Oil for Profits
I don't normally get involved in debates for two reasons:1) I don't seem have the 'built-in' judgement to know when to stop, to allow an opponent the opening to retreat.
2) A lot of issues boil down to opinion - everyone has one consequently many debates devolve to agreeing to disagree. The problem is most people today aren't willing to leave it at that, instead positing that anyone who disagrees with them is either evil or suffering from a congenital mental defect.
Back to the topic at hand:
Much has been made in media recently of oil company profits. The reports quote huge dollar values, yet no attempt is made to place these in context.
For starters, lets disregard the total dollar value - the numbers for any multinational company are tremendous, no matter the industry, and can exceed the GNP of many small countries. Quoting the number value of the profit can be completely accurate, but reporting this without context of the investment costs and return is intentionally inflammatory.
To put this in context, these profits should be reported in terms of percent return on investment - ROI (which is one aspect of performance used by any financial manager to determine if/where to make their investments) ExxonMobil just managed to report an approximate 10% return, about the high end of the range for most oil companies.
How does that compare to other industries? Well the average ROI for pharmacutical companies comes in at around 20%, the banking industry at around 25 - 30%. Yet I don't see anyone picketing their pharmacy or their bank about excess profits.What does this mean? That ExxonMobil is not a high return investment, more of a slow growth, or long term investment since they are one of the few stocks that still pay dividends.
Going back to the dollar amounts - Exxon posted a approximate $10 billion dollar profit this quarter - do you have any idea on the required investment to turn that profit into a barely 10% rate of return? ExxonMobil's largest domestic offshore platform cost $1 billion in 2000 to build and put in place. BP's Thunder Horse project currently has a $1.5 billion price tag and climbing (and hasn't produced a drop of oil yet). And both of these are just single projects out of a large portfolio of exploration and production projects for both companies.
This also excludes the tremendous amount of damage suffered by production and refinery infrastructure that is still not completely repaired (and some will never be repaired). At one point there were only two production platforms in the entire Gulf of Mexico still making any production, of the hundreds that populate the region. Those repair costs have yet to be fully tabulated and have not yet hit most of the oil companies financial reports yet. The Minerals Management Service (the branch of the government responsible for regulating offshore production), in conjunction with the USCG, lists over 140 facilities in the Gulf of Mexico as hazards to navigation as a result of being destroyed/sunk by the one-two punch of Katrina/Rita.
Remember that exploration is just that, with far more dry holes drilled than productive wells. No other industry has to invest so much with such a significant chance of no return at all for the investment. The risk is so high, and the costs so great, that most projects today are a product of partnerships of the major oil companies. This is done to spread the risk around so that no one company is faced with an all or nothing investment, something that makes such projects economically impossible to justify otherwise.
As far as the oil price itself goes - the oil companies haven't ever had control of their pricing (actually the biggest single item of increase in gas at the pump has been taxes - which puts the focus on government). Price is set by market forces, primarily by the futures market, which is a bunch of investors (the same that set sugar, coffee, and other prices) by making committments to purchase/sell based on what they think the market will be in a few months time.
Nothing magic, nothing that companies can control - just a group of hyper people shouting at each other in the futures market pit.
The only thing that can reduce oil prices is to find more. Reducing demand domestically, while helpful, will have little impact. Why? Because of the rapid industrialization of India and China, which has made them major competitors with the US for world oil supply. This is the factor that has been driving oil prices up prior to the 2005 hurrricane season and is still the reason why the market reacts so violently (or over reacts) to events in the Middle East.
Despite this, the US remains one of the most hostile regulatory environments in which to attempt oil exploration and production - which seems suicidal for an economy that is so dependent on oil to grow and drive the rest of the world's economy.
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