only it's domestic reserves have increased, which is in an area where the table is tilted in its direction and the industry is under-developed.
As one example of confiscation, Mexico seized the assets of Big Oil in 1938. These assets had cost Big Oil $500 million. Using the CPI adjustment, that is $7.2 billion in 2007. The value of the expected production that was sonfiscated was likely on the order of 3X the investment, or over $20 billion. That is just one of over a dozen examples of nationalization that have occured. (Note: Mexico agreed five years later to repay Big Oil, but to date not a single penny or peso has been sent to Big Oil.)
From Wikipedia:
"Kate Dorian of Platts has noted that "some oil-rich countries are restricting oil sales outside of their country. These countries are now reluctant to share their reserves."[1] According to consulting firm PFC Energy, only 7% of the world's estimated oil and gas reserves are in countries that allow companies like ExxonMobil free rein. Fully 65% are in the hands of state-owned companies such as Saudi Aramco, with the rest in countries such as Russia and Venezuela, where access by Western companies is difficult. The PFC study implies political factors are limiting capacity increases in Mexico, Venezuela, Iran, Iraq, Kuwait and Russia. Saudi Arabia is also limiting capacity expansion, but because of a self-imposed cap, unlike the other countries.[2] As a result of not having access to countries amenable to oil exploration, ExxonMobil is not making nearly the investment in finding new oil that it did in 1981."
Big Oil simply does not have equal access to oil supplies. Hell, they are even shut out AT HOME (ANWR and 90% of the OCS come to mind).
And again, for you to quote the reserves of CNOOC and others also ignores some major issues. First of all, these companies do not use SEC, SPE or other accepted industry guidelines to estimate reserves. I worked with a CNOOC partner (PPCO) in Bohai and CNOOC routinely estimated 2-3 times our internal estimates. You are comparing apples to oranges. Also, their safety, environmental, and labor conditions are abhorrent compared with Big Oil.
I have included at least as many numbers as you, so quit asking. You are just wrong, Vikram, and you are too tainted by your own ideology to admit it.
Thanks for posting some numbers.
1. Your Petrobras comments have to be taken with a grain of salt. In the last two PBR has hit upon one the largest find ever in the Western hemisphere off the coast of Brazil. These deep-water fields will be coming online within the next two years (earlier than expected). Since they have found so much oil at home, the share of foreign oil in their reserves has fallen. In fact I do not expect PBR to go out anymore, their hands and tankers are full of dealing with the oil they have at home. However that does not change the fact that between 1998-2004 they too went beyond their borders to look for more oil.
2. What I posted was the percentage of oil from external sources vs domestic sources. Since this is a ratio, any escalation in the estimates cancels out assuming the method used to come up with the reserves are similar.
3. The political factors apply to every company in various degrees. How come the companies from countries I mentioned have increased their share of foreign oil, while Big Oil's replacement number continues to fall during the same period?
4. I completely agree with you that restricting drilling in our domestic land is wrong, as are the NIMBYs from Cape Cod who did not want Wind-Mills to disturb their million dollar views.
I appreciate that you took the time to do some research and come back. However for any numbers to be meaningful, you have to compare them with their peers.
Big Oil has ensured that oil's grip on our transportation system remains vise like; however when the going started getting tough, they dumped us at the altar. They felt it was better to return capital to their shareholders at the time their reserves were falling, and the rest of the world was aggressively looking for oil.
Your comments about what Mexico did to Big Oil in 1938, seems to illustrate how the thinking is stuck in the past; we can not dwell upon what happened prior to WW-II. What next? Should Native Americans be compensated for all the oil being drilled from land they once owned? Should African Americans be given restitution? Or Asian Americans be compensated for the Asian Exclusion Act which allowed American companies to use them as laborers but then deny them citizenship?
Now, why is it that Big Oil isn't running out to increase investment? Two reasons: lack of good places to spend where the rate of return AFTER RISK is appropriate. And second, WALL STREET ANALysts have been harping on them to show "capital discipline". If Big Oil would go out and double their capital spends on Exploration, they would be crucified by the financial geniuses we call ANALysts. That is a fact. Listen to the comments after each conference call and you will hear these youngsters talk about "disciplined capital expenditures" or "overweighted explorations spending".