Oil industry awash in record levels of cash

[RBA]

MSNBC.com
Oil industry awash in record levels of cash But a smaller portion of profits is going to find new oil discoveries

Bydocument.write(""); John W. Schoendocument.write('');
Senior Producer
MSNBC
Updated: 9:12 a.m. ET July 21, 2005

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."


© 2005 MSNBC Interactive
© 2005 MSNBC.com

http://www.msnbc.msn.com/id/8646744/

[Johnny Footstool]

I thought one of the benefits of the war in Iraq would be to keep oil prices down. That's what my Republican friends told me.

Also, does anyone else remember Bush campaigning and telling the public that "Gore wants gas prices to go up" so we'd all have to drive electric cars? I remember that.

[Dom Heffner]

Also, does anyone else remember Bush campaigning and telling the public that "Gore wants gas prices to go up" so we'd all have to drive electric cars? I remember that.

To which I always replied that Bush wanted them to go up to help his oil buddies.

[macro]

It's comforting to know that these people aren't going hungry.

[registerthis]

Price fixing.

[zombie-a-go-go]

Originally Posted by registerthis

Price fixing.

Maybe we should get George Soros to buy BP so Congress will revoke their antitrust exemption?

[Mutaman]

The oil industry runs the country. The present administration consists of men and women with significant ties to the oil industry. Why should the fact that the oil industry is making record profits surprise anybody? When people voted for Bush didn't they realize that they were giving the oil industry a liscence to make money?

[savafan]

Give me a candidate who will do something about the things that effect us all every day like gas prices, health insurance, unemployment, etc. and not worry about legislating what people can put into or take out of their own bodies, and they will get my vote.

[registerthis]

Originally Posted by savafan

Give me a candidate who will do something about the things that effect us all every day like gas prices, health insurance, unemployment, etc. and not worry about legislating what people can put into or take out of their own bodies, and they will get my vote.

<ahem>

Ralph Nader.

Just sayin'.

[savafan]

Originally Posted by registerthis

<ahem>

Ralph Nader.

Just sayin'.

Yeah, but so many people in this country only believe in the two party system and refuse to accept the existence of any other candidates. Many uneducated people vote a straight party ballot, as they've done for years, without even caring what the candidate says or believes. These same people then complain about how bad things are and question what can be done to change it.

[registerthis]

Originally Posted by savafan

Yeah, but so many people in this country only believe in the two party system and refuse to accept the existence of any other candidates. Many uneducated people vote a straight party ballot, as they've done for years, without even caring what the candidate says or believes. These same people then complain about how bad things are and question what can be done to change it.

Oh, believe me, you're preaching to the choir here. In 2000, I listened to Nader speak several times, and was just amazed that he was receiving no more support than he was. He just made sense on so many issues, particularly those that--as you put it--affect us in our day-to-day lives.

[Falls City Beer]

Originally Posted by savafan

Give me a candidate who will do something about the things that effect us all every day like gas prices, health insurance, unemployment, etc. and not worry about legislating what people can put into or take out of their own bodies, and they will get my vote.

*cough* John Kerry *cough*

[savafan]

An example of what I'm talking about, I wonder how many Republican voters in Ohio are still glad that they voted for Bob Taft?

[Mutaman]

Originally Posted by registerthis

Oh, believe me, you're preaching to the choir here. In 2000, I listened to Nader speak several times, and was just amazed that he was receiving no more support than he was. He just made sense on so many issues, particularly those that--as you put it--affect us in our day-to-day lives.

You're right but...

Don't you agree that if Nader had not run in 2000, Gore would have been elected? Don't you agree that as an incumbant Gore would have probably been re-elected and we'd be in the middle of Gore's second term? No Iraq, no Schiavo, No John Roberts, no neo-cons, no Bush. But for Nader, things would have been a lot different. A lot of people who voted for him in 2000 now tell me that they made a mistake.

[Falls City Beer]

Originally Posted by Mutaman

You're right but...

Don't you agree that if Nader had not run in 2000, Gore would have been elected? Don't you agree that as an incumbant Gore would have probably been re-elected and we'd be in the middle of Gore's second term? No Iraq, no Schiavo, No John Roberts, no neo-cons, no Bush. But for Nader, things would have been a lot different. A lot of people who voted for him in 2000 now tell me that they made a mistake.

Agreed. There's a difference between having ideals and being idealistic.

I've never in my life recalled such voter regret on the part of Republicans vis. Bush Deux. It's hilarious. Before last November 2, I predicted that Bush, if he won, would be the worst two-term President in this country's history. So far, I'm dead-on.