Vikram Saxena

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

Lillte Oil Man:

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?

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

Lillte Oil Man:

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.

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

Ron Abate:

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.

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

Lillte Oil Man:
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.../

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

Lillte Oil Man:

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.

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.