Vikram Saxena

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

hotforoil:

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.

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

Augustus:
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.

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

A number of posters have mentioned how Big Oil takes political risks in operating in foreign lands and an investment risk when looking for new fields, and hence should not be compared to grocery stores. It is important to put the numbers in context; here are some points to ponder.

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.

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

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.

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

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...

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

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.

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

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.

The Era of Cheap Crude Is Ending

A lot of people are writing about the Tata Nano and oil demand. What they miss is that the Nano is a replacement vehicle which gives better mileage than the two-wheelers it will replace. Plus it can carry 2x the load of the two-wheeler. The person buying the Nano will be replacing one or two two-wheelers and is likely to consume less gas.

Another aspect to keep in mind is that folks in emerging economies spend a significant chunk on food and energy. They are very conscious when it comes to spending on energy and even a 5-10% difference in mileage will sway their choice regaring the vehicle they use. The emerging economies have a lot of demand elasticity built in to the system; consumers there will adapt to higher prices quickly.

In developed economies the percentage spent on food and energy is much less than that spent in emerging economies and hence the demand elasticity is limited. Further the lifestyle changes needed to reduce consumption are much tougher in the developed world compared to the emerging markets where attitudes and trends are still evolving and can adapt easily.

Crude Oil: Congress Acts, Iran Hoards, RTX Soars

JREwing:

Goldman and Morgan Stanley indeed have oil tank farms. That is why they can act as commercial hedgers. It seems last week even JPMorgan decided to get in the physical commodity business (Bear Sterns had a strong commodity trading group).

JPMorgan's action seems to be designed to pre-empt any effort to have a dual margin structure (hedgers vs speculators).

The large investment banks have a their finger on the pulse of almost everything in the capital markets; it is not wise to bet against them. Goldman will drive the super spike, which will eventually result in a dramatic shift in oil consumption patterns.

The New Peak Oil: Peak Demand

Here is an interesting piece on how the investments in commodity indices are allowing speculators to bypass position limits created by CFTC.

www.bloomberg.com/apps...

"Asset Diversification'

With the popularity of long-only commodity index funds and the prevalence of total-return index swaps, the definition and quantification of speculation has changed, according to Jim Bianco, president of Bianco Research in Chicago.

Let's say a pension fund, like the California Public Employees Retirement System, wants to increase its exposure to commodities. Calpers, a speculator according to the CFTC, does a total-return swap with Goldman Sachs Group Inc., a hedger. Goldman promises to pay Calpers the total return on the Goldman Sachs Commodity Index and hedges the swap by buying futures contracts. Calpers's speculative bet on commodities gets recorded as Goldman's hedging in the COT report. In so doing, investors circumvent the position limits on non-commercials, says Aronstein, who estimates that passive commodity index exposure in commodities amounts to some $250 billion.

With everyone on board the express train, pension funds can market these bets as ``asset diversification.'' And who will argue otherwise in the middle of a boom? "

The New Peak Oil: Peak Demand

freewilly: During a bull run, all news is bullish.

The seasonal maintenance, by definition, is seasonal and predicted; the refiners of the crude would have communicated that to the sellers. But even then the glut continues to the point that Iran has to think of cutting production.

Saudi Arabia is offering a $7 discount on its not so light crude since there are a few buyers.

The Russians have come out to say that their productions will go up this year 'wait till the end of the year'; the drop in the Russian production was one of the thesis of peak oil scaremongers.

Bloomberg has interesting article out there saying that more than $256B invested in commodity indices linked notes is showing up as money invested as hedgers in the COT reports when it is speculative. The notes are sold by banks (like GS) who then hedge by participating in the futures market. However this serves as a mechanism to bypass the CFTC position limits on speculative positions.

This is a bubble driven by speculation where a physical commodity is being treaded like other paper assets. However it has deep political and economic ramifications which will lead to a radical change in the energy complex as we know it. The super-surge will help accelerate the process.

Speculation: Stocks vs. Commodities

Here is an interesting piece on how the investments in commodity indices are allowing speculators to bypass position limits created by CFTC.

www.bloomberg.com/apps...

"Asset Diversification'

With the popularity of long-only commodity index funds and the prevalence of total-return index swaps, the definition and quantification of speculation has changed, according to Jim Bianco, president of Bianco Research in Chicago.

Let's say a pension fund, like the California Public Employees Retirement System, wants to increase its exposure to commodities. Calpers, a speculator according to the CFTC, does a total-return swap with Goldman Sachs Group Inc., a hedger. Goldman promises to pay Calpers the total return on the Goldman Sachs Commodity Index and hedges the swap by buying futures contracts. Calpers's speculative bet on commodities gets recorded as Goldman's hedging in the COT report. In so doing, investors circumvent the position limits on non-commercials, says Aronstein, who estimates that passive commodity index exposure in commodities amounts to some $250 billion.

With everyone on board the express train, pension funds can market these bets as ``asset diversification.'' And who will argue otherwise in the middle of a boom? "

The New Peak Oil: Peak Demand

JR:
Read carefully. The uncultivated arable land is not in the Amazon region. In fact Sugar cane does not grow in the Amazon region (too wet/hot).

Further there are national security concerns which will ensure that countries will continue to look for new oil. In most of the world, oil is a nationalized resource and it is not oil companies which their vested interests who determine where new development will happen.

Many governments will be willing to pay $90 for local oil when OPEC sells at $70 since they know without their oil they will be paying OPEC $125.

Traditional oil industry analysts thinking has been stratified by decades of inaction; they can not think beyond what they have been used to thinking. They ignore the progress in technology or the dramatic change in the developing world's attitudes (they no longer need capital from Western oil companies to develop their fields).

From GPS, remote sensing, remote controlled robots/machines, deep-sea exploration and drilling we have come a long way in the past 2-3 decades. The Petrobras experience with the Tupi fields is an indication of things to come. The naysayers are still asking questions while Petrobras is hiring workers and rigs, and bringing the field online much sooner than the scaremongers ever thought they would.

The New Peak Oil: Peak Demand

JR/Crossing:

The move to sugar based ethanol can be dramatic and quick. Brazil has huge tracts of arable uncultivated lands which can be brought online much quickly. Sugar plants and sugar fermentation plants can be bought online, especially when done on a small to medium scale.

Unlike some who believe that there was divine intervention which led to oil being concentrated in the Gulf, I believe that it was just the low oil prices of the past few decades which prevented newer areas being explored. We will discover new oil and oil will stabilize between $60-$90.

Google’s Earnings Expose Wall Street’s Limitations

Scott:

Thanks for your comment. I wanted to highlight how many on the street bought the bearish hypothesis, while ignoring obvious, public information which contradicted most of the basis of the bear case.

The magnitude of the change in Google's market cap right after the earnings illustrated the degree to which the Street was caught on the wrong foot. Clearly a lot of the analysts and the money managers who follow them, were well off the target. Clearly many got it right too. BTW, Google's results were almost inline with the original consensus estimate.


The article in Barron's, the pundits on TV, Blodget's blogs, all painted a picture of Google on life-support, when all the company did was sneeze. What really caught my attention during all the negativity were the jibes at the Google culture and the short-sighted attacks on their spending habits. I wrote a few articles during this period highlighting how the detractors were off-target, which are available on Seeking Alpha.