Good Times, Good Times!
by sarabeth at 6:00 am on April 22nd, 2008 in Bush Man Date, Economy, Podium SpinWhen Congress has Big Oil over to grill them about how they’re making out like bandits of late — which happens once a year, when the oil companies declare their latest round of record-breaking profits — the unanimous script the bandit chiefs stick goes something like this:
“Our earnings, although high in absolute terms, need to be viewed in the context of the scale and cyclical, long-term nature of our industry as well as the huge investment requirements,†said J.S. Simon, senior vice president of Exxon Mobil Corp., which made a record $40 billion last year.
“We depend on high earnings during the up cycle to sustain … investment over the long term, including the down cycles,†he continued.
Well, it looks very much like the bad times are a trifle overdue at this point. Or maybe the oil business just suddenly stopped being cyclical in the time of Bush:
Exxon Mobil is … the most profitable company on the Fortune 500 for the fifth year in a row, raking in a record-breaking $40 billion in 2007 earnings.
So one day, in the long-term, oil company profits will come down again, will they? Which long-term will that be in, the one in which we’re all dead? Some of us, no doubt, due to malnutrition (due to abject poverty (due to losing too many arms and legs at the gas pump)).
On a related note, a little humor:
Q: Why did AP run this headline “With gas hitting record highs, drivers feeling squeezed” today?
A: Because they’re a family news wire; they can’t say “drivers feeling buggered” or “drivers feeling f**ked”.
effay wrote:
I just don’t understand how people can complain about gas prices and then call for some sort of profit-taking from oil & gas companies. Reducing gas prices and profit-taking are totally antithetical. If you take money from an oil company, they will have less to re-invest in drilling. Less drilling means less production. Less production means less supply. Less supply means higher prices.
If you want to call for profit-taking from oil & gas companies, you’re free to do that, but you contradict yourself if you also call for lower gas prices.
Posted 02 May 2008 at 11:24 am ¶
matt wrote:
>If you take money from an oil company, they will have less to re-invest in drilling.
none of them are investing at the pace they should be given this windfall. and why should they when they can wait until prices go even higher?
contradiction?
Posted 02 May 2008 at 12:18 pm ¶
effay wrote:
Yes, actually, you do contradict yourself.
Supposing you are right that oil & gas companies aren’t investing at the rate they “should be” (whatever that means), decreasing their resources still doesn’t help reduce prices.
Also, your theory about deferred investment is illogical.
It can take from around 6 months to 10+ years to complete an oil & gas production project depending on the size of the endeavor. If oil & gas companies think that commodity prices will rise in the future, they will have to invest now. Consider for example the Jack #2 test well completed by Chevron/Devon/Statoil in the Gulf of Mexico during 2006. This well discovered reserves estimated to be as high as 15 billion barrels of oil, which would increase US reserves by 50%. However, the consortium has said that production from the field will not be on line until 2013.
Another factor that informs oil & gas exploration & development decisions is cost. I can tell you first hand that costs are skyrocketing right now and play a role as significant as commodity prices in these decisions. Because of this, companies are racing to complete projects as soon as possible to avoid higher costs in the future.
And the obvious point, not even the most brilliant economists know what commodity prices will be years into the future. If they did, the failure of so many oil & gas companies in the early 80’s, who did not foresee the fall in oil & gas prices, would not have happened.
I am afraid that companies like Exxon are not even remotely as sinister as they are made out to be.
Posted 02 May 2008 at 3:29 pm ¶
matt wrote:
>Because of this, companies are racing to complete projects as soon as possible to avoid higher costs in the future.
the cost of oil is easily outpacing any of these other costs, and it’s outpacing inflation. the higher the prices go, the more feasible it is to get the oil in the tar sands and other tricky places online.
they also aren’t keeping up with maintenance, remember a few years ago when all those refineries accidents were happening? what happened to prices then?
>not even the most brilliant economists know what commodity prices will be years into the future
i guess you’re not a peak oil guy. i’m sure that stuff will last forever.
Posted 02 May 2008 at 3:46 pm ¶
effay wrote:
Supposing, once again, that you are right about oil prices outpacing costs (although I can name projects that have been canceled due to cost overruns ad nauseam), inflation (although an April 28 WSJ article noted that, “had the dollar merely retained the same purchasing power as the euro [since 2003], today’s price of oil would be below $70 a barrel”), and the Time Value of Money, that you forgot to mention, that still does not eliminate cost considerations.
I would also note that oil & gas companies are quite conservative when it comes to project economics. From my experience, most smaller and many medium sized companies actually use current oil/gas prices in their economics with only an inflation factor; they don’t even think about potential oil/gas price increases in the future. And larger companies that do use economic estimates always use extremely conservative projections.
Most importantly, though, there is virtually nowhere on Earth that you can go find oil & gas and defer producing it. In the US, if you lease someone’s land, drill a well, and find economic (at current price levels) oil/gas, you are required by law to produce those hydrocarbons immediately. And even if there were no law requiring production, mineral owners would still place provisions in leases to the same effect.
In the international arena, no host country would ever allow, say, Exxon to unilaterally defer production of discovered reserves. Only the host country would ever defer production if they were engaged in cartel activity (ex. OPEC) (which Exxon has no control over).
In short, the only way oil & gas companies could defer production is if there was an international cartel of oil companies that agreed to defer exploration (exploration would have to be deferred for this to work, since once you discovered the hydrocarbons, the mineral owner would require production).
Also, I am a peak oil guy, but the peak in oil production will come due to prices that are higher than alternatives, not a lack of oil. You may be interested to know that the DOE estimates that we have nearly four times as much oil in the US alone (2,594 bbo) as has been produced from the whole world throughout all of time (718 bbo IEA). The problem is that lots of it is in heavy state, oil sands, oil shales, etc…
I remember once hearing a Saudi prince say that one day there will be billions of barrels of oil in the ground but nobody would want it because it was too expensive to produce. He’s right.
Posted 02 May 2008 at 5:02 pm ¶
matt wrote:
i’m not going to spend any more time than we already have on knocking down the absurd gaming of inflation statistics.
>they don’t even think about potential oil/gas price increases in the future.
my ass.
>required by law
that’s funny. like the law that says they have to pay royalties on oil they find on public lands that they are ignoring to the tune of tens of billions of dollars? or the osha regulations that they continue to ignore, or god forbid environmental rules…
what good are laws if no one is enforcing them?
but keep spitting out your textbook learnin’ and continue to ignore what’s right there in front of you. it’s quaint.
>but the peak in oil production will come due to prices that are higher than alternatives, not a lack of oil
right, and the oil companies and their republican thugs will continue to kick that can as far down the road as possible, won’t they?
Posted 03 May 2008 at 7:18 am ¶
effay wrote:
Well I guess we’ve come to the point where it’s hard for me to argue further since you are questioning my anecdotal evidence. I can only reiterate that I work in the oil & gas industry and, as far as I can tell, you don’t. I know it’s hard to believe, but this is what happens.
One more thing though that I forgot to mention, for clarification. In the typical well that I deal with, about 30% of the mineral interest is actually owned by another oil & gas company! It’s not like mom and pop (who are very well read on their oil & gas rights here in Oklahoma anyhow) down in the trenches trying to get the law enforced, it’s the big boys. And even if you mess around with a mom and pop mineral owner, they will never lease to you again, and they will get all of their friends and relatives to never lease to you again. It’s amazing to see the speed and depth of information flow sometimes, and it is very devastating to companies that are not conscious of the community they operate in.
Also, I would be interested to know what public lands you are talking about that you say have unpaid royalties? I’m guessing you’re talking about the GoM lands, right?
Posted 03 May 2008 at 9:25 am ¶
effay wrote:
O matt, you boy!!
Posted 03 May 2008 at 10:27 am ¶
matt wrote:
our spam filter has gone haywire. investigating…
Posted 04 May 2008 at 6:29 am ¶
matt wrote:
is that much of a shock?
no, i don’t. buy i have taken economics, and i can tell when something doesn’t make any sense.
there aren’t that many big boys, and even then, it’s just as easy to say that the small companies/individuals don’t sue or report things because they wouldn’t be able to get deals as it is to say that the majors won’t get deals if they mess around with mom and pops? no?
here:
An eight-month investigation by the Interior Department’s chief watchdog has found pervasive problems in the government’s program for ensuring that companies pay the royalties they owe on billions of dollars of oil and gas pumped on federal land and in coastal waters.
Posted 04 May 2008 at 7:19 am ¶
effay wrote:
“there aren’t that many big boys, and even then, it’s just as easy to say that the small companies/individuals don’t sue or report things because they wouldn’t be able to get deals as it is to say that the majors won’t get deals if they mess around with mom and pops? no?”
Well, if we lived in a more socialist system where there was a monopoly in the oil & gas sector, like maybe a national oil company for instance, you might be correct. Luckily for us, we still cling to some of the vestiges of the free market, which means that there are countless companies vying for mom and pop’s lands. If someone blacklists you because you won’t let them cheat you out of your money (which, in case you were wondering, doesn’t happen), there will be companies lined up to lease you that won’t cheat you. As a company competing for good lands to drill on, it is in your best interest to get those lands because if you don’t, the other guy will. Thank God for competition, right.
Also, your link is a really good indictment of the existence of state owned lands. Royalties don’t go unpaid in the free market.
Posted 04 May 2008 at 1:15 pm ¶
matt wrote:
remarkable. an american who never heard of enron, market manipulation, and the outsized power of corporations over people.
yeah, let’s privatize everything. it’ll be nirvana. i’m really taking too long to invent Market Porn Magazine.
Posted 04 May 2008 at 6:35 pm ¶