Does Big Oil's Apathy Justify Proposals to Tax Windfall Profits?

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 20^th 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.

Comments

[Brian Pursley]

Let me get this straight: Congress wants to raise the price of crude oil by increasing (already high) taxes on oil companies? Why?

Since when does Congress want to cut the federal deficit? Under Obama the deficit is going to double to $1 trillion: moneynews.newsmax.com/...

[Brian Pursley]

How is Big Oil supposed to invest in illegal exploration?

[takutourist]

Mr. Saxena's view of the oil companies resembling a food staples industry rather than technology is novel but misses the mark. Their retail service stations, found on every corner, more closely resemble the grocers model but their exploration and production is more akin to farmers producing staples than it is to grocers peddling them. And, those farmers are also heavily subsidized by the goverment. If he would have farmers give up their subsidies, too, then I can see "big oil" giving up theirs--as both industries should. Also, the rather astounding potential reserves recently written about in N. Dakota and off shore, and the oil shale in the Rockies, as well as the Alaskan ANWR reserves are all blocked from development. Maybe oil company exploration funds should be directed at lobbying Congress to allow drilling at home rather than risking nationalization in third world countries.

[fxtrader07]

big oil had zero incentive to explore for new oil until very recently because oil was absurdly cheap. the cure for high prices is high prices - not higher taxation of those who are bringing the stuff out of the ground and into the economy. the result will be that big oil will pump even less - look no further than russia where they are doing the opposite - slashing the excessively high tax rates becuase production is declining rapidly. Nor should you force oil companies to invest in alternative energy. I have high sympathy for subsidising research and development of alternative energy sources - but why should any particular company be forced to do it??
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?

[Brian Pursley]

Congress needs to impose a windfall profits tax on the IRS.

[mixter]

Oil companies are in business to make legal profits for their shareholders. They are, just as their names imply, oil companies, not social responsibility, "do gooder" companies (although they do a lot of good of their own free will through contributions to charity and community projects). The owners of oil company stocks, union, teacher, and various retirement funds, in addition to millions of individual owners, would be very upset if a company's management strayed away from its basic business to develop alternate energy resources, when the financial return was not promising now, or in the future.

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?

[Russ Krull]

The author claims to be a "strong believer in free markets," but favors a bill that dictates what operations a company should engage in.

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

[Hiya65]

Brilliant, clinical piece. The price of oil is indefensible, and hearing reasons from a politically motivated indsutry is not credible.

[hotforoil]

Increase the "TAX", another word for redistribution of wealth, watch the price soar!
Good Luck!

[smartbt]

Why won't anybody believe that there is a shortage of oil and natural gas? The writing has been on the wall in big letters for years.

[hotforoil]

Krull, you got it nailed!

Cheers!

[Lex Luz]

It strikes me as absurd to continue tax and subsidy policies that encourage total dependence on oil - a commodity that is clearly finite in supply - and it strikes me as equally absurd to try to cover up that fundamental policy framework or mindset with talk of a "windfall profits tax" however prettily dressed up it may be. As a nation, we are not yet willing to confront the fundamental issue here: in the very real world of the future, oil production can't possibly keep up with demand. We can argue all we want about the timeframe, but the end-game is exactly the same every time: we're out of oil.

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.

[theinvestingspeculator]

Oil is at almost $146 a barrel this morning. This is just election populism. Both are to smart to start going in that direction. But oil is killing the market. I was surpised by how much some of the stocks are down over the last 12 months.

[Thor]

Excellent article! To all you backwards-assed dinosaurs out there, well, see you in the museum. Big Oil and the Big Three of Detroit will soon go the way of all flesh, and they deeply deserve the death that is coming to them. Their only interest has been profits, right? Good capitalists right? Well, there's more to this world than money boys, believe it or not. And those Mofos have held back progress and deeply hurt the American people. Screw them, that is what I say!

[stanr]

Almost everyone knows that Exxon made $41 billion in profit last year - how many know that they also paid $71 billion in taxes and duties. It doesn't appear sensible to force the oil companies into alternative energy, a business they may know little about. Let the govt sell them leases in ANWR and off-shore and take this lease money and the ensuing royalties and put it to use with people who know that business. Would we force Microsoft to get into the timber business to avoid taxes? I don't think so.

[Oil Man]

Why not tax only oil that is imported? This would discourage oil importation, which is the big problem in the US, encourage domestic oil exploration as well as conservation. Why isn't anyone talking about this? It might seen like protectionism but China and India both have price controls on fuels which is basically a form of subsudies for there industries.

[Brian Pursley]

smartbt: the reason why noone will believe there is a shortage of oil is because hydrocarbons are infinite and renewable.

oilismastery.blogspot..../

I'd hardly call 300 trillion barrels of proven reserves a "shortage."

www.nasa.gov/centers/j...

[freemrktr]

While I find the author wrong on many levels, the one that stands out is investment in renewabless. Nothing could be better for renewable energy than high oil prices. It makes them economic even without government subsidies. So if the big oil companies don't invest in them someone else will becasue there is money to be made, and if that’s true then is high prices still good for big oil companies. If they are still making 8.3% on their investments then they really aren't making higher returns with these high prices.

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.

[Oil Man]

Proven reserves are a falacy!

[The FItzman]

As usual, wrt energy, the US government will continue to do the wrong thing (windfall profits tax for example). However, the big picture here is that the US government, media, and citizens are in denial about the most basic fact: from here on worldwide oil supply will not be able to keep up with worldwide oil demand. so, for a country like the US which imports the majority of its oil, the rising price can only mean: a falling US dollar, a falling standard of living, a weak and unsustainable economy. the ONLY way to deal with the realities of oil are a long-term, comprehensive energy policy:

thefitzman.blogspot.co...

[Vikram]

Thank you folks for your replies. Some follow-up thoughts.

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.

[Vikram]

5. To the poster who commented about India/China: I agree with you that demand for energy there is going to be huge. However, they are still in the early stages of developing their energy policies. If the United States had taken a lead in spurring development of technologies needed for renewable energy resources, American companies would now be reaping the benefits of exporting high technology, high value goods to the emerging economies. However, due to the vise like grip of Big Oil on our energy policies, that never happened and we lost any technological edge we might have profited from.

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.

[Fritz]

Oil is obsolete. We're still using it but for most of us commuters oil is obsolete. GM had the tech with the EV1 and Toyota had it with the RAV4-EV. 100 miles on pure electric power. GM destroyed their tech examples for some reason and either ignores the EV1 today or uses it for greenwash. They always make the point that nobody bought it. Of course not - they never sold it - leases only. I think a good number of people are buying other companies products b/c of their patronizing attitude. Toyota and Panasonic had to quit building the battery that the RAV4-EV used b/c GM sold the patent to Texaco who was then bought up by Chevron. Now Chevron holds the patent and won't license it to anyone for large format NiMH batteries. Look up "patent encumberence Chevron" for more background on that.

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.

[CricketBeers]

Lex Luz -- you are right on! I enjoyed your post completely.

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.

[CricketBeers]

Fritz - what an excellent post!

[Lazy Al]

From The Energy Information Agency:

“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.”

[Clif]

Firstly, the implication that all of the public lands made available to oil companies has oi underneath it is beyond stupid! The fact that so much oil has been found on public lands made available by the Bush Administration is AMAZING! Finding oil is more like finding a needle in a haystack than pumping water out of a lake! The oil royalties are substantial to the federal govt. Much of it has been pumped into the strategic oil reserve during May and June.

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.

[User 221640]

Vikram
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.

[Vikram]

User 221640:
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...

[seymour]

It's discouraging to see people continue to hammer at Big Oil for not investing in alternative energy. Since none of the oil companies are power producers, I assume you believe they should be investing in alternative transportation fuels. Has ethanol been a good place to invest? There sure wasn't any lack of money flowing into that sector, even without Big Oil money, yet it's been a total bust so far. How about giving Exxon a pat on the back for recognizing (and not investing in) a money loser?

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.

[Vikram]

Seymour:

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.

[Brian Pursley]

Oil can never go obsolete. We use it for everything.
Every calorie of food that we eat requires 10 calories of hydrocarbon energy to produce.

wolf.readinglitho.co.u...

Air conditioners, ammonia, anti-histamines, antiseptics, artificial turf, asphalt, aspirin, balloons, bandages, boats, bottles, bras, bubble gum, butane, cameras, candles, car batteries, car bodies, carpet, cassette tapes, caulking, CDs, chewing gum, cold, combs/brushes, computers, contacts, cortisone, crayons, cream, denture adhesives, deodorant, detergents, dice, dishwashing liquid, dresses, dryers, electric blankets, electrician’s tape, fertilisers, fishing lures, fishing rods, floor wax, footballs, glues, glycerin, golf balls, guitar strings, hair, hair colouring, hair curlers, hearing aids, heart valves, heating oil, house paint, ice chests, ink, insect repellent, insulation, jet fuel, life jackets, linoleum, lip balm, lipstick, loudspeakers, medicines, mops, motor oil, motorcycle helmets, movie film, nail polish, oil filters, paddles, paint brushes, paints, parachutes, paraffin, pens, perfumes, petroleum jelly, plastic chairs, plastic cups, plastic forks, plastic wrap, plastics, plywood adhesives, refrigerators, roller-skate wheels, roofing paper, rubber bands, rubber boots, rubber cement, rubbish bags, running shoes, saccharine, seals, shirts (non-cotton), shoe polish, shoes, shower curtains, solvents, spectacles, stereos, sweaters, table tennis balls, tape recorders, telephones, tennis rackets, thermos, tights, toilet seats, toners, toothpaste, transparencies, transparent tape, TV cabinets, typewriter/computer ribbons, tyres, umbrellas, upholstery, vaporisers, vitamin capsules, volleyballs, water pipes, water skis, wax, wax paper

[Scammr]

This is all DC's fault and the result of 15 yrs of low energy prices. The American consumer just went to sleep and figured prices would stay low forever! I'm convinced the Saudis/OPEC'ers flooded the markets with crudes intentionally for years just waiting for the day like recent and now they've got us where they want us -- they might not beat us militarily, but they can DESTROY us financially! Forget about trying to blame "Big Oil!" Big Oil is NOTHING in the scheme of the entire world markets! America has no one to blame but itself, and I got news for everybody, "You ain't seen nothing yet!"

[hotforoil]

All the hot air produced by the Ostriches on this subject would heat my house for the next year.

I think they have their heads stuck someplace other than in the sand.

[Pezman]

I read everyone's comments with great interest so I thought I would add my $.02. I dislike the term 'Big Oil' because most of the majors have re-branded themselves as 'energy' companies. Chevron for example does primarily invest and subsequently profit from oil but they also invest in geothermal in Indonesia as well as other energy related activities.

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.

[francis schutte]

Whether or not we like the Oil companies, we have a situation of Peak Oil, a recession that is becoming a depression and lower Government income (tax income). There is no doubt in my mind that the US will once more impose windfall profit taxes on the oil companies. Such an action will receive the cheers of the masses and will bring additional income for government. Peak Oil is, like Peak Coal was before WW II in a final stage and signifies the end of an era. Don't expect Recession and Depression to go away as long as we aren't using a cheaper form of transportable energy (nuke, hydrogen,...) . Hopefully, we won't need another war to speed up the conversion.