CORPORATISM - LOOKING GLASS NEWS | |
Oil industry awash in record levels of cash |
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by John W. Schoen MSNBC Entered into the database on Wednesday, July 27th, 2005 @ 15:57:52 MST |
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When major oil companies report their quarterly profits next week, they're once
again expected to post record numbers. With crude trading around $60 a barrel,
the oil industry is enjoying one of the biggest windfalls in its history. But
as the industry looks for places to put that cash, it's finding it harder and
harder to put funds to work finding new deposits of oil and natural gas. By just about any measure, the past three years have produced one of the biggest
cash gushers in the oil industry’s history. Since January of 2002, the
price of crude has tripled, leaving oil producers awash in profits. During that
period, the top 10 major public oil companies have sold some $1.5 trillion worth
of crude, pocketing profits of more than $125 billion. “This is the mother of all booms,” said Oppenheimer & Co. oil
analyst Fadel Gheit. “They have so much profit, it’s almost an embarrassment
of riches. They don’t know what to do with it. The reason for the boom is simple. Much of the investment in finding that oil
-- and developing the wells and pipelines needed to produce it -- has already
been made. So an oil field that was profitable with oil selling for $20 a barrel
is much more profitable with oil trading around $60. That’s left the industry with a happy problem -- what to do with enough
cash to fill a supertanker. Many publicly traded oil companies have been busy
buying back their own stock, which helps drive up the price of the rest of the
shares left on the open market. Since January 2002, stocks of major oil companies
have gained 88 percent; during that period the Standard and Poor’s 500
index has gained less than half as much. Oil producers have also given investors a raise by gradually increasing the
dividends paid out to shareholders. And they’ve paid down their debts
to record low levels. ExxonMobil, for example, is virtually debt-free -–
with a cash pile of more than $25 billion. All of this industry good fortune has not escaped the notice of consumers,
whose anger at higher gasoline prices has been rising in lock step with the
price of crude. The energy bill recently enacted by both houses of Congress
provides little relief for U.S. energy consumers. But a continued rise in prices
could bring increased political pressure to find ways to lower the cost of energy,
according to Tom Kloka at the Oil Price Information Service. "This is something that Americans regard as their birth right," he
said. "If gasoline prices are still north of $2.25 (a gallon) when we reach
the midterm election, there's going to be an awful lot of outrage." Even as their overall profits have soared, major oil companies are earning
a relatively modest 8.7 percent profit margin -- the portion of the sale of
each barrel that hits the bottom line. Major banks and drug makers, for example,
enjoy profits margins that are twice as big. Keeping the oil flowing Not all of the proceeds from the surge in oil prices has gone straight to the
industry’s bottom line. As oil prices rise, so do oil companies' costs.
For starters, they pay royalties to governments that lease the rights to drill
-– a payment that ranges as high as 18 percent in the U.S. Domestic oil
producers also pay taxes of about 40 percent, according to Gheit. So as the price
of oil rises, so does the bill for royalties and taxes. Oil producers also have to spend money to keep oil flowing from aging fields,
by drilling more holes in the ground to squeeze fewer and fewer barrels out
of the same fields. The cost of these oilfield services, everything from drilling
rigs to pipelines, has risen by as much as 50 percent over the past five years,
according to Gheit. So the cost of maintaining existing levels of production
is now consuming more than half of the industry’s annual capital outlays,
most of which used to go to discovering new oil fields. That means a smaller portion of oil industry profits are being put to work
to find more oil. One big reason is that finding promising areas to develop
new reserves has become increasingly difficult. In part, that's because the
bulk of the world’s oil reserves sit in the ground controlled by authoritarian
regimes. The higher the price of oil goes, the easier it is for those regimes
to maintain power and the less they need to turn to outside oil companies for
investment, said A.G. Edwards futures analyst Bill O’Grady. “Foreign investment brings in foreigners and their ideas,” he said.
“OPEC countries and Russia have worked vigorously not let that happen.” Despite pledges to increase output, most OPEC countries are pumping at full
capacity already. And if oil prices are headed higher, those countries with
the ability to boost output now have little incentive to do so if they wait
and get more money for the same oil in the future. As a result, Western oil producers have been forced to look for new reserves
by shopping for other oil companies that have already found and developed deposits
of oil and natural gas. As oil prices have risen, so has the value of another
oil company's reserves. The current bidding war between Chevron and China’s
state-owned CNOOC is just the latest example. But none of that investment in other oil companies is increasing the world’s
supply of oil. And without new discoveries, the price of oil will likely continue
to rise. "Basically, it's musical chairs, and every time you have fewer and fewer
companies,” said Gheit. “The people who are slicing pie among themselves
-- the number is shrinking, but the pie itself is not growing. The pie is shrinking." |