Ron Abate

Why I'm Anti a 'Windfall Profit Tax' on Big Oil

Excellent article. Considering the long period of time between the time when expenditures are made to acquire and develop a field and the revenues from that field, even though the price crude has increased dramatically the discounted rate of return basis of those profits are quite modest. Fields last for 30 years. For example, a $125 price today versus a $3 price in 1973 works out to an 11% annual rate of increase, not really spectacular. If you then adjust the $3 per for inflation over the period, even assuming modest inflation of 3% per annum, the inflation adjusted increase would be a modest return of 8%. The real windfall profits are made by politicians who purchase remote land and then earmark funds for a road to that land. In a matter of a few years or even months, that politician can double or triple their money with very little risk. Those are windfall profits but you will never hear about them. Throw the bums out but I am afraid that we would only vote for new bums because in a democracy our elected representative are a reflection of us.

Exxon Mobil's Record Profit: How Much Is Too Much?

Folks, this Nation has over $60 Trillion in on and off balance sheet liabilities. Allowing companies like XOM to tap our natural resource base to create wealth producing these resources to help pay for these unfunded liabilities (lease and royalty payments, personal and corporate income taxes from jobs and profits) seems like a no-brainer. However, we have become an absurd Nation and eventually we will become a failed Nation. When I hear politicians say that it will take too long and that we should pursue alternative energy instead, I am confirmed in my belief that we are an absurd Nation. If, in the highly unlikely event, we do convert the majority of our energy needs to alternate energy, we can export the oil and gas to nations too poor to afford alternate energy. Frankly, I believe that with over $60 trillion in future liabilities, we are too poor for alternate energy, considering that alternate energy requires massive subsidy for anyone to consider it, except for a few rich enviro nuts. I also believe that once we get to look at the climate change mathematical models (Google David Evan - Australian who worked in the Australia carbon accounting office) we will find a lot of funny modeling all designed to show global warming.

You Don't Own Real Estate - It Owns You

When I arrive back in the country in 2005 after 15 yrs. living and working overseas, I needed a place to live. I rented a place in LV and then started looking at the purchase of a house. I constructed a lease versus buy program on Excel taking into consideration all the costs of ownership. As for the tax deduction I receive from the federal government for the mortgage interest and property taxes, the first $5,000, now $6,000, doesn't count because I automatically get the standard deduction. In 2005, I had the gut feel we were nearing the top of a bubble. Anyway, assuming my rent increased a 4% p.a. and home prices also increased at 4% p.a. renting was a better alternative. I used a discount rate of 8%. What people fail to consider is that money used for the down payment and the monthly principal portion of the mortgage can be invested in other asset classes.

I am still in my rented apartment. My rent has not gone up in 3 years, and after the first year it went up by $25 per month (on a base lease cost of $1,350 per month. I rent 1,300 sq ft. (3 bedrooms, two car attached garage, LR/DR/K combined) facing a well maintained swimming pool in a guard gated community. I continue to look for a house and still the NPV cost is negative to renting. I refined my lease versus buy worksheet. What I found was that the NPV for 1,300 sq. ft. was now competitive with leasing. What made owning uncompetitive with leasing was the additional 1,000 to 2,000 sq. ft. of a minimally acceptable house. This is my quandary. I like nice things like quality appliances and bathroom fixtures, moldings and flooring, educated neighbors with professional occupations, etc, but you don't get them in a 1,300 sq. ft. home and it does not pay to upgrade.

I have also done quite well with my overweigh energy portfolio (even a money market fund out performed residential real estate) versus what I would have invested in a down payment and the principal portion of the mortgage payment.

I may still purchase a house if the prices gets cheap enough and the incremental enjoyment of more space and a more pleasing ambiance offsets my current enjoyment of having money to invest in the stock market (there are places where you can still make money) and the enjoyment I derive from much greater disposable income renting, which allows for a very high grade diet of prime meats and fish, organic fruits and vegetables, fine wines, more dining out and first class vacation travel.

Have to go. If I have time I will post another comment about a study I just completed.

Cheers

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

I think your comments are way off base and reveal a total lack of understanding of the oil business and business acumen in general. First, oil companies face huge risk, not the least of which is political risk, whenever it invests in oil and gas development.

Let's discuss economic risk. The cost of developing a major oil or gas field can run into the tens of billions, partly because most of the easy to get at oil has either been discovered or is under the control of foreign governments. This leaves projects that are so technologically challenging and expensive that the national oil company needs help. Those are the projects that the major multinationals are best suited for. There are all manner of risks -- political, price (projects started today may not come on stream for five to ten years -- what will the price of oil be in ten years?), cost (projects started just a few years ago are running well over budget because of oil industry inflation, as demand for everything from qualified people, to steel, energy and other materials have skyrocketed), geology, health and safety (working with a volatile product can easily cause harm to people, environmental (as much as you try shit happens when mother nature is involved and then you have all the public relations consequences) and political.

ExxonMobil developed one of the Sakklin Island fields in the Russian Far East because it had technology and the money. Projects like Sakklin payout over decades and there is no guarantee oil prices will remain high during the life of the project thereby earning a reasonable return. In addition to oil price risk (oil prices went from $35/bbl. in 1985 to $10/bbl in the late nineteen nineties), there is reservoir risk (the oil that you thought was going to be there is not there, or its there but very difficult to produce due to the geological formation). What you have no idea about is how technological difficult the oil business. I wish you could sit in on a meeting of geologists and reserve engineers and hear them discuss the technical and engineering difficulties developing any geologically complex. I have and its an eye opening experience.

You have no idea what goes into producing oil from thousands of feet below the sea floor in thousand of feet of water in the turbulent and frigid North Sea. It's a technological and engineering feat to behold. Your cluelessness palpable.

To equate the business of running a supermarket with the business of exploring for, finding and producing oil and natural gas reveal a total lack of any understanding of either business.

As a shareholder of XOM, I wish XOM would get out of the retail end of the business (which is not or only marginally profitable -- they have recently announced they are selling all their owned stations, but will still sell to their branded distributors) and only stick to refining (also not very profitable) and exploration and production (very high risk but very profitable).

Then there is political risk. Once you have sunk billions into a project in another country, what is to stop that country from taking over the project and kicking your ass out or changing the terms to make the project unattractive. This has happened throughout the history of the oil business and is happening again today -- Venezuela, Russia, maybe even in our own country, and many others. It took ExxonMobil seven years to negotiate a field development agreement with Indonesia for the Cebu field after it had invested maybe a $100 million buying the interest and doing development drilling.

By the late nineteen nineties, ExxonMobil had sunk over about ten years $250 million into exploring and mapping the Natuna gas field in the South China Sea near Indonesia. The natural gas has a lot of CO2 so it is difficult and expensive to process. ExxonMobil tried to get Japan, China, Korea, or Taiwan to buy the gas on a long term contract basis so financing for the field and its development could proceed. There were other fields also being explored (in Australia, Malaysia, Qatar) that had gas with less CO2 that could offer their gas at a lower price. (You have no idea what a complex technological undertaking it would have been to develop the Natuna field, including the construction of an island for the processing plant -- there is also a dispute as to whose gas it is since China claims most of the South China Sea -- more political risk.) The field has still not been developed and Indonesia, if it could technically, wants to take it away from ExxonMobil. A no risk business like running a supermarket? You got to be kidding. You have no idea.

As for share buybacks, your article missed one really important point when it comes to buybacks versus windfall profits taxes. First, ExxonMobil has no expertise in alternate energy. As a shareholder, I would prefer that they stick to what they know best, which is exploring for, finding and producing oil and natural gas. Share buybacks, if you thought about it beyond the typical knee jerk reaction, puts money back into the private investment system. Most of the buybacks are block trades in the hundreds of thousand to millions of shares. That means that the money is being paid to pension funds, mutual funds, endowment funds and other professional money managers whose expertise is to reinvest those funds in other industries and companies that have good prospects for high returns. No doubt some of that money flows to alternate energy -- so the buyback are funding alternate energy and doing it more efficiently that if ExxonMobil did it. That is what makes the capitalistic system so great at producing wealth. Now if you impose a windfall profits tax on oil companies, instead of the money going to professional money managers investing in the best of breed companies, including alternate energy companies, the money will flow instead into the government and will be used to buy votes, because that is what politicians are expert at. That will not help the country, will not produce alternate energy and subverts the capitalistic system. That is the argument you need to make against a windfall profits tax -- windfall tax money will flow to "alternate energy" companies that have good political connects but not good business prospects. Companies will sprout out of no-where bearing alternate energy names run by people who have good political connections and that is where the windfall profits tax money will flow. There will also be a lot of cons. I see iy happen here in Las Vegas.

There is plenty of venture capital money for alternate energy, and that money is not looking for political favors, it is looking for high investment returns. A politician or government bureaucrat couldn't give a fig about high returns.

I suggest before you write your next article about how easy it is for oil companies to make money and how riskless it is, you take a tour through an oil refinery, go out to a production platform in the North Sea, sit in on some technological discussion regarding the seismic findings for a new field, go to a research lab working on new drilling technology that allows horizontal drilling out seven miles and tens of thousands of feet below sea level. You need to go out to the Rockies to see how companies are using technology to extract natural gas from shale rock formations "tight gas". This technology did not exist a few years ago but is now being used by ExxonMobil and other to tap our natural gas resources in the West.

ExxonMobil and most of the major multinational are above all technology companies, every bit a technology company as Microsoft, Intel and Pfizer and operating in an industry with far greater risk. You just do not appreciate the science that goes into the business nor the risks.